Strong pension, no problem? Maybe.

jamal-blogWe all recall last year’s demise of BHS and its failure to protect the company pension scheme.  Frequent news headlines report huge numbers where future pension liabilities exceed assets, and estimates of overall underfunded final salary (defined benefit, or DB) schemes are at 80 percent.

Years of low interest rates and increasing lifetimes have made it difficult for pension investment trustees and their actuaries to ensure that there’s enough in the pot to make good on pension promises.  DB schemes were originally designed for folks living 10 years into retirement – not 30.

It’s no wonder we worry about the ability of our companies to still be around when it comes time to draw our pensions.  And if a company goes bust, we have the PPF (Pension Protection Fund) in the UK, although there are limitations on that as well.

So your DB pension scheme’s not in deficit, life’s good? Not necessarily.

While many DB schemes (including all of the FTSE 100) have been closed to new employees for years, the cost of providing for existing members is still there and growing.  Increasingly, even well funded schemes are at this and concluding that changes must be made.

Marks & Spencer closed its scheme to new accruals from March 2017.  No additional benefits will continue to accrue to existing members – they’ll still get their pension, but future work won’t count.  Royal Mail made a similar announcement earlier this year, one that is likely to lead to a postal strike in the UK very soon. A company does not have to be in a situation like Tata Steel where the choice is closing the pension fund or closing the company.

34% of the FTSE 100 schemes are now closed to future accruals and the number is likely to rise. Some companies are rewriting other aspects of their schemes, such as making a “final salary” now a “career average earnings”.

There are a number of reasons for the large number of people transferring their pensions out of their company’s plan.  High transfer values (the multiple of an annual pension), wanting to take control of probably one’s largest asset and underfunding concerns may all play a part.  Considering a transfer out is a big decision and needs professional advice.  But uncertainty about changes to even strong plans is now adding another consideration to that decision.

pam-jamal

 

 

 

 

 

Pamela Morgan CPA
UK Liaison and Guest Blogger
Investme Financial Services LLC

 

Why I love ETFs — but sometimes love can be blind

5Looking through the newspaper or on the Internet, I often see investment fund companies listing funds they’re offering – and most of these are highly rated 4 and 5-star funds.  So surely that’s the company to choose — are these guys smart or what?
But to quote Winston Churchill “I only believe in statistics that I doctored myself”.

This is because the funds listed do not represent the entire universe that the fund group has — or have had. Fund groups tend to close or merge under-performing funds, distorting the statistics and giving you a false sense of security.
It is a well-known fact that almost 90% of all funds perform less than their benchmark.  So — maybe not so smart after all.

Think of it this way: If I offered you an investment that has only a 1 in 10 chance of beating its no-brainer benchmark and asking you for a lot of fees just to be able to underperform, wouldn’t you would question “why”?
This is one of reasons we are seeing a huge shift in money moving into passive funds, i.e. ETFs. An ETF (”exchange traded fund”) is similar to a mutual fund in that it’s a basket of investments.  An ETF tracks an index, the original and best known, SPDR (Spiders), tracking the S&P 500.  There are a lot of mutual funds that also track the S&P as well, (these tend to be called closet trackers pretending to be active funds to justify the high fees). But with a mutual fund, there is an active fund manager and all of the resultant costs that go towards actively trading every day to achieve the same result at the end of that day – so your return is minus fees: commissions, redemption fees, operational costs, etc. – that can be as high as 3%!  No wonder the size of the ETF market is expected to surpass mutual funds by 2023. Last year USD 326 billion left mutual funds, with an additional USD 429 billion going to ETF’s.  In the last 10 years, USD1 trillion has left mutual funds and flowed to ETFs.  There are also other benefits of ETFs (trading flexibility, tax efficiency) that I won’t go into here, as I’ll bore you another day on those.

Mutual funds can easily be 10 or 20 times more expensive than a passive fund (ETF), which has a cost of about 0.10% and will most likely follow its benchmark. So the goal of the ETF is not to beat the market but to match the market’s performance. The role of an active mutual fund manager is to spot better growth opportunities, achieve better returns and avoid the bad investments.

But as these 90% underperforming statistic shows, the majority of these active mutual fund managers have a poor track record. So why does your advisor show you active funds that can be 10 – 20 times more expensive than a passive ETF – and with historically the 1 in 10 chances of beating the market — versus a passive ETF fund that basically does what the market does. Perhaps one of the reasons why many advisors suggest these types of funds is because they historically pay a trailing commission to the advisor where an ETF does not (this is no longer the case in the UK and other jurisdictions resulting somewhat in a reduction of mutual fund fees). While many active managers are trying to reduce fund costs, there’s a very long way to go (perhaps never) before this benefits clients and results in slightly higher returns.

So, I can see why ETF index funds play an important role in a portfolio, and yet I say my love can be blind as there can also be some dangers lurking.  More on this in my next blog.

If you would like to know more from the author then please contact me at gr@me-group.ae

 

Benchmarking and Why Insurance Backed Investment Projections are Bad for Your Financial Health

jamal-investme2It is standard that all investment managers who either have separate investment mandates or mutual funds will benchmark their performance against an index.

This helps the client and advisors in setting expectations and giving themselves the ability to compare an active investment manager vs a passive investment.

However, Insurance backed savings and investment schemes do not do this.

They take a gross performance of an underlying asset class and then make projections on the return of your savings or investment plan.

These projections have nothing to do with reality and as such set the wrong expectations for the investor.

It is a well-known fact that 50% of investors do half of what the market does. Also, the projected returns by the insurance companies do not include the fee structures which at the time of writing can be as high as 4-5% p.a.

