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Proposed revisions to Suitability in NY: What next?

You may have missed the publication of Proposed revisions to NY’s Regulation 187 as it came out as many of us were celebrating holidays and taking a few well-deserved days off. However, we are all back to work now and as we continue to grapple with implementing the mandates of Regulation 210 (regarding non-guaranteed elements), we have a new proposal: Suitability in Life Insurance and Annuity Transactions. Yep, you read that correctly, Suitability in Life Insurance and Annuity Transactions.

In some ways, suitability is a misnomer because one thing this regulation does is equate suitability and best interest in a new, direct way. Before the DOL rule, I often spoke to groups about what seemed to be a degree of regulatory confusion about the difference between a suitable recommendation and a best interest recommendation. There are many examples in disciplinary actions and published statements where insurance regulators, often at the commissioner level, have used those terms and phrases interchangeably and therefore, in my opinion, inaccurately. NY now intends to make it accurate. And apply this new concept of suitability to life insurance. 

So, what does “best interest of the consumer” mean in NY’s suitability proposal?

First, it is transactional, which makes more sense in the context of insurance than the relationship-based concept of the DOL fiduciary rule. A transaction is “any purchase, replacement, modification, or election of a contractual provision with respect to a proposed or in-force policy.” Note the inclusion of “election of a contractual provision”, which would typically be post-issue.

There must be a recommendation. Recommendation is defined as “one or more statements or acts…to a consumer” by a producer or insurer if there is no producer involved. The statements or acts “reasonably may be interpreted as advice” and the consumer enters into or refrains from entering into a transaction. Finally, there is an intent element to the definition. The recommendation must include an intent by the producer/insurer, which is interesting, especially when we are talking about an insurer. Is it possible for a corporate entity to have an intent? (They can make campaign contributions as people, after all.) Are sales goals the same as intent?

In all states plus in the federal securities suitability standards, there are 12 factors to be considered, but NY is proposing to add a lucky 13th: “Tolerance of non-guaranteed elements in the policy, including variability in premium, cash value, death benefit or fees.”  They also modify the wording of some of the other 12 as well to make some policy features explicit suitability factors. Very significantly, the definition of “suitable” also requires consideration of “all available products, services, and transactions.” What is meant by “available?” What the producer is licensed/appointed to sell? What is available anywhere by anyone with an appropriate license? How can a producer consider products that they do not sell with the level of diligence apparently required by the regulation?

A producer/insurer acts in the consumer’s best interest under this proposal when the recommendation reflects due care and skill and is based on an evaluation of the suitability information provided and is made “without regard to the financial or other interests of the producer, insurer, or any other party.” The consumer must have been “reasonably informed” of the features of the product – whether favorable or unfavorable. In addition, the consumer has to have been informed of the producer’s compensation, which is not really a new requirement since Reg 194 has required notification for several years now. The producer/insurer must determine that the consumer would benefit from features in the policy (which includes both life insurance and annuities).

In addition to these best interest/suitability standards, a few additional rules are incorporated.  The producer cannot “state or imply to the consumer that a recommendation to enter into a transaction is part of financial planning, financial advice, investment management or related services unless the producer has a specific certification or professional designation in that area.” That seems more than reasonable when it comes to financial planning and investment management. However, isn’t any recommendation covered by this regulation financial advice? What certification or designation is contemplated for that element of this prohibition? 

The regulation also states that it applies to “every producer in the transaction, regardless of whether the producer has had any direct contact with the consumer.” This seems to be a warning to general agents and IMOs that they need to be very careful in this regard and have good oversight in place to make sure that they are not inadvertently brought into a violation because of an override payment on a sale that was not suitable.

Insurers are required not only to have policies and procedures around suitability and the implementation of the above rules, but also, they must establish procedures “designed to prevent financial exploitation and abuse.”

Finally, in contrast with the DOL rule, this proposal specifically endorses commission sales as consistent with both the suitable and best interest standard. It states: “Nothing in this Part shall be construed to prohibit the payment to a producer of any type or amount of compensation otherwise permitted under the Insurance Law.”  That is consistent with the DFS position that the compensation limits set forth in §4228 are reasonable. 

This proposal is currently in the public comment period.

We have had conversations with clients about making comments on their behalf. If you are interested in discussing this proposal and how it might impact your company, please contact me at 518-692-2494 or ccurrin@currincompliance.com. We will also be discussing this in more detail at our upcoming symposium on February 6 in Irvine, CA