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Distribution Compliance

New Year, Old Issues

We are diving head first into the new year, but that doesn’t mean some of the most common sales practice issues have changed much. Florida’s Department of Financial Services shared a number of commonly investigated allegations in their December Insurance Insights publication, with many of them focused on sales practices. For example, advertising violations, annuity suitability, fraudulent and deceptive practices, misrepresentation, and twisting are all listed.

Understanding how products are being marketed, positioned, and sold to consumers is important for all members of the sales food chain - insurers, marketing intermediaries and agents – because if complaints do arise, there is a potential for any (or all) of those entities to be at risk for fines or other regulatory action. The DFS highlights a few specific advertising issues to remain mindful of:

  1. All advertising must have prior approval of the benefiting insurance company before being distributed. Note that even if the benefiting company is not specifically named, the use of product information such as interest rates, pricing or unique features can mean company approval is required. Additionally, once an ad is approved, it must be used exactly as-is. One of the issues the DFS notes is that “some licensees decide to be creative and make changes to preapproved advertisements.” The department states they will verify with the benefitting insurer if they have approved an ad in question. If not, then the agent will be in violation. For more information, you can refer to 69B-150.013(10), F.A.C. and paragraph 626.9541(1)(b), F.S.
  2. Advertisements must make clear that they relate to insurance products and agents must clearly indicate that they are acting as an insurance agent (s.626.9531(1), F.S.) At CCS, we commonly refer to this as the “golden rule” of insurance advertising – consumers must always understand what is being promoted (insurance) and who is selling it (an insurance agent.) If that message is minimized, rendered unclear, omitted, etc., then there can be a significant risk exposure.
  3. Fraudulent and deceptive practices (s.626.611(9), F.S.) misrepresentation (s.626.9541(1)(a), F.S.) and twisting (s.626.9541(1)(l), F.S.) can all be found within problematic advertising. As an example, the DFS gives the scenario of an agent using deceptive advertising to induce a sale as a form of misrepresentation.
  4. While suitability (s.627.4554, F.S.) is not as directly advertising related as using misleading, modified or unapproved materials, it is a sales practice issue that is closely related to advertising. Often suitability issues arise because product information is not being clearly disclosed to consumers during the sales process, whether for an initial purchase or for an exchange or replacement.

While Florida is sharing items that they frequently investigate, it’s important to understand that these issues are not limited to Florida. In fact, it’s fairly common to see the same issues come up in consent orders in many states across the nation. Insurers are expected to have a method and system of control over ads that benefit them, so if that is lacking, there is risk exposure. For intermediaries and/or agents, if modifications are being made to carrier-approved advertising or if ads are not going through carrier review when required, then there is a risk liability present.

Furthermore, to the extent that advertisements don’t meet certain standards such as clearly indicating that they are insurance solicitations, that they are being presented by insurance agents (if that is the case), or not adequately explaining the mechanics, benefits and limitations of the product, then there can be a significant risk liability for any of the parties found to be responsible.

Keep these items in mind as you make a fresh start in any of your marketing initiatives for 2016.

Lead Generation – Your Leads, Your Responsibility

Lead generation continues to be a concern in the insurance sales process. For example, Maine recently issued Bulletin 403 on May 11, 2015, which deals with a number of concerns around lead cards. The bulletin calls out some of the most prevalent issues we see with lead generation materials:

  • Containing words, symbols, seals, or logos that suggest to the consumers that the card comes from or is endorsed by any government agency.
  • Cards that fail to disclose conspicuously, in plain and understandable language and a typeface that will be visible to the mailing's intended audience, that the card is an insurance solicitation and that an insurance agent may contact the consumer.
  • Cards that suggest that the sole purpose of the card is to offer free information or a brochure to the consumer or provide a free review of benefits for the consumer ‘Free elder law information,‘ ‘Senior benefits update,‘ ‘Medicare health plan update,’ etc.
  • Cards requesting that consumers mail their response to an unspecified addressee, such as 'National Response Center,' 'Regional Reply Office,' or simply a Post Office Box, and which do not allow consumers to know the true identity of the addressee, whether it be a producer, insurance agency, or lead generating entity.

The bulletin also reinforces that producers and agencies using lead generation devices are responsible for ensuring compliance for the materials.  Similarly, back in 2012, Kansas issued a reminder that there is “no regulatory buffer” between third parties and carriers or agents. It’s become increasingly important to develop policies and procedures to monitor, review and act on issues within a carrier’s sales force. While there is not a one-size-fits all approach to how to set up such a program, it’s clear that not having a plan at all is no longer an option. 

Jumping on the FIA Birthday Bandwagon

There has been a small flurry of publicity around the 20th birthday of fixed indexed annuities. (e.g., InsuranceNewsNet, February 2015, p. 6 Editorial, “Happy 20th Birthday Indexed Annuities!”  and “Fixed Indexed Annuities Celebrate 20 Years”)

I read the first in this list, Mr. Morelli’s editorial, yesterday. The lead is that “Fixed index annuities want what any 20-year-old desires: Acceptance and Respect.” The piece acknowledges the “bad boy taint from years past” but then appears to suggest that the taint may not be as far in the past as that line suggests: “Sometimes those [marketing] messages and products have gotten a little too creative.” “Some companies were trying to delivery on an impossible promise.” “Aggressive marketing.” “Aggressive selling to prospects in their 70s and 80s and you had the makings for public revulsion.”

