One of the big news stories that impacted the annuities ecosystem over the past two years was around the Department of Labor (DOL) Fiduciary Rules, intended to create guidelines for focusing on client best interests in the sale of retirement-oriented products. The application of the “best interest” rules had significant implications for how products are sold, building on “know your customer” and existing suitability requirements, while also fostering important changes in how compensation plans operate. One consequence, beyond the flattening of compensation plans, could have been an acceleration into the fee-based realm of RIA’s. As published, the DOL rules covered a broader set of products than originally expected by the industry, sweeping into both variable and indexed annuities.
With the change in administrations in Washington, the decision was reached by the DOL to delay the full implementation of these rules as framed in 2015-16. All other things being equal, one reaction was that the focus for the industry could be to closely monitor developments in Washington while waiting for the final rules to be fully broadcast.
Of course, one of the interesting environmental issues in the broad financial services realm is that insurance is regulated at the state level, while banking and investments are controlled at the federal level. The DOL involvement injected a level of federal oversight into the insurance product universe specifically because of the retirement elements associated with these offerings. One possible response to diminished momentum at the federal level would be for states to step up their own regulatory efforts.
That transition in the driving force for these regulations now appears to be underway with New York State stepping in, as one of the most influential departments of insurance as evidenced by their pioneering cybersecurity rules. Some states followed their lead, and others decided to pursue their own approaches to addressing the issue. However the issue evolves, it creates the potential for a more complex environment than would have been the case had the things gone through a singular regulatory authority. New York has now proposed incorporating the best interest standard into its own annuity sales regulations. The state may actually expand their ruling to include life insurance, in addition to annuities, in the upcoming rules. This could also contribute to model regulations from the NAIC that could be adopted in other states.
For carriers and distributors alike, this is hardly a surprising development, but it is one that may be more difficult to support than the original DOL-sponsored rules. This will be very interesting to watch develop in 2018 and may turn out to be a somewhat ironic twist on the phrase we started the week with—Happy New Year!
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