New York Floats Best Interest Standards For Insurers
January 3, 2018 by Tracey Longo
New York is the latest state to plant its flag in the swirling sands of “best interest” standards in an effort to advance rules governing the sale of annuities and life insurance in the state. The reaction from those it will impact has been swift, and critics are zeroing in on what the rule doesn’t do, as much as on what it does.
“If this would lead the rest of the industry toward a fiduciary standard, I’m all for it, but it should not just be for insurance and annuities, but across the board for all securities,” said Devika Kamboh, president of the Financial Planning Association of New York.
The proposal would cover “all sales of life insurance and annuity products, beyond the types of advice covered by the DOL rule,” Gov. Andrew Cuomo said in a statement. While the proposal does advance New York’s suitability standard for annuities and insurance products, it would not apply to securities, mutual funds, ETFs or other investment products covered by the partially delayed rule created by the U.S. Department of Labor.
And while the DOL rule would only apply to the sale of products using retirement dollars, the New York proposal would extend to all sales of life insurance and annuities.
“As Washington continues to ignore and roll back efforts to protect Americans, New York will continue to use its role as a strong regulator of the financial services and insurance industries to fight for consumers and help ensure a level playing field,” said Cuomo, a Democrat who has been publicly critical of President Trump. “With these commonsense reforms, we are working to protect everyday New Yorkers and give them peace of mind when purchasing these products.”
According to the New York state proposal, a transaction is considered in the “best interest” of a consumer when it is “in furtherance of a consumer’s needs and objectives and is recommended to the consumer without regard to the financial interest of the product seller,” the governor’s press statement said.
The proposed amendments are subject to a 60-day notice and public comment period. If they are passed, New York would become the second state to pass its own best-interest standard. Nevada passed a law in June.
Both states have criticized the DOL’s lengthy delays of its fiduciary rule. While parts of the DOL rule went into effect June 9, provisions regulating the sale of variable and fixed indexed annuities have been delayed until July 1, 2019. Analysts expect the department to weaken annuities provisions, with exceptions.
The rule is concerning to the insurance and the annuities industries, especially those companies operating in New York. Critics of the state’s proposal argue that any new regulation should be uniform across the country so companies, sales professionals, investment advisors and consumers won’t face different standards in different states. New York insurers and annuities providers should not have more stringent rules, for instance, than companies operating in California or Massachusetts, critics said.
“The American Council of Life Insurers urges the New York Department of Financial Services to reconsider amending its suitability regulation to model the U.S. Department of Labor’s fiduciary regulation, which has been delayed for a comprehensive review,” said Kate Kiernan, the council’s vice president, chief counsel and deputy, in a statement.
“Since its partial implementation in June, the fiduciary regulation has harmed small and moderate retirement savers by restricting or eliminating access to retirement products and services,” Kiernan said, “creating an advice gap for those most in need of help. Its bias against commission-based arrangements restricts consumer access to annuities—the only product in the marketplace providing guaranteed lifetime income.
“Wisely,” she added, “the Labor Department has delayed implementing the regulation’s remaining provisions until July 1, 2019. The delay will provide sufficient time for the department to complete its examination of the regulation and determine its next steps.”
Both the ACLI and the Life Insurance Council of New York support an approach that applies more broadly. “We support reasonable and appropriately tailored rules that require all sales professionals to act in the best interest of their customers. To that end, we encourage the [New York State Department of Financial Services] to work with other state insurance regulators, the Labor Department, the SEC, Finra and Congress on a uniform standard of care for investment advice,” Kiernan said. “A collaborative and harmonized regulatory approach would ensure all consumers receive retirement savings information and related financial guidance from financial professionals acting in their best interest, regardless of the retirement products they purchase.”
Insurers would also be required to develop and maintain procedures to prevent financial exploitation of consumers, under the New York state proposal.
The National Association for Fixed Annuities, which along with the ACLI is battling to vacate the DOL rule in court, is no fan of the New York proposal either. “There is great uncertainty about what the final contours of the federal rule will be, not to mention what the [National Association of Insurance Commissioners’] best interest model regulation will look like,” said NAFA Executive Director Chip Anderson. “We are concerned that the New York State Department of Financial Services is moving faster than is warranted and that a resulting patchwork of possibly conflicting standards might have the unintended consequence of limiting product choices for consumers.”
While the New York FPA’s Kamboh would like to see fiduciary standards, rather than just the lower suitability standards the state is amending, she—like so many investment advisors and brokers—would prefer a uniform, national “best interest” standard rather than individual state rules. “It’s just not good for productivity or consumer protection to have a lack of uniform regulation state by state,” she added.
