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N.Y. Advisors Face Tough Standard

Producers selling annuities in New York face two significant changes after the state’s best-interest standard takes effect in August: training and documentation.

The industry’s key goals should be complying with the new standards and eliminating conflicts of interest, said Issa J. Hanna, counsel with Eversheds Sutherland.

“It’s going to be more paper,” said Hanna, who specializes in compliance with state and federal financial regulations. “I don’t think producers like to hear that, but there’s going to be more forms, more paper.”

Regulation 187 was finalized last summer and takes effect Aug. 1 for annuities and six months later for life insurance. Simply stated, it requires producers to put the customer’s “best interest” ahead of their own.

To help accomplish that, the New York rules would:

  • Require disclosure of all suitability considerations and product information that form the basis of any recommendation.
  • Permit agents or brokers to make a recommendation only if they have a “reasonable basis to believe that the consumer can meet the financial obligations under the policy.”
  • Prohibit an agent or broker from telling a consumer that a recommendation is part of financial planning, investment advice or related services (unless the agent or broker is a certified professional in that area).

A National Association of Insurance Commissioners’ subgroup is working on an annuity sales model law for states. But New York bypassed those efforts in favor of a much tougher regulation.

Insurers are staring at a regulation that looks very similar to the controversial Department of Labor fiduciary rule, Hanna said.

“It uses a lot of the same terminology and phrases,” he added.

The DOL rule was bitterly opposed by the financial services industry,  and lawsuits led to a federal appeals court decision killing the rule last summer.

As this issue went to press, New York’s best-interest rule was also being challenged in court. Two lawsuits — one by Big I New York and the Professional Insurance Agents of New York, and one by the National Association of Insurance and Financial Advisors-New York — are working their way through the New York court system. 

Get Your Training

The regulation states that “an insurer shall be responsible for ensuring that every producer recommending any transaction with respect to the insurer’s policies is adequately trained to make the recommendation.”

Although the New York Department of Financial Services will not be approving or otherwise overseeing any training efforts, insurers have ample reason to take this requirement seriously, Hanna said.

It is likely that any training administered to producers would form the basis of a defense should the insurer be taken to court at a later date.

“That’s one significant additional impact from a practical perspective that producers may not be focused on right now,” Hanna explained. “At this time, it looks like training is going to end up being pretty standardized.

“Discussions within the industry seem to be focused on the insurance carriers working with popular training vendors to develop a kind of standardized training that’s going to be used across the industry.”

Regulation 187 is treating violations as “unfair methods of competition or unfair and deceptive acts or practices prohibited” under state insurance law. That law allows the DFS superintendent to levy fines of $500 per day up to $5,000.

But it’s the threat of civil lawsuits that is getting the attention of insurers and producers. In the courtroom, a jury can levy a wide range of judgments for a guilty finding.

Will training be enough to avert lawsuits? Unlikely, legal analysts say. Alston & Bird, a law firm based in Atlanta, predicts that the New York rule will lead to increased civil complaints. The firm also called the best-interest language “ambiguous, highly individual and subjective.”

Under the best interest standard, the producer is required to act in a manner that reflects the care, skill, prudence and diligence that a prudent person acting in a like capacity would use.

Keep A Paper Trail

The one thing everyone seems to agree on is that the more documentation associated with an annuity sale, the better protected the liable party is in the event of a challenge.

Financial Industry Regulatory Authority rules require extensive documentation for the sale of variable annuities, Hanna noted. VAs are regulated as a security.

“Producers are going to be facing the situation now where they’re going to have to adopt those FINRA-style documentation requirements with respect to recommendations to hold on any annuity,” Hanna explained.

“If they don’t have any existing processes to document and supervise recommendations to hold, that’s something that they’re going to have to get up to speed with.”

Insurers are likely going to demand substantial documentation, if for no other reason than to keep the New York Department of Financial Services satisfied, Hanna said. The potential is high for the industry to coalesce around a standardized format. Discussions on this are ongoing.

The amended regulation has a fast-approaching compliance effective date of August 2018 for annuities. If they haven’t already, distributors selling those products should begin the process of revisiting their consumer-facing forms and disclosures, Hanna said.

“The amended regulation requires the producer to deliver to the consumer a reasonable summary format disclosure explaining to the consumer the ‘why’ behind the recommended sales transaction,” he said. “Distributors have never been asked to deliver anything like this before to consumers, so many of them are having to draft something from scratch.”

Various insurtech and software companies are pushing out products designed to make client meetings easier to document for the agent on the go. These products will surely find an audience in New York.

Comp Concerns

The question on many minds is what happens with compensation. Unfortunately, with DFS being sued, the department has declined to issue further guidance for fear it will hamper its lawsuit defense, Hanna said.

That does not mean the questions have gone away.

“There’s a bit of uncertainty now over what’s going to happen to compensation,” Hanna said. “It’s going to have to play out. But I think there’s a fear out there that the compensation on annuity is going to have to get leveled in some way, or they’re going to have to establish the ability to make a neutral recommendation. I think there’s a fear out there that that’s what DFS is expecting.”

While compensation might decline, costs are surely going up. An analysis by A.M. Best confirmed that insurers will spend more money to sell annuities in New York.

According to a Best’s Briefing, titled “Regulation 187 May Impact Sales Practices and Products Sold in N.Y.,” insurers will most likely incur higher costs, as training will be needed for both producers and insurers’ sales support functions. 

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. Follow him on Twitter @INNJohnH. John may be reached at [email protected].

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