It is not surprising that clients are feeling disappointed. In this instance, the wrong expectations are being set and, it is most unlikely the client will achieve his or her goals.

Why are these projections from insurance companies not based upon the average return of their clients?

Take time to absorb that statement.

The insurance companies have empirical data to be able to benchmark their clients returns against the index’s so it is not a lack of technology.

I will make an intelligent assumption, if they showed the average performance of client’s vs the projection, no one would invest this way.

Protection and Investments do not belong together. They contradict themselves. Investments are a cost conscious structure, insurance is not.

The END GAME, Rip Off Savings Plans Adeiu!

I remember talking to friends and colleagues about it being harder to become a real estate agent than a UAE financial advisor. Blank stares, open mouths, bewilderment stared back at me. Although it reflected the IFA market, it also included the banks

There is a minority of advisors in the UAE who are dedicated and ethical, however they are overshadowed by a lot of unregulated, unqualified people even qualified advisors that sell investment products and savings structures, either through a regulated company, unregulated company or through a bank. They all however had one thing in common. Insurance Backed Savings Plans or Investment Plan that served the institution and advisor and not the client.

Over the last few months we have seen and heard very clear messages coming from the regulagors.

First, we had SCA regulating funds, companies, demanding education, qualifications and annual CPD targets.

Then we had the Insurance Authorities starting with Circular 33, and after much consultation with the various stakeholders they announced Circular 12. The end of consultation was May 11 with an intended rapid introduction of the new laws. It was regulations, qualifications, fees and sanctions.

Thirdly we had the Central Bank on May 11 throw their hat into the ring. They did not wait for the response of the IA (bearing in mind that the Central Bank does not regulate the insurance side), however they do regulate the banks.

The message has been repeated time and again from all regulatory authorities.

“The responses provided to the Consumer Protection Department at the Central Bank in relation to these ongoing complaints were not satisfactory”

The words being quoted “customer profiling”, “suitability of products”, “transparency” “grievances redressal mechanism (handing complaints)”. “qualifications”

Very similar words from the IA and Sca.

Then you hear the voices of the product providers, banks and IFA’s, we welcome those changes.

Well why did it take the IA, SCA and the Central Bank to step in and say STOP! We have had enough.

The blame lies on the industry, the companies and the advisors, despite what was happening in other jurisdictions and we knew why these changes were happening they still continued making hay while the sun shone even though the clients were suffering. The providers were also happy to deal with unlicensed companies, with products that fail to deliver what is promised. Products that they knew benefited themselves and the sales people more than the clients. Fee structures that were so opaque very few people could understand them let alone clients. These stakeholders had little moral compass to make a stand and either change or demand change.

Yet there were other individuals and companies that did make a stand, did change and become more client focused. They should be applauded and continue to flourish.

The message is now clear, The Game is Over.

For unlicensed companies, just close shop and move on.

For individual IFA’s go to work for a regulated company, become regulated, registered, do the exams, do your CPD and take this Holistic view you keep talking about, bring clients products and fees that are designed for the client. If you are unable to survive in this new environment, then move on.

For companies and banks, train up your staff, do wealth management with the customer first. Do what you should be doing “Wealth Management” not selling overpriced, inflexible savings plans,

The clients were not there to service you, you were there to service the clients. The clients need help to save and plan, do that, help them.

To those who said you can’t survive on the new fee structure, this may be so, but in the last century when I worked for an investment house, our fee structure for the clients worked out at 1% p.a. and it was success. For the clients, for the company and for the employee. It was a win win solution.

I and many other professionals look forward to the new future.

Have a great day.

 

The UAE IA’s Circular No. 12: ‘Advisers, get ready to be registered, tested’

Towards the end of last month, the United Arab Emirates Insurance Authority quietly went public with a 26-page synopsis of its latest thoughts with respect to its already-flagged-up plans to introduce a raft of new regulations governing the way life insurance and insurance-based savings and investment products are to be marketed and sold in the country. 

The IA regulations package, which is currently being referred to simply as “Draft Circular No. 12 of 2017”, updates the IA’s previous missive, Circular No. 33 of 2016, and in so doing, contains a number of new elements – the most surprising of which is a change is in the minimum requirements for insurance intermediaries looking to practice in the UAE, and news of plans for them to be registered, according to Gordon Robertson, founder and director of Investme Financial Services.

Below, Robertson, pictured, takes an in-depth look at Draft Circular No. 12 of 2017 (subtitled “Draft Regulations Regarding Life Insurance and Family Takaful Business in the UAE”), and shares some of his findings and conclusions – a key one of which is that the UAE’s advisory industry is currently “not prepared” for the changes it will soon be expected to take on board. 

Since last November, we have been aware of the coming changes in the way insurance-backed savings and investments are sold and marketed in the UAE. There were hopes that “Circular No. 33”, as we came to know the document outlining the proposed changes, might be watered down.

Now that we have the next instalment of what the Insurance Authority is planning to introduce, it says, as soon as possible, in the form of Draft Circular No. 12, we find that although there have been some minor changes as to the implementation,  the real surprise lay in the way the IA is proposing to regulate the UAE’s army of financial intermediaries.

If the regulations take effect as set out here, it is clear that quite a few intermediaries will be forced either to close, merge, or leave the industry in the UAE.

The timing hasn’t been formally set, but the Insurance Authority has made it clear that it is setting a May 11 deadline for input on its proposals from “life insurance companies and family takaful operators and other interested parties”, after which it is hoping “to issue the final regulations without undo delays”.

Once published in the Official Gazette, much of this will become law immediately; some of it a year later, and the rest in another year’s time.

