Date: 25-Aug-2021
The push to change regulatory standards for annuity sales is gaining momentum.
On Aug. 17, Connecticut became the 16th state to adopt a suitability model update developed by the National Association of Insurance Commissioners (NAIC). The update sets a “best interest” standard for annuity sellers, meaning sellers must put customers’ interests ahead of their own.
“The department’s action builds on the growing, nationwide momentum for enhanced protections for retirement savers relying on annuities for lifetime income,” American Council of Life Insurers President and CEO Susan Neely and National Association of Insurance and Financial Advisors Connecticut President Sofia Dumansky said in a joint statement about the new regulations.
Iowa was the first state to put the new NAIC rules into effect. They have been followed by Alabama, Arizona, Arkansas, Connecticut, Delaware, Idaho, Maine, Michigan, Montana, North Dakota, Nebraska, Ohio, Rhode Island, Texas and Virginia.
Neely and Dumansky explain that a fiduciary-only approach limits choices for consumers. At the same time, a “best interest” model offers strong state and federal protections and provides savers, particularly financially vulnerable middle-income Americans, access to information about different choices for long-term security through retirement.
The rules by NAIC’s model regulation that these states have adopted are consistent aside from minute procedural distinctions. Supporters of the regulation say that a high degree of harmonization across state regulators would benefit consumers and the industry.
Since 2003, state insurance regulators have overseen the sale of annuities to ensure products sold to consumers are suitable for them, based on a review of their needs.
In April 2018, the U.S. Securities and Exchange Commission (SEC) updated the standard of care broker-dealers and investment advisers would be required to provide to retail investors. The final rule was approved in June 2020.
The U.S. Congress confirmed the importance of lifetime income when it passed the SECURE Act of 2019 that made it easier for employers to include annuities in workplace retirement plans.
Now the state laws bring rules in closer alignment with the SEC’s Regulation Best Interest, which requires broker-dealers to only recommend financial products to their customers in their best interests and clearly identify any potential conflicts of interest and financial incentives the broker-dealer.
Under the new state rules, producers and insurers will have to satisfy requirements outlined in a care obligation, a disclosure obligation, a conflict of interest obligation, and a documentation obligation. The state regulations aim to ensure that consumers receive better information in plain English to help them make informed decisions while preserving access to valuable financial services.
The regulation also permits the sellers to collect sales commissions and participate in some kinds of sales contests.
Industry observers expect that half of the states will adopt “best interest” regulations by the end of 2021. Kentucky, Nevada and Pennsylvania are considering similar rules.
“More states should follow Connecticut with this sensible consumer protection. Then more consumers across America looking to protect their family’s financial future will benefit from a best interest standard of care, no matter where they live,” Neely and Dumansky said.
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