annuity
What Happens If Annuities Are Considered ‘Complex’? END
I nternational regulators are stepping up their examination of variable annuity sales, but that scrutiny has not yet trickled down to state and federal rulemakers. By Linda Koco
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ecurity regulators in the U.S and internationally are sending out signals that they intend to step up review of distribution of complex financial products, such as variable annuities and equity-linked instruments. This could affect advisors who handle such products eventually, if not in the immediate moment. For example, the Financial Industry Regulatory Authority (FINRA) sent out a letter on Jan. 11 to broker-dealers indicating that variable annuities are among its regulatory and examination priorities in 2013. The same letter also says it will examine B-D firms and registered representatives to ensure they have a full understanding of complex or high-yield products, particularly in regard to market risk, credit risk and liquidity risk exposures. This reinforces points FINRA raised last year in its Regulatory Notice 12-03 on Heightened Supervision of Complex Products. Meanwhile, an international securities organization has just released its final report on suitability requirements in the distribution of complex financial products. The report does not name life insurance or annuity products in the long list of examples of complex products, but it does include the term “equity-linked instruments and instruments whose potential pay-off is linked to market parameters.” That equity-linked phrasing will be of interest to U.S. financial professionals for two key reasons. First, that term has a variable/indexed product-like ring to it, and so may be
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Federal & Start State Regulators
viewed as “catching” certain insurance products that have equity-linking features. The final understanding will likely depend on how international regulators, and country-specific regulators, interpret equity-linked instruments. For now, it’s sufficient to note that the language may be encompassing enough to sweep in certain insurance product types. Second, the organization that published the report is the International Organization of Securities Commissions (IOSCO). This organization is no stranger to variable products. In fact, in announcing its new report, IOSCO points out that the report is intended to complement work completed by the Joint Forum on the topic of complex
InsuranceNewsNet Magazine » March 2013
products which include, among many others, variable insurance products. The Joint Forum is an international group of regulators from banking, securities and insurance. IOSCO is a parent committee of this group, as is the Basel Committee on Banking Supervision (BCBS) and the International Association of Insurance Supervisors (IAIS).
A Convergence
The above would suggest that regulatory thinking may be converging around suitability standards and complex products. It may also be that some regulators will consider treating certain insurance and annuity products as complex products within this context. This is not certain at