These proposals will clearly alter the face of insurance-backed lump sum and savings programmes in the UAE. This is possibly not surprising, as they’ve been brought about in response to a huge number of mostly-justified complaints from clients who have been reacting to what they consider to be excessively high fees, the lack of commission disclosure, and up-front commissions, as opposed to commissions being spread out over the life of a policy.

What the Insurance Authority is proposing to change:

Savings products

  1. The maximum fee that advisers, under the new proposals, will be allowed to charge on savings products is 4.5% of the periodic premium (investment portion), to a maximum of 90% of the first-year premium (down from the current 7% to 8% level).
  1. First year commission is capped at 50% of the annualised premium, or 50% of the total commission paid, whichever is less. The rest will be paid over the life of the policy to the adviser.This will be paid by the product provider, and not through the client’s account. There will be a commission claw-back against the agent during the first five years, based upon the first year’s commission.

Ten percent of the annualised premium (protection portion), times the number of years of the policy, with a cap of 160% of the first years premium (single premium is 10% of the premium).

Example A: regular savings programme

Here’s an example of how it would work. Let’s assume someone has savings of AED100,000 (£21,156, US$27,225) to invest in a regular savings programme each year, for the next 15 years. This would break down as follows:

a. AED90,000 for investments,  and

b. 10,000 for the protection (insurance).

Commission would be: 90,000 x 15 x 4.5% = 60,750

10,000 x 15 x 10%  = 15,000

Total commission would then be AED75,750, of which 50% would be paid to the agent in the first year, and the remaining amount over the life of the policy.

Year One, for the agent, would be  half of  AED75,750 , or in other words, AED37,875, with AED2,525 annually for each of the next 15 years.

However, the first-year commission would be subject to a commission claw-back during the first five years of the policy.

[Important note: The minimum amount insured, under the new regulations, is now 10%, up from the existing 1%.]

Example B: Term products (no maturity benefits)

Under the Insurance Authority’s new regime, the maximum commission that may be deducted is 10% of the whole premium, or 160% of the annual premium, whichever is less.

In other words, a client saving US$1,000 for ten years would pay a maximum commission of US$12,000 (or 1,000 x 12 x 10, for a total commission of US$12,000.

Single premium policies will have a maximum commission is 10%.

 Retrocession/trailing commission

The adviser can still be paid a trailing commission; however, the fees can no longer be recouped from the product.

In other words,  if a client buys a current mutual fund, it traditionally has had a high Total Expense Ratio (TER); this is because part of that TER was being reimbursed to the adviser. This will no longer be permitted.

As such, the funds will have a lower TER, giving a higher return to the client. However, that may be reduced by having to pay a higher commission to the product provider (they are not allowed to breach the previous overall commission limits).

Short term products

Maximum commission for life and takaful products in the UAE is currently capped at 25% indemnity commission (this is where a life company pays commission upfront to an intermediary based on the full value of the policy).

This is being stopped, and replaced with a system whereby the commission will be paid when the client pays the premium.

Products with an insurance portion below 10%

Going forward, these will only be able to be marketed when it is clearly stated in a bold red font that “the product has a limited or no life protection benefit”. The customer’s signature is required immediately below this disclosure.

Takaful products

The rules governing the sale of takaful products are similar to the way general insurance is structured.  However, the wakala and muduraba fee for short-term products is set at a maximum of 35% of gross written contribution.

Multiple channels
Going forward, clients will no longer subsidise other sales channels. This will help reduce costs to most clients, as they will be paying only for the sales channel they are using.

Disclosures

  1. All parties to the transaction must sign off on the product sales document, clearly disclosing each one’s responsibilities. This includes the insurance intermediary, the agency representative, the broker etc. The documents must be in both English and Arabic.
  2. It was the usual practice previously that before an adviser gave an investment product proposal to a prospective client, they would often ask for certain documentation, such as a copy of the individual’s passport, visa, bank account information, etc. Under the new regime, this will not be allowed.
  3. No product will be able to be sold without all the relevant documents, and a copy of these must be supplied to the client.
  4. A declaration that the client signs will say that the client is aware the returns featured in the illustration are not guaranteed.

‘Free look period’ is fixed at 30 days minimum

  1. Under the new rules, if an insurance agreement is cancelled during the ‘free look period’, the adviser must refund to the client all of the commissions that may have been taken; then the pro-rated first year commission must be paid back.
  2. The adviser is not allowed to pressure the client to recoup the cost of the adviser’s time and effort in preparing the structure.
  3. If there is a decision to cancel, then the client will be refunded their full premium. This may include any profit or loss on the fund but will not include the bid and ask pricing of the fund.
    If there has been a cost of a medical exam as part of the sale process, that can also be charged to the client. The client will receive a copy of the receipt for the medical as well a copy of the medical report.
  4. the intermediary is not allowed to ask the client why they want to cancel. However, a third party, such as the company or other representative, may ask, so long as they do not abuse this right by using pressure tactics.

