It's debatable if the fiduciary standard is 'higher' than suitability. But the better question might be, who's holding the bar?
The New York Department of Financial Services was acting within its authority when it issued a rule requiring insurance brokers to disclose sources of compensation, an appellate division of the New York Supreme Court ruled.
The rule, known as Regulation 194, requires insurance brokers to disclose to clients a description of their role in the sale of insurance, any compensation received because of the sale and factors that will affect their compensation. It was instituted in January 2010 by the New York Insurance Department, which later became part of the DFS.
Those challenging the rule, which include the Independent Insurance Agents and Brokers of New York, the Council of Insurance Brokers of Greater New York, Aurora Inc. and Sullivan Financial Group, have claimed the state's insurance superintendent was acting outside the scope of his authority when issuing the rule. The court, however, rejected those arguments in its ruling, finding there was nothing in case law that prohibited the insurance superintendent from requiring disclosure.
Christopher A. Brassard, chairman of the IIABNY board, said in a written statement he was "disappointed" by the ruling and disagrees with the court. He said the law doesn't provide any benefit to consumers and places "unprecedented obligations" on insurance brokers. The group "still believes that Insurance Regulation 194 is a burdensome, unnecessary regulation that imposes new duties on insurance producers beyond those in existing law," Brassard said.
Tim Dodge, director of research and media relations for the IIABNY, said the board has not made up its mind about the next course of action. He said the IIABNY has not yet run out of state options and the board of directors could decide to appeal the to New York State Court of Appeals, the state's highest court.
Dodge said the regulation ladens brokers with significant record keeping by requiring companies maintain quotes and alternate quotes they submit to clients, and compensation agreements, among other papers. The regulation says companies must keep these records for three years, unless there is an agreement in place for the insured to retain the records.
"We're talking about holding on to a lot of nitty-gritty details that it's quite possible no one would ever ask for," Dodge said.
In a previous defense of the appeal, the New York Attorney General said the regulation was not only adopted properly, it addressed a missing component in financial services oversight (Best's News Service, Aug. 4, 2010). The New York Attorney General previously said brokers operate "under a cloak of secrecy," while other financial services professionals, like stockbrokers and mortgage brokers, must disclose their sources of compensation.
The most recent court opinion said the rule was rationally justified as evidenced by the need for regulation after criminal bid-rigging and steering schemes involving numerous insurers and insurance producers were uncovered in New York. The court noted that from 2005 to 2007 the New York Attorney General "entered into settlement agreements and regulatory stipulations with a number of major insurers and brokers, resulting in more than $1 billion in compensation paid to consumers harmed" by the practices.
David Neustadt, spokesman for the DFS, said the department was gratified by the ruling and will continue to defend against any attempts to overturn the rule.
(By Michael Buck, senior associate editor, BestWeek: Michael.Buck@ambest.com)