The fallout from the tough best interest regulation passed by New York officials has begun.
Just weeks after Regulation 187 took effect, two major insurers pulled their annuity business from the state:
Jackson National suspended the sale of fee-based annuities. A Jackson spokesman called the suspension “temporary” until the company sorts out compliance issues.
Penn Mutual suspended all annuity applications, effective Aug. 30. The Pennsylvania-based insurer will cease accepting life insurance applications in New York on Dec. 31.
The Penn Mutual timeline reflects part two of Regulation 187. The rules will be extended to life insurance on Feb. 1, 2020. That is just one area where rule borrows heavily from the late Department of Labor fiduciary rule.
But while the DOL rule was tossed out by a federal appeals court, Regulation 187 opponents were not as successful. Acting Albany County Supreme Court Justice Henry Zwack ruled July 31 that the New York Department of Financial Services was within its authority when it issued Regulation 187.
As this issue went to press, the National Association of Insurance and Financial Advisors–New York and the Independent Insurance Agents and Brokers of New York, plaintiffs in the lawsuit, had not appealed Zwack’s decision.
“It may take another life insurance or annuity sales scandal to speed things up, but the application of a robust best interest standard of care to annuities and life insurance is inevitable.”
— Birny Birnbaum, Center for Economic Justice
Speculation is rampant that more insurers will pull business from New York in the months ahead. The issue is liability.
The rule requires that financial services providers consider the interests of the consumer above everything else when making the annuity recommendation, mandating that any advice be “based on an evaluation of the relevant suitability information of the consumer and reflects the care, skill, prudence and diligence that a prudent person acting in a like capacity and familiar with such matters would use under the circumstances then prevailing.”
But it’s the training requirements that are likely causing heartburn for insurers. The rule mandates that insurers and broker-dealers develop training programs for their producers that sell annuities.
Jackson is reportedly taking issue with a requirement that insurers offering both fee- and commission-based annuities deliver a comparison between the two products. A spokesman for the company sent InsuranceNewsNet the following:
“Effective Aug. 12, Jackson temporarily suspended all advisory sales in New York as we and other market participants continue to work through the product disclosure requirements in Regulation 187 with the New York Department of Financial Services. We remain committed to delivering helpful and relevant disclosures to consumers and distribution partners and to resuming sales of our advisory products in New York as soon as possible.”
A Penn Mutual statement does not rule out a return to product sales in New York.
“This decision was made in the best interests of all of our policyholders,” the statement said. “We remain committed to continuing to provide the highest level of service to our existing New York customers.”
In the meantime, the National Association of Insurance Commissioners is hoping to finalize an annuity sales model law by the group’s fall meeting in December. New York regulators continue to push the parent organization to adopt the framework of Regulation 187.
Many people in the industry think that is the direction annuity regulation is heading.
“The New York regulation will become the template for other states,” said Birny Birnbaum, executive director of the Center for Economic Justice, a consumer-focused organization. “It may take another life insurance or annuity sales scandal to speed things up, but the application of a robust best interest standard of care to annuities and life insurance is inevitable.”
New York has a solid ally 3,000 miles away. California Insurance Commissioner Ricardo Lara’s office told InsuranceNewsNet in July that it wants “as close to a fiduciary standard as possible.”
If the NAIC doesn’t come through with a tough standard, “like New York, we may decide to pursue laws that are stronger than the revised NAIC Model Regulation,” Lara’s office said in an email.
For now, the NAIC Annuity Suitability Working Group is holding two-hour conference calls to work through its model language. The group is working with a draft model that Chairwoman Jillian Froment, director of the Ohio Department of Insurance, has termed “less than a fiduciary standard, but is more than suitability.”
Trump’s Beef With The Fed
President Trump’s ongoing Twitter war with the Federal Reserve, and more specifically with Fed Chairman Jerome Powell, has shown a willingness to put pressure on the otherwise independent central bank.
In his criticism, the president most often lashes out at Powell and the Fed for doing too little or for its inaction altogether around the issue of interest rates.
Trump isn’t the first president to do so. Presidents Lyndon Johnson and Harry Truman also put pressure on the Fed to lower or maintain interest rates, to varying outcomes.
What Exactly Is The Federal Reserve And What Are They In Charge Of?
The Federal Reserve or U.S. Central Bank is made up of three key entities — the Board of Governors, 12 Federal Reserve Banks and the Federal Reserve Open Market Committee.
The 12 Reserve Banks follow geographically outlined districts, each having its own Reserve Bank. The district boundaries were based on prevailing trade regions that existed in 1913 and related economic considerations.
During Fed meetings, policies — including interest rates — are voted on by these 12 districts.
The Federal Reserve’s five primary functions are to:
Conduct the nation’s monetary policy — “to promote maximum employment, stable prices and moderate long-term interest rates in the U.S. economy.”
Provide and maintain effective and efficient payments systems — “through services to the banking industry and the U.S. government that facilitate U.S.-dollar transactions and payments.”
Supervise and regulate banking operations — “and monitor [the banks’] impact on the financial system as a whole.”
Promote consumer protection and community development — “through consumer-focused supervision and examination, research and analysis of emerging consumer issues and trends, community economic development activities, and the administration of consumer laws and regulations.”
Promote financial system stability — “and seek to minimize and contain systemic risks through active monitoring and engagement in the U.S. and abroad.”
Is The Fed Independent?
Kind of. The Federal Reserve is independent from the rest of the federal government in that its funds come from its own operations, not from Congress. Other than funds and its governors’ extremely long tenures, it’s not as independent as it’s often described.
When making policy, the Fed still has to take into consideration the information they are receiving from global markets, lawmakers, investor expectations and even presidents. This is extremely true of interest rates.
Are Trump’s Complaints About The Fed Valid?
The White House has said that the Fed is the biggest problem facing the economy, but is the Fed really the enemy?
Short answer: No. Here’s why:
Trump has often touted on social media and at his rallies the triumphs and successes the economy has seen under his presidency. With a possible recession riding his coattails, Trump is pressuring the Fed to give the economy a recession-busting boost before the 2020 election.
Unfortunately, the evidence suggests that interest rates aren’t the problem. Unlike past circumstances, the unemployment rate is at a record low and inflation would not prompt an interest rate drop from the Fed either, since it is currently below the Fed’s 2% target.
Additionally, investors are still borrowing at reasonably cheap rates and companies are not worried about access to credit, leaving a gaping hole in Trump’s endless search for someone to blame where interest rates are concerned.
What companies are complaining about are tariffs. President Trump’s ongoing trade war with China continues to be “a dagger in the body of the economy,” as one economist described it.
Not only does Trump’s trade war have direct costs to the economy, but it also causes uncertainty and lack of confidence in the market among investors.
If inflation, unemployment and credit were issues afflicting the economy, the Federal Reserve would be inclined to act. The economy is slowing, but stocks are still performing well. If the Fed acted too swiftly and aggressively and lowered rates prematurely, they won’t be able to cut rates when they are desperately needed, such as during a recession.