The Department of Labor started the regulatory tinkering with a best-interest standard — but the states may finish the job.
Some aspects of the controversial DOL fiduciary rule took effect June 9. Those rules require anyone selling financial products into retirement accounts to make no misleading statements and accept only reasonable compensation, among other things.
But the more onerous rules that accelerate legal liability are delayed until July 2019 and might never take effect.
Since that delay was published in November, fiduciary proponents at the state level have stepped up efforts to pass their own rules.
New York Gov. Andrew Cuomo announced a best-interest standard for anyone selling life insurance and annuity products in the state. The proposal would cover “all sales of life insurance and annuity products, beyond the types of advice covered by the DOL rule,” Cuomo said.
The proposed amendments are subject to a 60-day notice and public comment period. If adopted, New York would become the second state to pass its own best-interest standard. Nevada passed a law that Gov. Brian Sandoval signed in June.
Both states cited the lengthy delays of the DOL rule.
Politically, the issue is a big winner, said Howard Mills, global insurance regulatory leader for Deloitte.
“Best-interest standard for consumers is, politically, a very powerful message for a state legislature to be saying, ‘Hey, you know, we’re really looking out for the consumer,’” Mills said. “So I think there’s almost a bit of a competition between the regulators and the legislators.”
Products with more complex modeling are sure to attract the attention of state regulators, Mills said.
“I think they’re going to get much more granular on what is a suitable sales practice, on insurers acting in the best interests of their consumers, particularly around products like variable annuities, long-tail products,” he said. “I think that’s going to be clearly a very strong focus going forward.”
California Fault Lines
There are plenty of rumors of other states working on similar best-interest standards. In particular, all eyes are on pro-fiduciary efforts in California.
California is a crucial state because insurers do so much business there, said Kim O’Brien, CEO of AssessBest, an insurance software company.
“Once California goes, many of the carriers decide ‘Well, we’re just going to do it nationally because to carve out one state in our processes isn’t efficient,’” O’Brien said.
The biggest problem with states taking up the fiduciary issue is the likelihood of inconsistency. There are 50 states, plus the District of Columbia and five sovereign territories that could pass their own standards, Mills noted. “So while Washington, D.C., is talking about deregulation, that may very well be the case for environmental standards or a regulation on banks,” he explained. “But it has nothing to do with the insurance industry.”
In fact, the Trump administration’s eagerness to neuter any federal regulatory body, which includes the Federal Insurance Office and the Financial Stability Oversight Council, might actually hurt the insurance industry.
“States no longer have to compete with the FIO, the FSOC, any federal regulators or federal agencies trying to horn in on the insurance space, so they don’t necessarily have as much of an incentive to work together and uniform their standards,” Mills said.
“So you might see a more challenging regulatory environment for insurers, while for other industries it’s getting less challenging.”