Illustrations to be given to the client

Under the proposed regulations, product illustrations given to clients must show:

  1. The frequency of payment to be used, such as monthly/quarterly/annual/single payments.
  2. The full and proper name of the plan; its sum assured, coverage term, and premium payment term.
  3.  The death/protection benefit, account value and surrender value should be clear and distinctly presented.
  4. The premium shown should always be gross of all fees, but the death benefit, account value and surrender value should always be net of all fees.
  5. Any illustration should state that it is either “illustrative value” or “guaranteed value”, whichever applies.
  6. The cumulative plan premium should be indicated.
  7. All compulsory charges must be disclosed.
  8. Revised illustrations must be supplied if requested, and would be compulsory if any top-up premiums are more than 20%, or if there is a withdrawal more than 20%; also, if there are changes to benefits, this must also be disclosed separately with a revised illustration.
  9. The life insurance company behind the product being illustrated must quote the gross return, based upon cash flow, and then deduct all other charges so that the client is able to see clearly whether there is any actual benefit in having this type of policy.
  10. Two scenarios at a minimum should be illustrated.
  11. Maximum investment return is based upon the three-month EIBOR (Emirates interbank offer rate) plus 4%, rounded up to the next 0.5%.
    For example, current EIBOR (1 May 2017) is 1.46%; plus 4% is 5.46%, rounded up is 5.5%. The first calculation, therefore, would be based upon 5.5%.
  12. The second scenario must show a clear picture of the effect of charges or a reduction in yield. This will illustrate the effect of all the charges, if the illustration is not clear, then they must show a zero-pct. return.
  13. Under the new regulations, any fees paid by a mutual fund to the IFA, or to the IFA’s company, are considered to belong to the client, and must be reimbursed to the policy holder.
  14. Surrender charges and the surrender value of the policy at the end of each year must be provided as a separate document. The font must be in red, and the client must sign this document separately.
    If there is a discrepancy between the illustration and the valuation, then this must be justified by the actuary.
  15. For “with profit” policies, a qualified and appointed actuary must certify the illustration before it is shown to any prospective clients. The illustration should also be consistent with the valuation reports, and if it isn’t, the actuary may have to explain why it’s not.
  16. The annual valuation report has to be sent as a separate document, and not bunched with other documents. The “font” must be red, and the client must sign receipt of this document.
  17. To ensure that that the profitability of each savings product is achieved throughout the policy period, and that the policyholder is not heavily penalised for the company’s profit in the initial year(s), the actuary must ensure that any surrender charges are equitable between the provider and the client.
    These charges are only to mitigate risk in relation to the actual expenses incurred by the provider.

Declaration by the policy holder

  1. Under the new regulations, the client will be required to sign a declaration stating “I have received a copy of this illustration and understand that non-guaranteed elements illustrated are subject to change and could be either higher or lower. The intermediary (John Jones) has told me that they are not guaranteed. Further I confirm that insurance intermediary (John Jones) has not made any verbal or written communication, electronic file or any other material that is different from this illustration”.
  2. A statement to be signed and dated by the intermediary or fund manager must be included, saying to the effect, “I certify that this illustration has been presented to the applicant and that I have explained that the non-guaranteed elements illustrated are subject to change. Further, I confirm that I have disclosed all charges and fund management fees to the customer, and I have made no statements in any form that are inconsistent with this illustration.”
  3. Historical performance of the top five funds for that product in the client’s risk strategy must be provided to the policy holder.These top five funds are measured by assets under management (size of the fund), and with a minimum of five years’ history (track record) unless the fund has been in existence for less than 5 years.
  4. The client must receive information on all funds available in a period. The client will then select the funds they wish to buy, rather than the company or adviser suggesting a limited choice for the client.This must be disclosed at the point of sale and on an annual basis to the client.These top five funds must be chosen from the range of funds that are available to retail investors within the UAE.

Banc assurance

Banks often buy insurance at a discount from a provider. Under the proposed new regulations, the banks will no longer be allowed to mark up the price, and thus make an extra profit, when selling insurance to their clients.

Under the new rules, the banks will can only be compensated by the insurance provider separately.

Also, banks will no longer be allowed to insist that the client buy the credit insurance from the bank, but going forward, will be obliged to accept a credit life policy from other companies.

Insurance Intermediaries

Any person acting as an insurance intermediary must be:

  1. Employed by a licensed company
  2. Sell only products that are sold by this licensed company
  3. Be licensed by the authorities, and this license must be renewed on an annual basis
  4. Meet minimum educational qualifications for practicing in the insurance intermediary profession, as well as engaging in CPD (continuing professional development) every year
  5. Be at least 21 years old, and have a minimum two years of  experience in the insurance industry
  6. Have no criminal record of a felony or misdemeanour involving moral turpitude, trustworthiness or against public morals, bankruptcy and not having rehabilitated
  7. Never have been suspended or had qualifications cancelled without these having been formally restored while working in the insurance industry
  8. Must have professional liability insurance
  9. Comply with all the laws, regulations, instructions and decisions issued the authority and other relevant legislation

Annual renewal

The intermediary must be able to demonstrate to the IA that they meet the minimum service standards such as:

  1. They hold regular annual review meetings with their policyholders, discussing the progress towards the agreed savings targets;
  2. Their review documentation will include the actual performance of the product to date, and a new projected performance plan, going forward to the intended policy termination date;
  3. An annual gap analysis to enable the client to assess the need for additional contributions, or a change in risk appetite to achieve the planned savings goal

Application for license and registration

The new application form will require applicants to provide:

  1. Their name, nationality, address and place of residence
  2. A copy of their Emirates ID, if a UAE resident; and a current passport, if  non-resident
  3. A certified copy of the minimum qualification and membership from an entity accredited by the Insurance Authority
  4. A declaration that they have never been subject to disciplinary actions by any professional body that they belong to, or by the supervisory authorities in other jurisdictions
  5. A certified copy of their academic and professional qualifications
  6. An official certificate proving that they have never been convicted for an offence involving moral turpitude or trustworthiness along with a declaration that the applicant has never been declared bankrupt or bankrupt and rehabilitated
  7. An undertaking to comply with all regulations and laws issued by the Insurance Authority
  8. Proof of payment of the fees as per the regulations, as well as any other documents requested by the Director General

The IA will notify candidates of their approval or rejection within 20 business days of their having completing their application.

