The New York State Department of Financial Services (DFS) has amended its proposal to adopt a “best interest” standard for those licensed to sell life insurance policies and annuity contracts. Among other things, the proposed rule, which would amend New York’s current suitability regulation, Insurance Regulation 187 (11 NYCRR 224), would require insurance companies to establish standards and procedures for recommendations to consumers for insurance products “delivered or issued for delivery” in New York to ensure that any sales transaction is in the best interest of the consumer and “appropriately addresses the [consumer’s] insurance needs and financial objectives” at the time of the transaction.

As currently presented, the proposal would:

• expand the purpose of the regulation to apply to life insurance transactions—in addition to transactions in annuity contracts;

• clarify that the duties of insurers and “insurance producers” (insurance agents or brokers) apply to life insurance recommendations, in addition to applying to annuity recommendations;

• make any requirement applicable to a producer under the regulation applicable to every producer in the transaction who participated in the making of the recommendation and received compensation as a result of the sales transaction, regardless of the level of contact made with the consumer;

• broaden the applicability of the regulation so that, in addition to sales transactions, it would cover any modification or election of a contractual provision with respect to an in-force policy that does not generate 12 Investment Services Regulatory Update | June 2018 new sales compensation;

• prohibit stating or implying that a recommendation to enter into a sales transaction or an in-force transaction is “financial planning, comprehensive financial advice, investment management or related services” in the absence of a specific certification or professional designation, with proper licensing, as applicable; and

• require an insurer to establish, maintain and audit a system of supervision that is reasonably designed to achieve compliance with the amended regulation; establish and maintain procedures to prevent financial exploitation and abuse; provide any policy information reasonably requested by a consumer regarding the consumer’s in-force policy; provide comparison information showing differences between fee-based and commission-based versions of a product; and provide relevant policy information.

Standard of Conduct

The existing standard of conduct in New York requires that there be “reasonable grounds for believing that the recommendation is suitable for the consumer on the basis of the facts disclosed by the consumer as to the consumer’s investments and other insurance policies or contracts and as to the consumer’s financial situation and needs, including the consumer’s suitability information.”

The proposed amendment would provide for a best interest standard of care for all sales of life insurance and annuity products, applicable to recommendations made both prior to sale of an insurance product and, notably, during the servicing of the product. For sales transactions, the best interest standard would require that the recommendation to the consumer be “based on an evaluation of the relevant suitability information and reflects the care, skill, prudence, and diligence that a prudent person acting in a like capacity and familiar with such matters would use under the circumstances.”

Additionally, the new standard would require that (1) the sales transaction be suitable, and (2) there be a reasonable basis for believing that the consumer has been reasonably informed of various features of the product and “potential consequences of the sales transaction, both favorable and unfavorable, such as the potential surrender period and surrender charge, any secondary guarantee period, equity-index features, availability of cash value, potential tax implications . . . policy exclusions or restrictions . . . any differences in features among fee-based and commission-based versions of the policy and the manner in which the producer is compensated for the sale and servicing of the policy… ”

The proposed amendment would add a new section to the regulation to incorporate a best interest standard on in-force transactions. As a result, the insurance agent or broker (i.e., a producer), or insurer where no producer is involved, would be required, among other things, to have a reasonable basis for believing that the consumer has been reasonably informed of the relevant features of the policy and potential consequences of the in-force transaction, both favorable and unfavorable. In addition, an insurance producer would be prohibited from making a recommendation to a consumer to enter into an in-force transaction about which the producer has inadequate knowledge.

Procedures to Prevent Financial Exploitation and Abuse

The amended regulation would require insurers to establish and maintain procedures designed to prevent “financial exploitation and abuse.” The proposal defines financial exploitation and abuse as the improper use of an adult’s funds, property or resources by another individual and includes fraud, false pretenses, embezzlement, conspiracy, forgery, falsifying records, coerced property transfers or the denial of access to assets. The amended regulation was published in the New York State Register on May 16, 2018, and the public comment period closed on June 15, 2018.

The text of the proposed regulation is available at: https://www.dfs.ny.gov/insurance/rproindx.htm

A press release issued by DFS regarding the proposal is available at: https://www.dfs.ny.gov/about/press/pr1804271.htm