Regulation maximalists and minimalists are clashing over states' efforts to apply new annuity sales rules.
The Annuity Suitability Working Group, an arm of the National Association of Insurance Commissioners, is drafting a batch of guidance for the regulators in charge of enforcing the new rules, which were created by an update of an existing NAIC annuity sales standards model regulation.
Many regulators, consumer groups and financial planners hope that the guidance will promote tough, broad oversight.
The Federation of Americans for Consumer Choice and a coalition of eight other trade groups hope that regulators will stick with the language in the new rules and not try to expand the scope of their oversight.
The eight "joint trades" asked the guidance drafters to distinguish between requirements in the model regulation update and any other ideas that they may have.
Kim O'Brien, FACC's CEO, said in a separate comment letter that the federation wants to ensure that "any guidance issued by the NAIC Annuity Working Group does not intentionally or inadvertently create new obligations or requirements."
What it means: The clash between the annuity sales regulation maximalists and the minimalists might last forever.
The NAIC: U.S. federal law leaves regulation of the business of insurance to the states.
The NAIC, a group for state insurance regulators, cannot normally set state insurance rules directly, but states often start with NAIC "models," or sample text, when developing their own insurance laws and regulations. States also often arrange to adopt some NAIC rule updates automatically.
Sales standards: Regulation maximalists have been fighting with the minimalists for decades over the standards that should apply to annuity sellers.
The maximalists want annuity sellers to meet a fiduciary standard, which requires a seller to put the client's interests first. A strict fiduciary standard may prohibit annuity sellers from collecting sales commissions. Critics say a fiduciary standard would expose annuity sellers to the risk of facing lawsuits if clients buy well-regarded annuities and discover, years later, that other annuities performed better.
The NAIC originally imposed a "suitability" standard. The suitability standard required annuity sellers to verify that the products they were recommending suited the consumers' needs. Insurers and agents assumed that the suitability standard allowed insurers to pay agents sales commissions and use other incentives, such as chances to win trips, to increase annuity sales.
The new NAIC suitability model update is supposed to adopt a third type of standard of care, a best-interest standard.
The U.S. Securities and Exchange Commission adopted a best interest standard in a major financial services sales and marketing regulation, Regulation Best Interest.
A best-interest standard appears to let annuity sellers continue to collect sales commissions, and it requires them to act in the best interest of an annuity buyer.
All states other than New York have adopted the NAIC's best interest-based suitability model update. New York has imposed a fiduciary standard on its annuity sellers.
The draft guidance: The suitability working group's new guidance is supposed to help annuity issuers comply with the model update by creating a "safe harbor," or a set of standards for issuers that want to show that they are clearly trying to meet the best-interest standard.
The issuers can qualify for the safe harbor if they verify that other safe harbor conditions are satisfied, "monitor financial professionals' conducting using information gathered in the normal course of business" and offer broker-dealers or other supervising entities "sufficient data to maintain effective oversight systems," according to a draft the working group posted on its section of the NAIC's website Aug. 7.
Reactions: FACC likes the version of the draft guidance posted Aug. 7 better than the previous version, O'Brien wrote.
The joint trades objected to sections in the Aug. 7 draft that do not distinguish between the language in the model regulation update and the drafters' own ideas.
The "verification" provision in the safe harbor is an example of something that should be listed as a "best practice," rather than as a requirement, because verification "is not an explicit requirement in the model," the joint trades wrote.
"Our goal is to avoid the implication that failure to verify is a violation in and of itself," they added.
The joint trades coalition includes the American Council of Life Insurers, the Committee of Annuity Insurers, Finseca, the Financial Services Institute, the Indexed Annuity Leadership Council, the Insured Retirement Council, the National Association for Fixed Annuities and the National Association for Insurance and Financial Advisors.
© Touchpoint Markets, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to TMSalesOperations@arc-network.com. For more information visit Asset & Logo Licensing.