  1. If more information or documents are required, this must be submitted within 60 days of the date of the notification
  2. Failure to supply the information sought will result in the application being cancelled, and a three-month waiting period must pass before the applicant can submit another application
  3. If their application has been approved, and the necessary fees paid, they will then be entered into the official register
  4. If they are rejected, they can appeal the rejection within 30 days. (A Board of Directors decision, however, will be deemed to be final.)
  5. The licence has a maximum validity of one year, and expires on 31 December.
  6. On an annual basis, the insurance intermediary will submit a renewal document with supporting documentation no less than 30 days prior to expiration of their licence.
  7. The intermediary must inform the authorities within 10 days of any change to the intermediaries’ documentation, to ensure continued compliance. 

Commission abuse penalties

Under the new regulations, all forms of commission abuse will be  strictly prohibited. Those who are found to be in violation of this may be subjected to the suspension or non-renewal of their licence.

Enforcement

Once the new laws are published in the (monthly) Official Gazette, the new laws will be implemented as follows:

  1. Fees and commission abuse regulations will take effect on publication
  2. Commissions, disclosure and regulations regarding pure protection will take effect one year after their Official Gazette publication
  3. All other elements of the new regime will take effect two years after publication

As indicated earlier, many of the proposed changes will be seen by the UAE advisory industry as Draconian, and will introduce a dramatic change the entire industry – to the benefit, many of us believe, of the industry’s clients.

The biggest adjustment, for many, is likely to be that of having to comform with the new minimum requirements to become an insurance intermediary.

As mentioned above, the consultation period on the latest version of the regulations is set to end on 11 May.

Documenting Change

It has been described as a ‘game changer’ by some, but whatever the terminology, the changes being introduced by the UAE Insurance Authority will impact on advisers and providers in equal measure, as Gary Robinson has found out by speaking to those affected.

Following an announcement on April 25, the United Arab Emirates Insurance Authority issued its regulations package, which is currently being referred to simply as “Draft Circular No. 12 of 2017” and updates the IA’s previous missive, Circular No. 33 of 2016.

The UAE’s insurance industry regulator has, as expected, decided to go ahead with a planned overhaul of the way life insurance products are marketed and sold in the jurisdiction.

The package of new regulations includes a ­ban on indemnity com- missions, as well as fee limits, new charges on life insurance products, and new rules affecting financial advisers who sell insurance products in the UAE.

Gordon Robertson is the founder and owner of Investme Financial Services, a Dubai-based holding com- pany for a group of financial services businesses operating in the UAE that he launched after originally coming to the Gulf in 1998, to oversee the opening of a Prudential-Bache Securities office.

In the early days, he says, he was “amazed and disappointed” at the quality of financial advice on offer in the region. In the years since then, he has observed the progress of Dubai’s financial regulatory environment with interest, and, at times, some scepticism.

The IFA industry in the UAE, he argues, is “not prepared” for the shock it is being asked to take on board, given the fuller clarification of the licensing and educational requirements for intermediaries.

“Since November we have been aware of the coming changes in the way insurance-backed savings and investments are sold and marketed in the UAE,” says Robertson.

“There were hopes that the Circular 33 might be watered down. There have been some minor changes as to the implementation, but the surprise was the change in regulating financial intermediaries.

“These changes will no doubt mean quite a few intermediaries having to close, merge or leave the industry in the UAE.”

REACTIONS

At least one financial adviser that International Investment spoke to in the days after the Board Decision No. 9 document was released said that it revealed the regulator was pushing ahead as planned, “without pulling any punches” and that it had not been deterred by those ­industry players that sought to have the changes brought in more slowly.

The announcement of the decision to go ahead with the package of new regulations, which also cover the Takaful industry, was contained in a draft circular ­on the UAE Insurance Authority (IA) website. It came after feedback from major international life companies and a meeting held with industry.

The UAE Insurance Authority’s proposals

Gordon Robertson of Investme Financial Services takes a closer look at some of the finer details of the proposals.

Savings products.

  1. Under the new proposals, the maximum fee that advisers will be allowed to charge on savings products is 4.5% of the periodic premium (investment portion) to a maximum of 90% of the first-year premium (down from the current 7-8% level).
  2. First year commission is capped at 50% of the annualized premium or 50% of the total commission paid whichever is less. The rest will be paid over the life of the policy to the advisor. This will be paid by the product provider and not through the clients account. There will be a commission claw back against the agent during the first five years based upon the first year’s commission. 10% of the annualised premium (Protection Portion) times the years of the policy with a cap of 160% of the first year’s premium (single premium is 10% of the premium).

Term products (no maturity benefits). 1. Under the Insurance Authority’s new law, the maximum commission deducted is 10% of the whole premium, or 160% of the annual premium, whichever is less. 2. Single premium policy: Maximum commission is 10%Retrocession/trailing (or trail) commission. The adviser can still be paid a trail commission; however, the fees can no longer be recouped from the product.

For example, mutual funds often have a high Total Expense Ratio (TER), this is because part of that TER has been reimbursed to the adviser. This will no longer be permitted.

Short term products. 1. Maximum commission for life and Takaful products is currently capped at 25% indemnity commission.

This is being stopped, and replaced with a system whereby the commission will be paid when the client pays the premium.

Takaful. Similar to the way general insurance is structured, however the Wakala and Muduraba fee for short term products is a maximum of 35% of gross written contribution.

Multiple channels. Going forward, clients will no longer subsidise other sales channels. Penalties. (a) All forms of commission abuse are strictly prohibited. (b) All complaints, if found to be in violation may subject the offender to suspension or non-renewal of their licence. Enforcement. Once the new laws are published in the (monthly) Official Gazette, the new laws will be implemented as follows: (a) Fees and commission abuse effect on announcement in the Official Gazette. (b) Commissions, disclosure and regulations regarding pure protection is one year after the announcement in the UAE Official Gazette. (c) All others have a two-year implementation period.