There is a mention of “uncapped” strategies that are the latest marketing concern he correctly notes that this marketing is getting attention from regulators. See Iowa Bulletin 14-02 dated September 15, 2014. Morelli says that analysts such as “Sheryl Moore of Moore Market Intelligence say that those products are built so they will have the same result as pretty much any other FIA.” If FIAs do want acceptance and respect, then the “aggressive” and “creative” marketing has to stop.

To “shake the bad boy rep,” FIAs have to be marketed in a fair and balanced way, making clear what they can and cannot do, what they offer protection from and what the costs of that protection are. The bad boy rep can, perhaps be turned around, but it will mean that those who create the “aggressive” and “creative” marketing material have to stop and they have to let the product become boring. If bad boys do change, they may be perceived as boring. But it isn’t only the products that have to shake the rep, it is the people who sell them. If the product is going to get real respect in the next 20 years, the people who create marketing materials about FIAs and the people who sell FIAs are going to have to come to terms with a little boredom.

Morelli concludes: “How will the FIA be taken seriously as a retirement vehicle? The same way in which any 20-year-old shakes a bad rep: Make clear promises that they keep, time after time, year after year.” That is true for the products and also for the insurance producers selling the product, though I would modify it a bit: Give real information that is fair, balanced, complete and accurate, time after time, year after year. Then perhaps the FIA will grow into a mature and respectable adult.

Tennessee Joins States with Advice on Permitted/Prohibited Activities Based on Licensing

In our Advertising and Distribution Compliance Department, we receive questions on this issue almost every day. Having guidance on what an “insurance-only” producer can and cannot do from the states is very helpful in framing those discussions. Tennessee now joins the small number of states providing that guidance in their Bulletin dated May 22, 2013, titled: Licensing and/or Registration Requirements and Permitted Activities.

Tennessee’s guidance is very similar to that first offered by Iowa in that the list of permitted activities clearly and explicitly includes the items that must be discussed to complete the suitability forms now mandated in most states and carriers.

From a producer’s perspective, some of the most important and difficult issues are raised in the following statements from the Tennessee Bulletin:

“In his or her general discussion about the expectations of the funds being considered to purchase the annuity or life insurance, the Insurance-Only Person may discuss: that the funds need protection from market risk; that the tax status of the funds and that tax deferral needs to be utilized or maintained; that the funds may be needed to provide a lifetime income stream; that the funds need to earn a guaranteed interest rate; or that there are other funds available during the surrender period of the annuity or life insurance for emergency or urgent needs and where those funds are located….”

This statement is completely reasonable, but in practice it puts the Insurance-only producer in the difficult situation of identifying assets that could fund an insurance product but then having to send the prospect elsewhere to liquidate them. That is a tough thing for anyone in sales to do, even if they know it is the right thing to do. As a result, in practice, there is a lot of pressure to find a way around these rules and we have often heard that no insurance producer has ever been disciplined for this type of source of funds issue. I am hopeful it won’t take such regulatory action to achieve widespread compliance, but it might. The Bulletin notes that the penalties could be license probation, suspension, and revocation, as well as fines of up to $10,000/violation.

For any producers operating on the assumption that this will not be enforced, I encourage placing a call to the Tennessee Insurance Department. Our opinion is that the DOI put the bulletin out because they are concerned about these issues and that operating on another assumption puts one’s livelihood at risk, not to mention one’s savings.

Licensing issues should be included in the debate about fees

Our Advertising and Producer Compliance Department has regular conversations with various interested parties about charging fees and/or commissions, services provided and the related licensing and certification issues. In our reviews, we question the term “advisor” when used by individuals who possess an insurance license but do not have their Series 65 Investment Advisor Representative license.

Given the blurred lines and confused analysis we sometimes see, I was disappointed that a recent article in a trade publication (My Big Debate With Fees, Juli McNeely, InsuranceNewsNet, January 2013, page 32) did not address these and related compliance issues that should be part of the decision-making process. Ms. McNeely discusses the dilemma faced by an independent agency over whether to move from a commission-based to a fee-based structure but completely failed to mention the licensing issues involved. It appears from her brief bio that Ms. McNeely does have the licensing (RIA) and certifications (CFP, CLU, LUTCF) to provide a wide range of services to her own clients and community. Her internal debate, as described publicly in the article, does not point out to her readers that the only reason this option is open to her is because of all the work she has done to obtain these licenses and certifications. There is no easy way to get to that place—no shortcut. One must do the work and master the necessary material. It is because she has made this commitment to her career and has put the time and effort into obtaining these that she is in a position to confront and debate the fee issue.

The article presented the choice as absolute: fee-only or commission-only. Not all producers see it that way. In the article, Ms. McNeely looked at the choice—one or the other—from a purely business perspective. However, there are compliance issues involved with the change as well that must be considered. There is no mention of fiduciary obligations or licensing prerequisites. I would like to have seen a mention of some of the non-financial issues involved in this choice.

From a compliance perspective, a complete change from one compensation approach to another (as is apparently contemplated in the article) is cleaner than when a producer charges a fee for some services while also selling insurance products on a commission. An insurance office adding fee-based services needs to be very clear about what falls into each category of compensation and also that the appropriate licenses and certifications are held for all activities. Staff and clients have to clearly understand what falls into which category of compensation and what personnel is licensed to do what. Even if all licenses are held, IAR/RIA as well as an appropriate insurance license, there is a significant challenge to make sure that no fee is charged for those services which are generally considered to be compensated through the commission paid on insurance products.

It is our recommendation that any firm looking at these issues and alternative methods of compensation look at the business issues as Ms. McNeely does, but also a variety of compliance issues that inform and flow from the various choices. But beyond that, we also recommend looking at these compensation issues on an on-going basis as part of a regular, compliance audit program.