Recently, the state of New York's Department of Financial Services (DFS), which monitors state banking, insurance and related regulations, updated its proposal for a new "best interest" standard for life insurance and annuity transactions. And like such proposals at the federal level, it’s sparked controversy over how it might help or hurt clients.
New York has floated the regulation because it wants to ensure that sales of insurance and annuity products are appropriate to customers' "insurance needs and financial objectives," as a department statement put it. In a way, the New York proposal mimics the recently jettisoned U.S. Department of Labor fiduciary regulations and a similar proposal from the U.S. Securities and Exchange Commission, except of course that the New York version would apply only to transactions within the state.
Among critics' complaints is that the new proposal sets the bar too high, requiring sellers of insurance products to take into account all available products and services, even those they don't offer, when speaking to clients. "The DFS took suitability concepts from other bodies of law and threw in everything they could find, making this proposed standard as tough as they could," said Steven Lofchie, a partner and co-chair of the Financial Services Group at New York-based law firm Cadwalader, Wickersham & Taft.
The rule, he said, effectively requires every salesperson to act as a fiduciary for each client. "The sales rep would have an obligation to gather and analyze a substantial amount of information about the client and about the market, and then find the best deal for the client," said Lofchie. "Imposing those kinds of obligations on a salesperson has very substantial costs, which, realistically, the customer must ultimately bear."
But supporters contend that that's a cynical misreading of the rule. "I’ve read the [New York] proposal, and nothing in it required salespeople to understand all available products and services," said Jane Bryant Quinn, AARP columnist and author of How To Make Your Money Last. "That’s pure scare talk by people hoping to bring the regulation down."
Quinn says the proposal plainly allows salespeople to offer a limited number of products as long as they disclose that fact to customers. "That seems pretty reasonable to me," she said. "The rule does require that salespeople understand the particular products they’re selling, which, in my experience, would be a great advance."
Nevertheless, Lofchie is concerned that the regulation's high costs and standards will have a dampening effect on consumers' ability to obtain products they want. "At some level, you make it so tough that it's impossible for people to do business at a reasonable cost," he said.
Quinn isn't buying it. "Every single consumer advance in the financial field has been accompanied by industry whines that they’ll be put out of business and consumers will suffer. It’s never true. Consumers always gain from fee disclosure, honest product disclosures and tough rules that prevent (or try to prevent) misrepresentation," she said. "It’s either funny or sad—you choose—to hear agents complain that they’ll be afraid to sell if they’re required to understand what they’re selling.
“It is a positive service to the consumers to protect them from salespeople who are poorly informed and have no idea what the consequences of selling an annuity might be."
There is, however, a common thread between these two views. The crux of the controversy may lie in the term "fiduciary." By definition, a fiduciary must act in a client's best interest. But with a sales rep—for any product or service, not just financial transactions—that's not necessarily the expectation. A salesperson wants to sell. No sales rep is going to tell a potential customer, "You should not buy this."