Changes To Florida's Annuity-Sales Law Draw Flak
June 3, 2013 by Richard Burnett
June 03–A new state law pushed by the life-insurance industry and easily passed by Florida lawmakers promises to “safeguard” all investors — not just elderly ones — from becoming victims of sketchy sales or marketing practices in the annuity business.
But the new legislation, not yet signed by Gov. Rick Scott, is drawing fire from those who say it undermines existing law to such an extent that the expanded protections may be unenforceable.
Also, there may not be enough regulators left to handle the expanded workload, those critics say, because last year’s budget cuts dramatically reduced the enforcement staff at the state’s financial-services agencies — especially the Office of Financial Regulation.
“How are you going to have real enforcement when you don’t have the budget or enough people to do it?” said Paul Auslander, an Orlando financial-planning executive and adviser to former Chief Financial Officer Alex Sink, who pushed for passage of the state’s current annuity law, the Safeguard Our Seniors Act of 2010.
Sales of annuities — long-term insurance contracts designed to provide a reliable stream of income, usually during one’s retirement — are a multibillion-dollar-a-year business in Florida, according to investment-research company Morningstar Inc.
“How can you effectively oversee these products when you put in new rules to expand oversight, but you only have the same four investigators running around the state to keep up with it?” Auslander said. “It’s an absolutely nightmare scenario.”
The insurance industry says such reaction is misplaced. It insists that the restrictions placed on the sale of annuities to people 65 or older by Safeguard Our Seniors have been effective — and extending those protections to all investors only makes sense.
“Ask [financial regulators] how many complaints they have received under Safeguard Our Seniors, and I think you will find not very many,” said Sam Miller, vice president of the Florida Insurance Council. “Expanding this to everybody probably won’t increase their workload.
“The old and amended laws are strong in consumer protection and a deterrent to improper behavior by insurance agents,” he added.
This is only the latest dispute in a long-running battle over regulation of Florida’s annuity market — third-largest in the country, after California’s and New York’s. Sales of variable annuities — the largest category — totaled $11.2 billion in 2011, according to the latest-available Morningstar data.
Aimed largely at older investors, annuities can provide a specified, steady income in retirement. But even good annuity contracts can be complicated, with pages and pages of potentially confusing jargon — something that, when in the wrong hands, has led to abusive and misleading sales or marketing tactics.
Safeguard Our Seniors, which took effect in January 2010, targeted those abuses. Among other things, it raised the fines imposed on insurance agents caught “churning” annuities by reselling them to a customer to generate excessive sales commissions; capped at 10 percent the annuity-surrender fee that can be charged when an investor cashes one in; and established a 14-day period during which an investor can nullify an annuity purchase and receive an unconditional refund.
The new law, passed by the Florida Legislature on April 30, extends the law to all investors. It also extends the unconditional-refund period to 21 days, and it retains the prohibition on annuities with penalty periods of more than 10 years when sold to anyone 65 or older.
For critics, however, the problem is not in the restrictions, which closely track existing law; the problem is embedded in the new law’s fine print, which undermines the ability of regulators to enforce it.
An analysis by the Florida Department of Financial Services in February identified at least a dozen amendments it said were needed to prevent Safeguard Our Seniors’ enforcement provisions from being watered down by the new legislation.
The main concern raised by the analysis involved a change in the legal standard regulators could use to determine whether an insurance agent had sold clients a “suitable” annuity, given their age and financial needs. The current law states that insurers must have had “objectively reasonable grounds” to think the annuity was suitable; the new law removes the word “objectively” — a nuance that would have serious consequences, the regulators warned.
“This omission could significantly hamper enforcement of this statute,” the analysis stated.
Miller, of the insurance trade group, said the February report was much ado about very little. He dismissed it as an exercise by a novice analyst — “a newly hired DFS employee” — and said the report was not introduced to lawmakers until late in the legislative process, after the new law had unanimously cleared multiple committees.
Although it was not clear last week who actually wrote the final DFS report on the new law, other regulatory documents indicated the source of the analysis was Barry Lanier –veteran director of the agency’s Bureau of Investigations.
Also, Miller did acknowledge that state regulators had repeatedly raised similar concerns previously about industry proposals to change Safeguard Our Seniors’ “objectively reasonable” standard. But, he added, those concerns weren’t strong enough to convince lawmakers to alter the new law.
“The term ‘reasonable’ is a legal term, and the courts have clearly established what that means,” Miller said. “Nobody knows what ‘objectively reasonable’ means. We asked DFS and other regulators, and they couldn’t tell us.”
But critics of the new law say the change is a clear strategy by the insurance industry to shrink its exposure to liability by erecting new hurdles to enforcement. Removing “objective” from the law makes a big difference, they say.
“It means that, in litigation, a company accused of doing something deceptive can argue that any allegation is subjective,” said Walter Dartland, a former Florida assistant attorney general who is now the Tallahassee-based director of the Consumer Federation of the Southeast.
“It pushes the burden of proof back on to consumers and presents real barriers to holding companies accountable.”
rburnett@tribune.com or 407-420-5256
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