Other key changes include a major overhaul of illustrations to be given to the client, the declaration by the policy holder, disclosures and the ‘free look period’ which is fixed at 30 days minimum. Also, new rules relating to Banc assurance and insurance intermediaries have been introduced.

For more detailed analysis and a link to the 26-page Insurance Authority document, visit www.internationalinvestment.net. Representatives on January 12, and follows on from the IA’s initial announcement last November of its plans to crack down on the industry.

The 26-page document (see left for a full breakdown) says that the IA “invites life insurance companies and family Takaful operators and other interested parties” to comment on the latest version of its regulations before 11 May, but warns that “absolutely no extensions will be granted”, so that it is able to issue the final regulations “without undue delays”. Because of the significant changes that impact on the way products currently are being sold, a number of industry executives have called for more time to prepare.

 ‘SENSIBLE TRANSITIONAL ARRANGEMENTS’

Still, ­there are few observers that will argue with the changes at least not publicly. Simon Willoughby, head of proposition at ­Utmost Wealth Solutions, who also chairs the Association of International Life Offices, echoed many in the industry when he said that Utmost’s view on the matter was that any move towards higher regulatory standards and greater cost transparency for customers in any market was to be “applauded”.

“The sensible transitional arrangements announced by the Insurance Authority recognise the industry feedback provided since the November announcement, and the level of change this will require for both providers and advisers,” said Willoughby.

Another well-known industry figure noting that he is “pleased” that the IA is moving forward so decisively with its new regulations is Sam Instone, chief executive of AES International, the expat-focused advisory firm with a major presence in Dubai.

“We couldn’t be happier that the IA have moved forward with all of this without delay,” Instone said. “Individual qualifications, CPD and registration will raise professional standards. Commission caps and an end to large indemnity commissions will be fantastic for consumers, and it is an excellent step forward for the UAE.”

As for as the likely impact, he said he thought it would result in “dodgy financial salespeople” leaving the UAE, possibly to “pop up somewhere like Kuala Lumpur” next. Nigel Sillitoe chief executive of the Dubai-based marketing consultancy, Insight Discovery, also welcomed the Insurance Authority’s announcement and said the new regulations were certain to “be­ welcomed by both distributors and consumers”.

“Invariably there will be operational issues for distributors in the short term, especially with the proposed commission caps,” he noted. “There will also be some players frantically looking to create new products and product codes – different operational structure to each product in each GCC [Gulf Cooperation Council] market, rather than a generic product across each – to make sure they comply, while others will be conducting full strategic reviews of their licensing going forward.”

Sillitoe noted that the United Arab Emirates was still “an emerging market”, and that, while this made it an exciting market, this needed to be remembered when comparing it­ “with other, more mature, jurisdictions”.

STARK WARNING

In last month’s edition of International Investment, Bryan Low,­ a long-time analyst of the cross- border life insurance industry, issued a stark warning about the possibility that a precipitous decline in unit- linked life insurance product sales in two key Asian markets would likely next hit next in the UAE.

Low points out that “the regulator’s initial proposals suggest a Hong Kong-style scenario that would have a significant impact on advisers’ use of unit-linked linked life products, and therefore, on many advisers’ traditional business models”.

As for the life insurance companies currently active in the UAE market without a local licence, the impact is likely to be “even more profound”, Low added.

“Sales of unit-linked savings and investment life policies in Hong Kong in particular have been decimated, falling by a whopping 89% across the last five years,” Low, who until last year spent a decade and a half as a cross-border life insurance industry consultant, added.

“Although the fall in sales in Singapore has been less dramatic, the next round of regulatory changes there will impact on the spreading and capping of commission, and prompt a further sales decline.”

This fall in sales occurred “in direct contrast to Asia’s continued economic prosperity” during the same period, and took place “in spite of extensive efforts by major multinational life companies to have locally authorised products in these markets and to promote them on a fully-regulated basis.”

THE ‘BIGGEST NEWS’ OF ALL

Once published in the UAE Official Gazette many of the proposals will become law immediately, some in a year and the rest in two years.

Robertson adds that the proposals will alter the face of insurance-backed lump sum and savings programmes in the UAE, with changes to the minimum requirements to become an insurance intermediary, the “biggest news” of all.

“This [release of the document] is possibly not surprising, as it’s been brought about in response to a huge number of mostly-justified complaints from clients who have been reacting to what they consider to be excessively high fees, the lack of commission disclosure, and up-front commissions as opposed to commissions being spread out over the life of a policy.”

“As can be seen, many of the proposed changes will be seen by the UAE advisory industry as draconian, and will change the entire industry – to the benefit, many of us believe, of the industry’s clients.”  ■

UAE Insurance Intermediaries to be regulated

There has been a lot of articles about the new regulations regarding products, but nothing about the proposed regulation of intermediaries. It has currently only been issued on the Circular 22, however if no objection the consultation period will end May 12. It is expected that this will be quickly be adopted with an implementation period of two years.

I have put together the proposed new regulations.

Application for license and registration.

Application form to include:

a.   Name of applicant, nationality, address and place of residence.

b.   A copy of the Emirates ID for a resident and passport for the non-resident

c.   A certified copy of the minimum qualification and membership from the entity accredited by the Authority.

d.   A declaration that they have never been subject to disciplinary actions by any professional body that they belong to, or by the supervisory authorities in other jurisdictions.

e.   A certified copy of the academic and professional qualifications.

f.     An official certificate proving that the applicant has never been convicted for an offence involving moral turpitude or trustworthiness along with a declaration that the applicant has never been declared bankrupt or bankrupt and rehabilitated.

g.   An undertaking to comply with all regulations and laws issued by the Authorities.

h.   Proof of payment of the fees as per the regulations as well as any other documents requested by the Director General.

