To Best Or Not To Best . . . That Is The Question — Or Is It?

By Kim O'Brien InsuranceNewsNet

For those following developments at the state commissioners’ level, a working group is drafting an update to the model suitability regulation, deciding whether to include an explicit “best-interest” provision.

It has sparked debate between factions on the working group but the Fixed Annuity Consumer Choice campaign is not convinced it matters.

FACC maintains the National Association of Insurance Commissioners should leave the model suitability regulation alone and focus attention instead on better disclosure. However, there are those who support an explicit best interest standard of care while others prefer instead to adopt practice requirements that emulate best interest.

Does it matter?

Unlike the profound choice confronting Hamlet on whether to go on with life, the question of whether the updated model law should include explicit versus implicit best interest requirements may be the proverbial distinction without a difference.

There are legal and practical reasons why the fight at the NAIC over the best-interest label might be much ado about nothing. It might serve only to underscore reasons why FACC opposes any change to the model suitability regulation that may head inexorably towards a reincarnated Department of Labor fiduciary rule.

How We Got Here

Let’s back up and assess how we got here. Following defeat of the DOL fiduciary rule, functional regulators started moving towards adoption of a best-interest rule to fill some perceived vacuum in consumer protection and try to create supposed uniformity across different kinds of financial services providers.

The Securities and Exchange Commission released its best interest proposal for investment brokers while the NAIC struggled to conceive its own version of best interest. An NAIC working group has met numerous times to modify the existing model suitability regulation to “enhance” protection, but so far there is no consensus on specifics.

The FACC – a nonprofit formed to promote fixed annuities -- is skeptical there is need for such additional regulation when all agree suitability is working. Creating a uniform standard across the wide spectrum of financial service providers runs headlong into legitimate historical differences between and among providers based on real differences in products and services.

FACC contends the financial services marketplace is vibrant, evidence of harm to consumers is dubious, and danger of unintended consequences from tampering with long-established regulatory standards is high.

Nonetheless, the NAIC has plowed forward with its debate over changes to the model annuity suitability regulation. Most industry trade organizations surprisingly endorse the work of the NAIC working group or sit silently through deliberations while FACC and a handful of others (including Americans for Asset Protection and Independent Insurance Agents & Brokers of America) have tried to tap the brakes.

It is in this context that the debate arose over whether the NAIC should use the words “best interest” or bypass those actual words while still adopting equivalent standards. Some suggest using those words only in the title or purpose section of the regulation (and not the body) as if that would make any difference.

Many – including most notably New York, which has already adopted a best-interest regulation – are adamant the regulation must include an explicit best-interest standard.

While the FACC would certainly prefer the words “best interest” be left out of any regulation, the debate is mostly academic, and in some ways a distraction. That is, the NAIC draft proposal will be interpreted as “best interest” regardless of whether that term is used or not.

Since the rule calls for placing consumer interests ahead of agent interests, that unto itself will be interpreted as best interest, for there is no sliding scale of interests between agents and consumers and thus putting client interests first is dictating that agents adhere to a quasi-fiduciary standard.

There Will Be Pressure

Beyond that, the proposed rule uses other loaded phrases and lingo inextricably tied to best interest, such as a requirement for agents to “act with reasonable diligence, care, skill, and prudence” and make various disclosures, including material conflicts of interest.

And to the extent there is doubt, the record being compiled during deliberations over adoption of the regulation provides ample ammunition that this regulation is for the purpose of imposing a best-interest or equivalent standard upon insurance agents.

There is also the practical reality that once the NAIC goes down the path of creating this regulation, pressure will mount to use the actual phrase “best interest.” Already one state has adopted the best-interest standard and the SEC is looking to adopt the same.

Consumer groups will demand best interest and many industry groups already signal support for best interest. It’s hard to imagine in the end that the NAIC will withstand public clamor to establish an explicit best-interest standard that puts the insurance industry ostensibly on the same footing as the securities industry, even though the rationale is flawed and results could be ruinous.

FACC remains steadfast in its view the NAIC should refrain from modifying the model suitability regulation, largely because a best-interest standard, whether explicit or implicit, will inevitably turn insurance agents into quasi-fiduciaries. That is exactly what industry worked so hard to defeat under a deeply flawed and now-discredited DOL fiduciary rule.

The NAIC proposal, no matter how well intended, is a warmed-over version of the DOL fiduciary rule that similarly will lead to overly conservative financial decisions, reduced availability of products, disruption of existing distribution systems, costly lawsuits, and potential reversal of otherwise sound transactions. It portends a boon for trial lawyers but a disservice to American consumers.

In the alternative, FACC has put forward a sensible concrete proposal that is disclosure-based, giving the consumer comprehensive information about the role of insurance agents, their compensation, and potential conflicts of interest. Instead of tampering with a new standard of care, FACC’s proposal gives agents a framework to communicate about compensation and conflicts to create a more virtuous marketplace that facilitates flow of information and true alignment of agent and consumer interests.

The FACC proposal is posted on the FACC website. http://fixedannuitychoice.com/ The organization is an alliance of insurance agents, independent marketing organizations, insurers, and industry advocates lobbying for continued access to fixed annuities.

The ongoing debate over the NAIC model suitability regulation is indeed an existential dilemma for the insurance industry but not because of the “to best or not to best” issue.

The real question is whether regulators and industry should continue down a path that inevitably leads to a best-interest requirement that in turn will saddle insurance agents with fiduciary duties that are foreign to the insurance industry and will spawn needless litigation.

Kim O’Brien is a 35-year veteran of the insurance industry specializing in guaranteed annuities and life insurance. She is the current CEO and Founder of AssessBEST, Inc., a sales and compliance software system. Visit www.AAPnow.com or www.AssessBEST.com for more information.

This article is provided for educational and informative purposes only and not for the purpose of providing legal advice. Readers should consult with their own legal and compliance counsels to obtain guidance and direction with respect to any issue or question.
Contact Kim at [email protected].