If state insurance regulators wrestle control over annuity sales standards away from the U.S. Department of Labor, some states could end up making the DOL look like a gentle little kitten.
Miami-based legal analysts at Carlton Fields Jorden Burt P.A., a law firm, raise that possibility in a look at new draft regulations released in December by the New York State Department of Financial Services.
The DOL has decided to delay the implementation of its own DOL fiduciary rule best interest standard guidelines by at least 18 months.
New York state regulators have responded by proposing a new version of the state’s Suitability in Annuity Transactions regulation. A new, broader Suitability in Life Insurance and Annuity Transactions regulation could include a best interest standard and best interest definition. The best interest standard would require an insurance agent to act in the best interest of the customer when recommending a life insurance product or annuity.
Other states have also been working on adding a best interest standard to their own annuity suitability standards.
Carlton Fields has posted its commentary on the draft regulations here.
Here are three Carlton Fields observations about the draft regulations, drawn from the commentary.
1. The fact that the draft regulations include life insurance is a big deal.
The Carlton Fields analysts call the proposed broadened scope of the regulation the “biggest noisemaker” in the draft.
In addition to applying to the sale of an annuity contract, the proposed draft could apply to an agent’s discussions with a client about whether the client should increase the face amount of a life policy, change a premium payment schedule, or elect to receive accelerated death benefits.
2. The draft regulations would apply to any discussions that “reasonably may be interpreted by a consumer to be advice.”
The draft regulations could apply to conversations that lead to a consumer refraining from entering into a transaction as well as to conversations that lead to a consumer entering into a transaction, the analysts warn.
Even if an agent simply met with a consumer every year to review the consumer’s insurance arrangements, without the consumer changing the arrangements, the draft regulation advice provisions could apply to that annual review meeting, the analysts write.
3. The draft regulations could increase the “confetti of disclosure.”
An insurer or agent would have to tell a consumer about the “potential consequences of the transaction, whether favorable or unfavorable,” the analysts write, quoting from the draft.
An insurer or agent would also have to tell a consumer about the potential tax implications; about the producer’s compensation; the suitability considerations and product information that provide the basis for any recommendations; and “all relevant policy information” for “all available policies of the same product type offered by the insurer.”
“Each of these additional disclosures raise a host of interpretive questions which may give producers and insurers a hangover,” the analysts write.
It’s not clear, for example, whether the potential consequences disclosures would have to be personalized, the analysts write.
4. The draft regulations could apply to producers who have never met the client.
The suitability requirements would apply to “every producer in in the transaction,” whether or not the producer had direct contact with the consumer, the analysts write.
“Does this mean every duty imposed on producers must be performed by each producer in the transaction, or is this merely a means to impose penalties against every producer in the transaction in the event of a transaction that was not in the best interest of the consumer?” the analysts wonder.
—Read Insurance Regulators May Update Annuity Sales Model Amid DOL Fiduciary Rule Uncertainty on ThinkAdvisor.