Can ‘regtech’ help producers stay compliant with new rules?

Every minute that an advisor spends making sure they are in strict compliance with ever-changing and tougher regulations is one less minute devoted to clients.

Unfortunately, it is also the reality in 2022.

Technology is filling that void with systems and software that are helping producers and their financial institutional sponsors achieve disciplined and consistent recordkeeping.

“The benefits are significant,” said Sandeep Deva, vice president of policy development for Exdion, an insurance digital platform company based in India. “These products enable the insurance industry to meet compliance regulations efficiently and effectively to reduce noncompliance events.”

What is at stake is nothing short of survival in a rapidly changing regulatory climate. States are rapidly adopting new and tougher “best interest” sales standards, while regulators struggle to give the industry consistent rules.

The U.S. Department of Labor is again attempting to redefine “fiduciary” in a way that has many industry watchers recalling the dreaded 2016 fiduciary rule. Although that Obama administration effort was defeated in court, the DOL likely learned enough lessons to craft a better rule.

Then there’s the Securities and Exchange Commission’s Regulation Best Interest, which took effect June 30, 2020.

The best compliance response for all these rules is usually documentation, documentation and more documentation. But that is just the start of the benefits that technology can bring to the independent agent, Deva added.

“Insurance compliance solutions typically contain policy and procedure management, incident management, complaint management, task management, audit trails, workflow management, reporting and regulatory intelligence features,” he said. “These provide a comprehensive set of tools for insurance agencies to use to govern all their compliance-related tasks.”

Many different rules

Ryan Brown is corporate counsel at M&O Marketing, an independent marketing organization focused on assisting independent financial professionals headquartered in Southfield, Mich. M&O does nearly $1 billion in fixed and fixed indexed annuity sales, along with some life insurance sales. The company also owns a broker-dealer and registered investment advisory firm called Corecap.

With many different advisors and producers operating under one umbrella firm, compliance solutions are a high priority at M&O, Brown said.

“We’ve taken the position that if something were to happen, whether it’s because of a regulatory mishap or a customer making a complaint against you, we’re the bigger fish in the food chain,” Brown explained. “So, we’re going to get dragged into it. Because of that, we require you to have this XYZ paperwork completed, these disclosures completed.”

Simply figuring out what regulations apply to a new transaction can be a difficult process, Brown said. For example, a life insurance sale would fall under state insurance regulations, but if that sale is being done with qualified money, it might also attract oversight from the DOL and/or Financial Industry Regulatory Authority (FINRA).

It is the impending DOL fiduciary rewrite that has the biggest compliance implications. Part of the concern is the history. The 2016 fiduciary rule included a private right of action, meaning disgruntled clients could sue producers and insurers.

That rule was replaced by a package of rules completed in the Trump administration and allowed to stand by the Biden team.

However, the DOL’s Spring 2021 Regulatory Agenda confirmed that it will rewrite the definition of fiduciary. The Employee Benefits Security Administration is expected to issue the notice of rulemaking at the end of this year or early in 2023.

Virtually the only thing left for the DOL to do with its fiduciary definition rewrite is to essentially make all first-time advice fiduciary, analysts agreed during an August webinar.

If it happens, that change would be significant and basically return the DOL to its initial 2016 fiduciary rule, said Brad Campbell, partner at Faegre Drinker law firm.

“Once the rollover occurs, DOL is taking the position that fiduciary starts with the initial conversation,” Campbell said.

“That’s a pretty aggressive reinterpretation of what they historically had said, which frankly, was the opposite, that most rollovers were not fiduciary.”

Keep good records

For many insurers, the key to maintaining strict compliance and avoiding fines and lawsuits is a disciplined, streamlined intake system. Several software companies, like Exdion, are providing solutions such as electronic notetaking and checklists so producers do not miss any important steps. Information is gathered in a consistent manner and shared among all parties.

With the COVID-19 pandemic limiting in-person meetings, accurate recordkeeping became an even higher priority. And a lot tougher, Brown noted.

“If you want to stay afloat, you have to adapt or at least get familiar with that, regardless of whether the producer is 80 years old and still selling insurance or is a newbie who is super tech savvy,” Brown said.

In a 2022 survey of financial services firms by Thomson Reuters, about a quarter of respondents said that the successful adoption of “regtech,” or regulation technology, will produce enough efficiencies over time to permit a greater focus on value-add activities.

Respondents had a substantial wish list of what they would like regtech solutions to be able to do for them. At the top was improved line of sight to risk management processes (21%) and increased accuracy of regulatory reporting (19%).

“I think customer relationship management systems are really critical,” Brown said. “And I think people that stuck with them are going to be grateful in the long run that they adopted them. They’re going to have better client notes versus just scribbles on a yellow legal pad.”

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. John may be reached at [email protected]. Follow him on Twitter @INNJohnH.