Approval/Rejection will be issued by the authorities within 20 business days from the date of completed application.

a.   If any request for more information or documents, this must be submitted within 60 days of the date of the notification.

b.   Failure to supply the information will result in the application being cancelled and a wait of 3 months before the applicant can submit another application

c.   If approved and after payment of fees they will then be entered into the official register.

d.   If rejected, they can appeal within 30 days of the rejection. (The Board of Directors decision shall be final)

e.   The licence has a validity of maximum one year and expires on December 31.

f.    On an annual basis, the insurance intermediary will submit a renewal with supporting documentation no less than 30 days prior to expiration of the license.

g.   The intermediary must inform the authorities within 10 days of any change to the intermediaries’ documentation to ensure continued compliance

Penalties:

a.   All forms of commission abuse are strictly prohibited.

b.   All complaints if in violation may subject the offender to suspension, non-renewal of withdrawal of their licence.

Enforcement

Once the new laws are published in the (monthly) Official Gazette, the new laws will be implemented as follows:

a.   Fees and commission abuse effect on announcement in the Official Gazette.

b.   Commissions, disclosure and regulations regarding pure protection is one year after the announcement in the Official Gazette.

c.   All others have a two-year implementation period.

As can be seen, many of the proposed changes will be seen by the UAE advisory industry as Draconian, and will change the entire industry – to the benefit, many of us believe, of the industry’s clients.

The biggest news is that of the minimum requirements to become an insurance intermediary.

Consultation period will end May 11. If no change they will implement the new rules in a short space of time.

What Does 2017 Have in Store for Portfolios?

5I first wanted to write about predictions for 2017, to do that I was going to talk about the predictions for 2016 that were almost all wrong except for the USD and Euro exchange rate.

If you had followed the advice of those experts with warnings such as “sell everything now as we will have a crash as bad as 2008” this was RBS, or perhaps as Goldman Sachs predicted in 2014 USD 200 for a barrel of oil, wrong, so in 2015 they predicted USD 20 wrong again.

To have followed the advice of these experts would have resulted in losing a lot of money.

However, you may be thinking that even your portfolio is not doing what the market is and wondering why?

As such I thought I would look at the stock indexes to help explain why your portfolio may not reflect the performance of the stock market indexes such as the Dow Jones or the S&P 500. Worse still, you may wonder why the market is going up but your account is going down.

Now we keep hearing on the TV and reading on the internet about the Dow Jones and the 20,000 level, the Nasdaq and S&P are steadily hitting new highs. Even the Russel 2000 gained 20% in one month.

However, this does not actually reflect what is going on in the market, as such it may not reflect what is going on in your portfolio.

The US has almost 5,300 listed companies in the NYSE and Nasdaq, yet the Dow Jones only has 30 companies and the S&P 500 only has erm.. 500.

If you have a mutual fund, it will most likely have a maximum of 50-60 stocks. As such it would be unlikely to mirror image the index unless it was a closet tracker. An ETF however is composed of all the same stocks and weighting as the index.

Let me explain how the index distorts the true state of the market.

The S&P has 500 companies, but the calculation is not 500 stocks equally weighted giving an index price of 2,300.

The top two companies from these 500 have a weighted value of 5.87% of the index and the top 10 have a weighted value of 17 pct.

Think about this, if the top 10 stocks went up by 25% and the remaining 490 stocks went down by 5%. The market would still be showing a gain of 0.1%

Ie these 10 stocks only represent 2% of the companies in the index but they have a huge effect on the index performance and the index performance does not really show the actual performance of the majority of the stocks. Confused? You should be. You could be in a bear market but still have a rising index.

This is not just confined to the S&P it is the same with the Russel 3000. This index gives a better representation of the US economy due to the number of stocks in the index. However again the top 1,000 stocks are the equivalent of 90% of the index and the remaining 2,000 only representing 10% of the index.

This is one of the reasons most mutual funds have a problem outperforming the index unless they take a few big bets on a few stocks or is a closet index fund.

If you want to mirror the index an ETF is ideal. It will not beat the index but it should track the index.

It is time to distance oneself from the way the main stream thinks about performance and benchmarking.

It is also not about making predictions, even a broken clock is right twice a day, the clock however is still broken and I would not use it for investing, i.e.. Market timing, guessing the market is a fool’s game.

Reduce risk and costs using ETF’s and don’t forget to diversify into other asset classes.

Have a great and prosperous 2017.

Gordon Robertson

If you have any questions just mail me at gr@me-group.ae

The IFA industry in the UAE is not prepared for this 2017 shock

jam

We have read articles about the coming changes proposed by the Insurance Authorities on insurance backed savings and investment products. Most of the articles I have read have only  covered a few points and as such have been incomplete. I have put together a very informative article which covers the most  important points  relating to the new proposals: These proposals if enacted in law will alter the face of insurance backed lump sums and savings programs in the UAE.

This has come as a result of the huge number of mostly justified complaints coming in from clients because of high fees and lack of disclosure

Commissions – The total commission charged should be spread over the life of the policy and no longer upfront.

  1. Regular premiums will be charged monthly over a period of not less than 5 years instead of the Traditional 18 months in so called “initial units”.
  2. Single premiums will be charged monthly over a 12-month period.

