NAILBA Perspectives - Winter 2018 - 21

legislative update

It's All About Accessibility!
F
MARK VALENTINI, MPP

or more than half a century
there has been a clear line
that delineates insurance
from the rest of the financial services
marketplace, and for the most part it
works. The current system recognizes that insurance-be it life, health,
P&C, or annuities-is different from
stocks, bonds, mutual funds, or other securities-type investments. The
risk is different, the costs are different, the perceived necessity
between fixed and variable products
is different, and most importantly the accessibility of these products for the majority of Americans is
different. The standards of care that
apply in the recommendation and
sales of fixed insurance products differ from that of variable products as
well, which makes a huge difference
in how the middle market accesses
insurance products versus securities.
Access is the key criterion here,
because we are in a regulatory environment where policymakers are pursuing rules that inadvertently reduce
accessibility to the kinds of products
that have played a significant and
often unrecognized role in maintaining a secure middle class. While we
have a regulatory scheme that recognizes the line between insurance and
investments, the financial crisis of
2008 blurred that line: to regulators,
all financial services are the same
and need to be stringently regulated.
One approach they're taking focuses
on implementing a standard of care
(the "best-interest" or "fiduciary"
standard) that is more appropriate
for advisors and fund managers. The
SEC has proposed it, the Department
of Labor (DOL) is implementing it,
and now the National Association of
Insurance Commissioners (NAIC) and
New York State Department of Financial Services (NYSDFS) are considering applying it to fixed products.

Which leads us to the proposed
amendments to NAIC's Suitability in
Annuities Transactions model law and
more significantly NYSDFS' proposal to
up the ante to include life insurance
under a similar best interest standard.
NAIC's proposal will reduce accessibility to fixed annuities if states adopt
the new model regulation and interpret it to mean that commissions are
a conflict of interest. The NAIC model
doesn't explicitly state that commissions are a conflict but its language
leaves room for states to interpret it
that way.
New York's state legislature and
the NYSDFS are politically prone to be
as broad as possible in the interpretation of what constitutes a conflict
of interest. Governor Andrew Cuomo voiced concern back in December 2017 about the Trump Administration's attempts to delay the DOL's
implementation of its own fiduciary
rule, thus necessitating the NYSDFS
proposal. Governor Cuomo is rumored
to have his eye on the Democratic nomination for President in 2020,
and the DOL fiduciary rule is a major
issue with the Bernie Sanders/Elizabeth Warren wing of the Democratic
Party whose support he'll need to be
successful in his run. As long as this
is a winning issue for Governor Cuomo it will not go away. Even worse, if
New York adopts this rule other states
may be more inclined to adopt New
York's proposal over the NAIC proposal, reducing access not only to fixed
annuities but also life insurance.
What is wrong with imposing a
best interest standard, you may ask?
It depends on how it's interpreted,
and therein lies the problem. Suitability requires specificities that must
be considered before a sale is made,
including the client's age, risk tolerance, financial needs, financial means,
source of funds, etc. But the defini-

tion of "best interest" is more open to
interpretation, and influential policymakers at the state and Federal levels want to apply it to anyone that
sells any fixed or variable product.
This is where access is affected in a
profound way, because if collecting a
commission on a sale is considered a
conflict of interest, how will the producer get compensated? By charging
a fee or working for free. If producers
charge a fee to find the right product
for the customer, that additional cost
brings into question affordability and
thus accessibility.
We are approaching an era where a
client may have to pay a fee to their
agent to find the right life insurance
or annuity product, and then pay premiums on top of that. This is absurd.
The ability of a client to simply
approach their insurance agent about
getting insurance is premised on the
fact that there are no up-front fees
because the agent is paid via commission. In essence, commissions make
accessibility possible and yet here
come the regulators trying to demonize commissions as if that will somehow keep producers honest. Ask any
former clients of Bernie Madoff how
the fiduciary standard to which he
was held worked in their best interest.
Preventing financial fraud by reducing
accessibility is akin to banning automobiles to prevent speeding.
Mark Valentini, MPP is a former
Director of Government Affairs for
NAILBA and currently works as a lobbyist for a non-profit organization
in Washington, DC. He has a Masters
in Public Policy with a Concentration
in Governance Systems and Policy
Management from George Mason
University and has served in a variety
of legislative roles during his career.
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Table of Contents for the Digital Edition of NAILBA Perspectives - Winter 2018