6 Compliance Risks Annuity Sellers Face In COVID Times

Market downturns can create annuity sales opportunities, but agents and advisors need to be taking steps to protect and prepare themselves because history will look back on how advisors and the industry conducted business during the crisis.

This was the central message of “Extraordinary Times call for Extraordinary Measures,” a National Association for Fixed Annuities webinar on compliance risks, conducted by Summit Compliance.

Although compliance risks exist during typical times, advisors’ exposure increases as clients take losses from investments, and even as a result of action by a broker who might be upset about money that they were managing moved to annuities, said Maureen James, a Summit Compliance principal.

Also during this period, sales due diligence might not be as rigorous as it is in normal times, James said. Advisors should be extra diligent about conduct and documentation.
Here are six risks that James identified:

Complaints/Chargebacks

It is not uncommon for a spike in complaints and accusations that something unsuitable happened during these volatile market times, James said. So advisors need to be especially careful about what will be scrutinized after the fact.

For example, a broker may meet with an advisor’s client and persuade the client to file a complaint.

“They might say, ‘That client was encouraged to sell their assets when the market was at the very bottom. They didn't sell high, they sold low,’” James said.

Insurance Carrier Actions

Insurance carriers can take action against producers if they see a trend or a spike in complaints, or if producers are starting to have regulatory actions taken against them.

Regulatory Enforcement Actions

Complaints to regulators could increase as a result of the current market conditions and we may see more enforcement actions like fines or license revocations.

With these low annuity rates, a client could later lodge a complaint that it was inappropriate to be locked into a low rate for a long term. That would be cause for a regulator to investigate not only that sale, but a whole lot more.

"This deal may have been completely suitable," James siad. "But the regulator may come in and say, 'Based on this complaint, I want to look at all of the sales you made to see if they're suitable.'"

In that case, the regulator will be looking for trends. And if that agent sold every client an annuity (maybe even only one product) regardless of the market, the regulator is likely to ask some tough questions about those sales.

"It's going to be really important that your documentation can support that these were well thought out, strong recommendations, based on long-term planning horizons," James said.

Lawsuits

It is not just official complaints that may arise from this period. As clients and lawyers review the sales made during these months, they might also find grounds for lawsuits.

Bad Press/Reputational Damage

“Something that we tend to overlook is bad press and the reputational damage that can cause a thriving practice to sustain a big loss,” James said.

Criminal Charges

But one risk that absolutely should not be overlooked is the possibility of criminal charges.
“Charges don't only involve obvious things like theft or premium, but they can be for things like giving investment advice if you're not properly registered,” James said. “Or say you're accused of financially exploiting seniors, especially if they or their relative or their attorney, may feel like they were scared into moving their money, or even that the senior was incapable of making financial decisions.”

All of these risks, but the criminal charges one in particular are especially heightened now because advisors are not or cannot meet clients face to face, James said.

Another article explores why advisors have to reshape their marketing and advertising to avoid serious regulatory and legal trouble.

Steven A. Morelli is editor-in-chief for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at smorelli@innfeedback.com.

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Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at steve@innemail.com.