Life and Annuity Suitability Requirements: An Evolving Regulatory Environment

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New life and annuity suitability regulations are coming at firms from all angles. Now is the time to act and be prepared. Are you ready to comply?


Life and annuity suitability requirements are certainly not new to the insurance and financial services industry. Regulatory regimes applicable to variable annuities and the separate accounts through which they are issued have been around since the U.S. Securities and Exchange Commission (SEC) enacted the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Company Act of 1940.

In 1990, the National Association of Securities Dealers (NASD) had a general suitability requirement 2310 (now the Financial Industry Regulatory Authority (FINRA) FINRA Rule 2111). This rule set the standards to make reasonable efforts to obtain consumer information concerning the customer’s financial status, tax status, investment objective, and other information considered reasonable in making the recommendation.

Then in the early 2000s suitability requirements added additional focus on annuities when the National Association of Insurance Commissioners (NAIC) first drafted the Suitability in Annuity Transactions Model Regulation (#275) in 2003 and the NASD followed with the NASD 2812 in 2008 (now FINRA 2330 – Members’ Responsibilities Regarding Deferred Variable Annuities).

The NAIC standards and procedures required insurers or insurance producers to make reasonable effort to collect financial details and investment objectives for the purpose of having reasonable grounds for recommending the annuity products to consumers.

FINRA 2330 focuses on more comprehensive and targeted protection to investors who purchase or exchange deferred variable annuities.  FINRA 2330 requires firms to have a compliance and supervisory process, where a registered principal must review all variable annuity sales to determine if it is suitable. In addition, FINRA has Rule 2320 to monitor cash and non-cash compensation arrangements associated with variable annuity sales.

Doing More to Protect Consumers

Many within the industry have felt these existing regulations are not enough to protect consumers and help ensure that the products they are purchasing match their objectives, financial goals, willingness to take on risk, and longevity goals.  Additionally, the existing regulations may offer too many opportunities for material conflicts of interest and compensation practices that may sway a decision.  To address these issues, the Department of Labor (DOL) introduced the DOL Fiduciary Rule in 2016.

While the goal of protecting the consumer had merit, the DOL fiduciary rule was too far-reaching and expanded the definition of fiduciary advice into areas that were previously regulated by the NAIC and FINRA.  It was vacated on March 15, 2018 by the 5th U.S. Circuit Court of Appeals with a decision that the rule was “arbitrary, capricious and exceeded the agency’s regulatory authority under ERISA.”   But, that does not mean that regulations that focus on the best interest of the consumer are no longer necessary.  In fact, the NAIC and the SEC were already working on amendments to their regulations to help address these concerns.

NAIC began working on its model law for states in 2017 and expects to finish in 2019. The goal is to set forth clear standards that put the consumer first where the advisor does not put compensation desires over the need of the consumer and requires the advisor to disclose any material conflict of interest.  The standards will also require documentation explaining the basis for the recommended product and included features to ensure the consumer understands the products they are purchasing and why that product matches their needs, risk tolerance and objectives.

Today, June 5, 2019, the SEC approved its Regulation Best Interest (also known as Reg BI) model, which updates the SEC’s 1934 Act establishing a standard of care for broker-dealers and investment advisors. The Reg BI will raise the advice standard for brokers requiring the investment advisors and broker dealers to act in the best interest of the retail customer at the time a recommendation is made without placing the financial or other interest of the broker-dealer or natural person who is an associated person making the recommendation ahead of the interest of the retail customer (“Regulation Best Interest”). Additionally, the SEC approved the Customer Relationship Summary Form (CRS Relationship Summary), which updates both the SEC’s 1934 Act and 1940 act and will now require investment advisors and broker dealers to disclose to the retail investor the relationship with the financial professional; including a summary of services provided, fees clients might pay, and any conflicts of interest. Regulation Best Interest and Form CRS will become effective 60 days after they are published in the Federal Register and will include a transition period until June 30, 2020, allowing time for compliance.

In addition to the Reg BI, several states are still forging ahead with their own “best interest” regulations that may or may not mirror what has been established at the federal level. For example, the New York Department of Financial Services (NYDFS) recently finalized the Suitability and Best Interests in Life Insurance and Annuity Transactions Regulation and has been making waves ever since.

Insurers and producers should prepare now for what will inevitably be a new future as other states, including Nevada, New Jersey and others, explore updating their own suitability rules.

State-by-State Best Interest Regulations

New York was the first state to adopt a “best interest” regulation that adds to the existing NAIC and FINRA 2330 with a new level of requirements aimed to ensure the best interest of the consumer is enforced for both life and annuity sales.

The New York Department of Financial Services (NYDFS) finalized the Suitability and Best Interests in Life Insurance and Annuity Transactions Regulation (also known as New York Insurance Regulation 187 or NY Reg 187) in July of 2018 and goes into effect August 1, 2019 for Annuities and February 1, 2020 for Life sales. The NY Reg 187 applies to both life insurance policies and annuity contracts sold in New York state and covers the duties and obligations of insurers and insurance producers, and requires that insurers, including fraternal benefit societies, and insurance producers ensure product sales are in the “best interest” of the consumer. Annuity and life sales must prioritize customer’s interest over sales commissions and the compensation should not influence the decision of the product recommendation.

When the Suitability and Best Interests in Life Insurance and Annuity Transactions Regulation goes into effect, insurance producers and insurers will be required to ensure their recommendations regarding a life insurance policy or annuity contract “are based on an evaluation of the relevant suitability information of the consumer…” This includes appropriately assessing and addressing the insurance needs and financial objectives, and financial circumstances of the customer at the time the product or products are purchased as well as all in-force transactions.

