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To Best or Not To Best . . . That is the Question . . . Or Is It?

For those following NAIC developments, the 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 FACC Campaign is not convinced it matters.  

FACC maintains the NAIC should leave the model suitability regulation alone and focus attention instead on better disclosure.  However, for those who seem intent on changing the model regulation, 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?

 Perhaps 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 may be much ado about nothing and indeed 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.

 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 SEC 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.    

 FACC is skeptical there is need for such additional regulation when all agree suitability is working and creation of 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.  To date nothing has been formally adopted but a proposal is emerging from an NAIC working group that promises to get further attention at the upcoming NAIC conference in San Francisco and beyond.  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 the debate has arisen over whether the NAIC should use the words “best interest” or stop short of using 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 of the regulation) 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 FACC would certainly prefer the words “best interest” be left out of any regulation, FACC sees the debate as 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.  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.  The SEC is looking to adopt a best interest standard.  Consumer groups will demand best interest and many industry groups already signal support for best interest.  It is 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 of this precise concern, i.e., a best interest standard, whether explicit or implicit, will inevitably turn insurance agents into quasi-fiduciaries which 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 and thereby create a more virtuous marketplace that facilitates flow of information and true alignment of agent and consumer interests.  Details about the FACC proposal have been described in an earlier blog and the proposal itself is posted on the FACC website.

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. FACC welcomes more robust debate over this – the real issue – concerning the future of our industry.