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New York proposes best interest standard to apply to annuity and life insurance sales

December 28, 2017

New York Department of Financial Services Superintendent Maria Vullo released a proposed revision to New York’s annuity suitability rule that would apply a best interest standard to all annuity and life insurance recommendations in New York.

State of New York outlineA recommendation is in the best interest of a consumer if it is in furtherance of the consumer’s needs and objectives and is made “without regard to the financial or other interests of the producer, insurer, or any other party,” according to the proposal. 

The New York proposal goes further than a recent draft revision to the model suitability regulation published by the National Association of Insurance Commissioners that would subject annuity purchases to a best interest standard. The New York proposal applies not just to annuities but also to life insurance sales. 

The two drafts also define best interest differently. The NAIC draft speaks in terms of “acting with reasonable diligence, care, skill and prudence,” similar to New York, it also specifies that best interest does not mean the least expensive annuity or that the annuity offers the highest interest rate or highest payout. Similarly, best interest does not mean the annuity is the single best annuity available at the time of the sale. The NAIC draft also defines best interest in terms of putting the interest of the consumer “first and foremost” rather than in terms of ignoring the producer’s compensation. 

The press release announcing New York’s proposal tied it to the Department of Labor fiduciary rule, quoting New York Gov. Andrew Cuomo as saying, “As Washington continues to ignore and roll back efforts to protect Americans, New York will continue to use its role as a strong regulator of the financial services and insurance industries to fight for consumers and help ensure a level playing field.”

The New York proposal covers both more and less ground than the DOL fiduciary rule. Unlike the DOL rule, the New York proposal would cover recommendations outside of retirement accounts. On the other hand, it does not apply to recommendations to buy or sell mutual funds or other securities (except, perhaps, to the extent a recommendation to sell is tied to a recommendation to purchase an annuity or life insurance product).

According to the proposal, one acts in the best interest of the consumer when “the producer’s or insurer’s recommendations to the consumer are based on an evaluation of the suitability information of the consumer that reflects the care, skill, prudence, and diligence that a prudent person familiar with such matters would use under the circumstances without regard to the financial or other interests of the producer, insurer, or other party,” when the transaction is suitable, and when certain other requirements that largely currently exist under New York law have been satisfied.

The proposal also specifies that producers not “state or imply” that the recommendation to purchase an annuity or a life insurance product “is part of financial planning, financial advice, investment management or related services unless the producer has a specific certification or professional designation in that area.” The revised rule would also apply to any producer involved in the transaction, even if he or she never met with the consumer.

Responding to another trend in the financial services industry, the New York proposal also includes a new provision regarding the prevention of financial exploitation: “An insurer shall establish and maintain procedures designed to prevent financial exploitation and abuse.”

 The comment period on the proposal expires Feb. 26, 2018.