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Life Groups Back Quick Adoption of State Regulators' Sales Standards Proposal

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A sales standard fight at the National Association of Insurance Commissioners (NAIC) could create a Regulation Best Interest rival.

Two consumer groups that oppose the latest NAIC proposal — the Center for Economic Justice and the Consumer Federation of America — say the NAIC’s current draft standard would be much weaker than the Reg BI standard.

(Related: Galvin Signs Off on Massachusetts Fiduciary Rule)

The Life Insurance and Annuities Committee, an arm of the National Association of Insurance Commissioners (NAIC), is in charge of the battle.

The NAIC is a Kansas City, Missouri-based group for state insurance regulators. It has no direct ability to change states’ financial services sales standards, but states often choose to base their insurance laws and regulations on NAIC models.

Many states are basing their current sales standards for annuities on the NAIC’s Suitability in Annuity Transactions Model Regulation.

The Annuity Suitability Working Group, part of the NAIC’s Life Insurance and Annuities Committee, has been responding to the controversy over the U.S. Labor Department’s fiduciary rule project and the U.S. Securities and Exchange Commission’s Reg BI standard by updating the NAIC’s own suitability model. The proposed NAIC update calls for annuity sellers to put consumers’ interests first and to disclose potential conflicts of interest.

The working group posted a draft Nov. 5.

Eight Industry Organizations’ View

A group of eight life and financial services organizations says in a comment letter that the draft looks great. The eight industry organizations have written to Doug Ommen, the chair of the NAIC’s Life Insurance and Annuities Committee, to ask the committee to approve the draft this month, at the NAIC’s fall national meeting in Austin, Texas.

The eight organizations believe the proposed model update “will make it possible for consumers — regardless of where they live — to be confident that insurance companies and producers with whom they are entrusting their retirement savings are acting in their best interest, and not putting their own financial interests ahead of consumers’ interests,” the organizations write.

Ommen’s committee should urge the full NAIC to adopt the proposed standard update as quickly as possible, the eight organizations write.

The organizations with representatives that signed the letter are the American Council of Life Insurers, the Indexed Annuity Leadership Council, the Committee of Annuity Insurers, the Insured Retirement Institute, the Financial Services Institute, the National Association for Fixed Annuities, the Association for Advanced Life Underwriting, and the National Association of Insurance and Financial Advisors.

Two Consumer Groups’ Position

The Center for Economic Justice and the Consumer Federation of America say in a comment letter of their own that the current proposed NAIC suitability model update would create a watered down version of the SEC’s vague, ineffective best interest rule.

“The current draft does not impose a true best interest standard,” the consumer groups write.

“The current draft requires that the producer have a reasonable basis to believe the recommended annuity meets the consumer’s needs,” the consumer groups write. “That is not a true best interest standard; it is simply a restatement of the obligation to make suitable recommendations. Calling it a best interest standard is misleading.”

The current draft would also exclude all forms of cash and non-cash compensation from the definition of material conflict of interest, the consumer groups write.

“As a result, compensation practices at the heart of a whole host of recent life insurance and annuity sales scandals would be preserved,” the consumer groups write. “The associated conflicts would not even have to be mitigated to minimize their harmful impact.”

The current draft would add new disclosure standards, but studies have shown that extra disclosures are often ineffective and, in some cases, increase consumers’ level of trust in financial advisors who may make more money if they sell products that are not in the purchasers’ best interest, the consumer groups write.

The consumer groups are asking for extra time at the meeting in Austin to make their case to members of the Life Insurance and Annuities Committee.


Links to comments about the Annuity Suitability Working Group’s current draft are available here, in the November 26 Comment Letters section, under the Related Documents tab.

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