While the Department of Labor has delayed implementing the “best interest” provision of the fiduciary rule, New York State may introduce its own standard.Although the Department of Labor has officially delayed implementation of a revamped fiduciary rule for advisors, insurance agents, and annuity sellers until July 1, 2019, New York State has proposed enacting into law its own annuity and life insurance sales standards. The Empire State’s proposal mirrors the Best Interest Contract Exemption (BICE) provision that was included in the DOL’s fiduciary rule, but is now under review by the department.
New York’s Department of Financial Services defines its “best interest” amendment as an annuity and life insurance transaction based solely on the financial goals of the client, not the advisor’s monetary gain. If BICE is eventually enacted, advisors and agents selling variable annuities and fixed indexed annuities would likewise be required to act in the best interest of the client, disclose compensation levels, and detail any possible conflicts of interest. Critics have asserted that BICE would increase class action lawsuits.
New York introduced the new regulation on December 27, 2017. Interested parties have 60 days on which to comment on the proposal.
Other States May Follow
New York may not be the only state to revise its annuity and life insurance sales directives. A committee within the National Association of Insurance Commissions (NAIC) discussed strengthening its suitability rule for the sale of annuities at a meeting in early December.
Currently, 39 states and the District of Columbia have adopted the suitability standard, which dictates that brokers and insurance agents recommend annuity products that match a client’s financial objectives and risk tolerance, but does not say anything about the agent’s financial interests. ThinkAdvisor.com reports that the NAIC is seeking comments on the revised annuity sales standards, which states could then use to update their regulations.
The NAIC’s draft rule, which would be known as the “Suitability and Best Interest Standard of Conduct in Annuity Transactions Model Regulation,” describes “best interest” as a deal during which an advisor acts “with reasonable diligence, care, skill and prudence in a manner that puts the interest of the consumer first and foremost.” Under the proposed regulation, advisors would be blocked from receiving “more than reasonable compensation” in exchange for making a recommendation.
The NAIC proposal, however, states that the new annuity sales regulation doesn’t necessarily require advisors to advocate only for the least expensive product or a product with the highest stated interest rate. Other provisions in the proposed law specify that an advisor must disclose all relevant product information and take measures to prevent abuse and fraud.
“There’s no question that we increased the responsibility of both the [insurance] producer and the [insurance] carrier in marketing these products,” Dean Cameron, Idaho’s Insurance Director and chairman of the NAIC’s annuity suitability working group, told Investment News. “A product can be suitable but not in the best interest of the consumer. We’ve tried to make it clear that the producer has a responsibility to determine whether a product is suitable and also whether a product is in the best interest of the consumer.”
New York Insurance Group Responds
Meanwhile, the Life Insurance Council of New York (LICONY) has weighed in on the state’s proposal, arguing that life insurers should operate under the same regulations in all states. According to the Council, subjecting its members to stricter regulations would make it harder for them to compete. “We would urge the [Department of Financial Services] to proceed in a deliberate manner and work with the industry to ensure that New York's life insurers are not put at an unfair disadvantage related to other financial services providers, while still protecting consumers,” LICONY said in a statement.
According to Investment News, the DOL will use the postponement period to work with the Securities and Exchange Commission and state regulators to develop a standardized fiduciary rule, a move welcomed by the American Council of Life Insurers. “A collaborative and harmonized approach would ensure all consumers receive retirement savings information and related financial guidance from financial professionals acting in their best interest, regardless of the retirement products they purchase,” said the group’s President and Chief Executive Dirk Kempthorne in a statement.
Gary Sanders, Counsel and Vice president of Government Relations at the National Association of Insurance and Financial Advisors, told Investment News his organization considered the NAIC’s annuity sales revision “workable” and a first step in the process of re-examining the fiduciary rule. “It's not harming the client but it is recognizing that there are a tremendous number of products out there," he said. "You can't consider price in a vacuum. This is a starting point.”