In January 2019, the state of Nevada announced their proposal for a best interest model that applies to broker-dealers and investment advisors, but does not include producers that only sell insurance. This proposed model imposes a definition of fiduciary that is both stricter and broader than what is in place today with FINRA and the SEC and applies to not only recommendations and advice to new clients, but also ongoing management of client assets.

Essentially, this best interest model requires that advisors provide “best interest” advice while receiving only “reasonable compensation”, but both requirements are left vague. While there is an exemption that allows for the fiduciary responsibility to end with the advice if the representative is not listed as an advisor or any term that implies advice and financial planning, the responsibility is on the BD to prove they are not acting as a fiduciary past the advice.

The Nevada proposal does not provide guidance on how a firm can demonstrate a best interest recommendation, lacks details for what constitutes conveying all risks of the product or investment strategy, and has limited details on how the commissions must be displayed (percent or actual number).  Additionally, there is no effective date noted in the proposal, which could mean that when Nevada finalizes their proposal, it could take effect immediately.

New Jersey is the most recent state to float a fiduciary proposal. Announced April 13, 2019, this rule is also stricter than the proposed SEC and NAIC rules as it reinstates the Fiduciary Standard on agents that requires a duty of care and duty of loyalty. It also stipulates any recommendation for “opening of or transfer of assets to any type of account,” is considered part of an investment strategy, which means the agent has an “ongoing obligation to that customer. The fiduciary duty will be applicable to the entire relationship with the customer, regardless of the security account type.”

Maryland announced a proposal, but it was rejected by the state’s Senate Finance Committee due to the potential to increase compliance costs and causing conflict with the Securities and Exchange Commission’s Reg BI.  While one state has put their regulation on hold, other states are following suit. Industry leaders expect the onslaught of state-level regulations will keep coming, especially while the SEC and NAIC are working on their proposals.

The Burden and Cost of Proof

The burden and cost associated with managing the increasingly complicated regulatory environment fall on firms and agents. Because of the complexity and cost, it is likely both insurers and distribution partners may opt for other forms of investments, which will limit the availability of valuable tools for retirement plans.

For example, the NAIC Model Regulation has proposed an expanded definition of “consumer”. The regulation now states “consumer” means the owner or prospective owner of an annuity contract. This implies the inclusion of post-issue activities, changes what client profile information must be collected (including debt information), and requires firms to identify a consumer’s willingness to accept non-guaranteed elements of an annuity—all of which are hard to collect accurately.

The disclosure requirements are also significantly more difficult, which adds to the massive amount of paperwork already required to sell an annuity and is likely to confuse consumers depending on when in the sales process the information must be delivered.

The burden of proof for best interest recommendations under NY Reg 187 is also expected to be considerable since the regulation will not only apply to new transactions, but requires insurers and producers to ensure existing policies are also in compliance.

The time, effort, and cost associated with ensuring in-force transactions comply are expected to be significant as the suitability requirements may not have been met when the original sale took place. Additionally, the suitability information that needs to be taken into account may be unavailable when a modification is happening, and many of these elections or adjustments are not generating any new sales.

The New Jersey proposed regulation also considers any recommendation for “opening of or transfer of assets to any type of account” to be part of an investment strategy and, therefore, stipulates the agent has an “ongoing obligation to that customer. The fiduciary duty will be applicable to the entire relationship with the customer, regardless of the security account type.” As such, firms will be required to manage clients post-sale to ensure the strategy remains in line with the clients’ goals.

All these differences are confusing to consumers and agents and could have the opposite effect.  Some agents may opt for other, less suitable investments due to the confusion, increased paperwork, and additional ongoing requirements around annuities, limiting the availability of these important investment strategy options. An annuity can offer lifetime income benefits that guarantee the consumer will not outlive their retirement income. This is a critical part of the retirement plan. Additionally, annuities can provide insurance and protection to other investments that are exposed to the market and inflation, again protecting the retirement plan.

What Can Insurers and Firms Do?

Insurers and distribution firms need a defensible process that is error proof and guides the agent through the defined requirements including additional data collection, disclosures, and signatures. They need to be nimble and able to adapt to the regulatory changes as they evolve.

Having workflow flexibility to meet individual requirements is vital, including the ability to support a product compare based on the suitability information collected either ahead of the sale or as part of the sale depending on their process.  Regardless of where the compare resides, it is our recommendation to have it reviewed and signed by the client, thus ensuring the client agrees to what was presented and discussed.

Additionally, it will be important to have this document included in the application documents along with additional product data and new disclosures. In-force transactions should be automated to ensure compliance with in-force contracts as well.  There is too much at risk to simply rely on a paper workflow that is confusing for the agent and has different requirements by state or product line.

Insurance Technologies’ clients are already leveraging the flexible FireLight® technology to provide suitability questions upfront to help make best interest recommendations, generate disclosures, and get those signed quickly and easily with built-in e-signature capabilities before moving into the sale transactions. With FireLight, the data captured in the pre-sale process moves seamlessly into the sales transaction for an audit trail and fully defensible record. And insurers and distributors are implementing these processes without being dependent on Insurance Technologies to do it for them.

Anything that can be done to make the process easier for the agent and clearer for the customer will be a huge win in the wake of all the regulatory changes. Finding a technology partner that can assist with the pre-sale, sale, and post-sale activities will be helpful in presenting a unified agent and customer experience.

By Katherine Dease, Vice President of Product Management, Insurance Technologies


The information provided within this article is intended to convey general information only and not to provide legal advice or interpretation. This article is not inclusive to the article topic and includes product marketing of Insurance Technologies. The views and opinions expressed in this article are those of the author. Katherine Dease, author of this article, is product specialist for Insurance Technologies and is not a legal representative.


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