New York State Final Best Interest Regs Cover Life As Well As Annuities
July 20, 2018 by Allison Bell
New York state has heated up the fight over financial services sales standards by adopting a best interest standard that applies both to annuities and to life insurance.
The final best interest regulation is set to take effect Aug. 1.
If the regulation takes effect on schedule and works as drafters expect it will affect transactions involving a wide range of products, including term life, life policies with small death benefit, group life policies, large policies sold to sophisticated investors through private placements, and group annuities, as well as to products such as individual annuities and individual permanent life insurance policies.
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The regulation does include four exemptions. The exemptions are for:
- Pension risk transfer arrangements.
- Corporate-owned life insurance (COLI) and bank-owned life insurance (BOLI) arrangements written under New York State Insurance Law Section 3205(d).
- Credit life insurance.
- Life settlement transactions.
The New York Department of Financial Services has drafted the new regulation in the form of an amendment to an existing regulation, Insurance Regulation 187.
The department has posted a packet of materials related to the regulation, including a copy of the text, here.
The department says it already has a fiduciary rule standard for life settlement arrangements.
Department officials say, in an assessment of the 36 sets of public comments the draft form of the regulation received, that they resisted many requests for additional exemptions.
“The department agrees with those commenters that support a consistent standard of care across life insurance and annuity product lines,” the department says in the assessment. “A consistent standard promotes a level playing field among insurers, is more easily understood by consumers and is more auditable for the department. Consistency across life insurance and annuity product lines also promotes cost savings for producers and insurers who would not have to develop multiple compliance systems and multiple supervision systems.”
If the department added more exemptions, that “would result in a patchwork of standards and uncertainty among producers and consumers about the standards of care that producers will provide to consumers in any given transaction,” the department said.
The Background
The Employee Retirement Income Security Act of 1974 and related laws and regulations have set standards for sales of investment products to retirement plans.
State insurance regulators have developed a number of sales standards and other market conduct requirements for sellers of annuities. One major standard, the suitability standard, requires sellers and issuers of annuities to verify that the products sold suit the purchasers’ needs.
During the administration of former President Barack Obama, the U.S. Department of Labor responded to complaints about possible gaps in ERISA-based rules by trying to develop the DOL fiduciary rule, and a set of best interest guidelines implementing the fiduciary rule. The fiduciary rule would have required sellers and issuers of retirement-related services and products to act in the best interests of the retirement savers. The best interest standard guideline would have defined the term “best interest.” That guideline and other guidelines would have set the rules product issuers, distributors and sellers would have used to implement the DOL fiduciary rule.
Under President Donald Trump, DOL officials delayed implementation of the rule. In June, a federal appeals court panel blocked the implementation of the rule, declaring it to be arbitrary and capricious.
The U.S. Securities and Exchange Commission is now trying to develop a best interest standard that would apply to both brokers and to financial advisors.
Some state insurance commissioners are trying to develop new sales standards for their own states, and some are working through the National Association of Insurance Commissioners to develop model regulations that could, possibly, be adopted by state legislatures and insurance regulatory agencies in many states.
New York State Rolls In
Empire State regulators took a turn at the bat in December, by posting the draft of the best interest regulations they have just completed.
In some ways, both the draft and final version of the New York state best regulations are tougher than the DOL fiduciary rule.
Officials at the DOL, for example, suggested that they might try to apply their rule to some forms of life insurance used in retirement planning, they never explicitly applied their rule to sales of life insurance.
The New York state rule will apply to life insurance.
What New York State’s Regulations Require
The new New York state best interest standard:
- Applies to any recommended transaction.
- Requires a recommended transaction to be in the best interest of the consumer, and to “appropriately” the consumer’s needs and objectives at the time of the transaction.
- Adds definitions of terms such as “producer” to the state’s existing suitability standard.
- Requires an insurer interacting directly with a consumer to meet the best interest standard.
- Requires an insurer or producer to consider only the interests of the consumer when making a recommendation, and not the producer’s compensation or other incentives.
- Requires the producer’s or insurer’s recommendation to be “based on an evaluation of the relevant suitability information of the consumer,” and to reflect “the care, skill, prudence, and diligence that a prudent person acting in a like capacity and familiar with such matters would use under the circumstances then prevailing.”
- Sets separate definitions of “suitability information” for term life policies with no cash value and for other specific standards.
Maria Vullo Weighs In
The New York department says its new regulation will help protect New York state residents against conflicted advice, by ensuring that life and annuity transactions are in the best interest of the consumers involved.
Maria Vullo, the New York financial services superintendent, says in a statement that New York state had to develop a state standard because of moves to roll back essential financial services regulations at the federal level.
“Given the key role insurance products play in providing financial security to middle class New Yorkers, it is essential that a provider adhere to a high standard of care and only recommend insurance and annuity products that are in the consumer’s best interests and not be influenced by a producer’s financial incentives,” Vullo says. “With this final regulation, New Yorkers can now be confident that the insurance agents, brokers and companies that they rely on are recommending the right products.”
Interest Groups React
Many different insurance and financial professional groups have argued that best interest standards in general, and New York state’s draft regulations in particular, are vague, hard to understand, unnecessary, and likely to lead to compliance and litigation problems for financial professionals who are doing their best to protect consumers against the risk of death and post-retirement poverty.
But he Life Insurance Council of New York (LICONY) has welcomed the final version of the New York regulations, saying the final version reflects changes it proposed.
