The time is nigh. The New York State Department of Financial Services Regulation 187 is upon us. I have seen a great deal of concern and criticism of it. This is my review having torn it apart over the course of a week and a half personally and listened/attended several discussions on it.
The purpose (Section 224.0) is very straightforward and I think most would agree that the Regulation has some merit. It states:
“The Insurance Law… establishes standards of conduct for insurance producers, including that producers must act in a competent and trustworthy manner,” and, “…clarifies the duties and obligations of producers…to help ensure that a transaction is in the best interest of the consumer and appropriately addresses the insurance needs and financial objectives of the consumer at the time of the transaction.”
I personally believe this is a noble goal. We all know producers that are not particularly driven by the best interests of their clients. We work with incredibly sophisticated financial tools. If there is a way to protect consumers, then I embrace any opportunity that rewards those who work to put clients first and holds accountable those who do not.
Having said that, we are in the business of selling life insurance, not “at-the-time-of-the-transaction” insurance. While the suitability questions outlined in the definitions section include popular hits like “Intended use of the policy,” and “Financial time horizon,” nowhere in the 13 pages of the regulation is the concept of a policy review mentioned, though in-force transactions are. This is most surprising given that the last line of the first page acknowledges that this regulation, “…does not guarantee or warrant an outcome.”
If we can all agree that what is suitable and in a clients best interest today might not be so in 20 years, then how can we claim to have the client’s best interest by not addressing that fact?
Up until a few years ago, MetLife offered competitive products that were suitable options for the clients of MetLife’s agency distribution force and independent brokers. When MetLife closed shop and spun off Brighthouse they closed the entire block of business and lowered the dividend interest rate on those whole life contracts.
As of May 1, 2019, their closed-block of business, which includes many of the aforementioned suitable contracts, are now under the responsibility of the CFO with the express written goals of “…improving operating efficiency to generate distributable cash,” and “…to look for opportunities to accelerate the appropriate release of capital and reserves.”
A life insurance advisor with his client’s best interest should be revisiting and reviewing these contracts with their clients. An at-the-time-of-the-transaction insurance advisor has no further requirements to the client under Regulation 187.
Section 224.2 is Exemptions
I have some serious issues with several exemptions. Specifically, exempting the following:
Policies used to fund:
1. Employee pension or Welfare benefit plans
2. 401(a), 401(k), 403(b), 408(k) or 408(p) plans
3. Several varieties of Government or church plans
4. Non-qualified deferred compensation plans
Funding any one of the above plans utilizing life insurance products is more complex than most individual life insurance sales and—done improperly—can have a disproportionately adverse impact on a business owner and/or their employees.
An unscrupulous advisor that understands the pension business can completely wipe out a client’s qualified plan balance and simultaneously put them in a position to pay significant taxes if the plan is ever terminated or they need to transfer the insurance policy out of the plan at any time.
I have seen the aftermath of several of these sales. It is devastating to a business owner who creates a qualified plan during a boom in their business. Then, following their “Trusted Advisor’s” advice, they fund a whole life policy with 49 percent of their max contribution. The next few years are leaner and/or they choose not to fund to the extent of year one, and the policy lapses with minimal cash soon after. The qualified plan ends up with a fraction of the funds contributed over that time and the main recourse is legal action against the advisor—the client is not guaranteed to win. There is no reason that these should be exempted transactions under this regulation.
I will get more in depth into the Definitions section (224.3) later as it becomes appropriate. As stated above, not once is a policy review mentioned.
Section 224.4 – Duties of Insurers and Producers
Now we are getting into the meat of Regulation 187. This section describes how a producer can act in the best interest of a client and what makes for a suitable transaction.
The main paragraph on how an advisor can act in the best interest of a client seeks to make only one point. Any recommendation made to a client should not be influenced by compensation.
The suitability of a sale gets more in-depth treatment. The regulation seeks to influence consumer education more than anything. It suggests that a sale is suitable if:
“…the consumer has been reasonably informed of various features of the policy and potential consequences of the sales transaction, both favorable and unfavorable, such as the potential surrender period and surrender charge, any secondary guarantee period, equity-index features, availability of cash value, potential tax implications if the consumer sells, modifies, surrenders, lapses or annuitizes the policy, death benefit, mortality and expense fees, cost of insurance charges, investment advisory fees, policy exclusions or restrictions, potential charges for and features of riders, limitations on interest returns, guaranteed interest rates, insurance and investment components, market risk, any differences in features among fee-based and commission-based versions of the policy, and the manner in which the producer is compensated for the sale and servicing of the policy…”
There are other guidelines later in the section, but this paragraph (to me) is the one that should be raising the most eyebrows and will likely be the source of future complaints. This section requires advisors to inform consumers on information that carriers consider proprietary and do not divulge.
Take a second to appreciate that last sentence.
This section requires advisors to inform consumers on information that carriers consider proprietary and do not divulge. Amazing!
The next few parts of this section go into some additional details that involve transparency and good business practices. Then we come to j…
“A producer shall not use a title or designation of financial planner, financial advisor or similar title unless the producer is properly licensed or certified and actually provides securities or other non-insurance financial services.”
This is not only odd, it is borderline insulting. Even the simplest term sale is financial advice that can completely alter the financial viability of beneficiaries. I would contest that the life insurance specialist who has worked with business owners and estates for decades is more of a financial advisor than his counterpart at a wirehouse that manages the same client’s wealth but has never broached the subject of risk management.
They prove my above point through some incredible irony. Ten of the thirteen suitability questions—offered in the definition section of this regulation—are financial in nature. If insurance advice is not financial advice, then why is this level of financial suitability underwriting required?
It gets odder in the next part, k, where it dictates that any entity that receives commissions on a sale is liable to the standards put forth, “…regardless of whether the producer has had any direct contact with the consumer…” This is a bombshell to anyone who partakes in overrides. In theory, an advisor that has a brokerage general agency run some term quotes, sells the cheapest one, and then gets sued by the client years later for not selling them a permanent or convertible product, would include the BGA in the lawsuit even though the BGA had never had direct contact with the client.
At this point you are probably concluding that carrier distribution channels will no longer be viable in New York. Fear not, section m states that if you work for a carrier you need only disclose that to the client in advance. I guess suitability is only important when you have access to multiple solutions.
We move along to a small section that discusses duties with respect to in-force transactions (224.5). This is the only section that gets involved with the review process but only if a transaction occurs where the producer is compensated. It is important to note that it does not mandate reviews, it simply discusses that any recommendation made on an in-force policy needs to be done in the client’s best interest.
Section 224.6 follows, and it regards insurer responsibilities and supervision. It describes how to best comply with this regulation, audit producers, compensation, and corrective actions for consumers harmed by violations of the regulation. There is a brief point on carriers “…ensuring that every producer recommending any transaction with respect to the insurer’s policies is adequately trained to make the recommendation…” which I am very interested to see how they will adhere to. Will there be training modules like what we have for annuity products? We shall see.
Section 224.8—Violations—effectively concludes the regulation by declaring any infractions unfair or deceptive acts.
If this entire regulation seems very vague and with little direction it is because it is. I have been told that New York has not made any efforts to explain anything as there are currently two lawsuits against this regulation. As it goes into effect August 1 for annuities and February 1, 2020, for life insurance, it is the opinion of those in the know that the lawsuits will find some conclusions in the coming months and that the rest of us will get much needed clarification.
This regulation may be well meaning but it completely misses the mark in several important respects. I learned recently that one of the main influencers of this regulation was in the compliance department for a major mutual which—if I was a cynical man—explains a lot about what is missed and/or what is specifically regulated.