Savings Products

1. maximum fee is now 4.5% and charged over the first five years. The overall cap is 90% of the first year’s payment. (based upon a monthly saving of aed 6,000 the initial units would eat up 108,000 in the first 18 months. This will be reduced to 64,800 spread over 5 years)

2. Single premium will now be a maximum of 4.5% and charged over 12 months

Term Products

  1. Maximum commission deducted is 10% of the whole premium or 160% of the annual premium whichever is less, paid over the first 5 years.
  2. Maximum commission is 10% of the premium deducted over 12 months.

Short Term Products

  1. Maximum for Life and Takaful is capped at 25%

Indemnity Commission (commission paid to the advisor)

This is being stopped. Commission will be paid when the client pays the premium.

Multiple Channels

No longer will clients subsidise other sales channels. This will help reduce costs to the client. They will pay just for the sales channel they are using.

Disclosures

  1. The advisor will no longer ask for full documentation such as passport copy etc, before they receive a proposal/illustration.
  2. The declaration will say that the client knows the returns in the illustration are not guaranteed.

Free Look Period

  1. The client has 20 days from the start of the investment to decide if they want to stay or cancel. The advisor is not allowed to pressure the client to recoup the cost of the advisor time and effort in preparing the structure.
  2. The client will be refunded their entire money plus any profit or minus any loss on the investment.

There will be no bid offer spread in the calculation.

Illustrations for the client

  1. Mode of payment such as monthly/quarterly/annual/single
  2. Name of Plan, Sum assured, coverage term, and premium payment term.
  3. Death benefit, account value and surrender value should be clear and distinct.
  4. The premium shown should always be gross of all fees but the death benefit, account value and surrender value should always be net of all fees.
  5. Any illustration should state that it is either “Illustrative Value” or “Guaranteed Value”
  6. Cumulative Plan Premium should be indicated.
  7. All compulsory charges have to be disclosed.
  8. Details regarding top up premiums have to be disclosed separately.
  9. The Life insurance company has to quote the gross return based upon cash flow and then deduct all other charges so the client can see if there is a benefit in having this type of policy. All charges have to be deducted before they can show the cash surrender/redemption value.
  10. Two scenarios at a minimum should be illustrated. Maximum investment return is based upon EIBOR (emirates interbank offer rate) plus 3% rounded up to the next 0.5%. example current EIBOR (Dec 22) 0.55714 plus 3% is 3.55714, rounded up 4%. The first calculation is based upon 4%. The second calculation is based upon a lower number.
  11. There has to be an illustration based upon 0% rate of return but reflecting all charges.
  12. Any fees paid by the fund to the IFA or to the company belongs to the client and should be reimbursed to the client. It is normal in the UAE that funds pay a so-called retrocession/trailer of up to 1%. This ultimately comes from paying a higher expense ratio in the fund. Once this is removed the returns to the clients should rise.
  13. With profit policies, any illustration must be certified by a qualified and appointed Actuary. This should now be consistent with the valuation reports, if not the actuary may have to justify why it is not consistent.
  14. The annual valuation report has to be sent as a separate document and not bunched with other documents. The “font” has to be red and the client has to sign receipt.

Declaration by the policy holder.

  1. The client has to sign a declaration stating that they have received a copy of the illustration, and that non-guaranteed elements are subject to change. They are aware it is not guaranteed and that the advisor has never promised them anything else either verbally or electronically.
  2. A similar statement has to be proved by the advisor.

Historical Performance

They have to quote the last 5 years performance of the top 5 funds in the policy.

Minimum Protection

  1. Policies which were previously sold with 1% or 101% of the cash value are no longer deemed to be an insurance policy due to the minimum amount insured.
  2. In future the minimum insurance will be 110% of single insurance if over the age of 45 OR 125% of the premium if under the age of 45.
  3. Regular premium/savings will be 7 x annual premiums or 0.25 x term x annual premium whichever is higher if over the age of 45. OR 10 x annual premium or 0.5 x term x annualised premium whichever is higher.

Protecting the policy holder

  1. Surrender values in the future will be equitable to both the client and the provider. Ie the provider should not benefit to the detriment of the client.
  2. The calculation to determine the redemption value has to be disclosed, ie if the charges are deducted linearly it is easier to reflect the true charges on the redemption value.

 Bancassurance

  1. Banks often buy insurance at a discount from a provider. The banks are no longer allowed to mark up the price when selling to the client. The bank has to be compensated from the provider and not the client.
  2. Banks are no longer allowed to just represent one provider but to offer choices to the client or allow the client to obtain their own life insurance.

 Enforcement

Once the new laws are published in the Gazette the providers have up to 6 months to implement the new laws.

As can be seen, these new changes are draconian and will change the entire industry here in the UAE to the benefit of clients.

I have been harping on about this for several years. I think the fees are still too high, but the full disclosure will help clients achieve better returns, better flexibility and understand the cost of the products being recommended.

Do you know what fees you are paying with your advisor?

5The UAE is currently is about to implement changes to the way investors who invest through an insurance product is charged and how the advisor is compensated.

These changes are long overdue, I have reviewed the Circular 33 and see that the massive changes will only benefit clients. However, I still believe the fees are still too high. The fees will go down, the insurance portion will rise.

I know that I go on and on about fees, and may sound like a gramophone record that has stuck and repeats itself.

However as this is your money, (I am only trying to help). I have a template which you can use to identify all the costs. (this exercise may be outdated when the law changes in the UAE).

The regulators (not the product providers) are pushing for more transparency and fewer fees. In a very clear format. It used to be that funds paid a trailing commission to the advisor. This will stop, if there is a trailing commission this will be paid back to the client.

Due to the power of compounding, fees that may look reasonable can have a substantial effect over time.  This can reduce your returns and affect your goals.

If you are a low risk investor, then you can expect lower returns, the effect of fees can make a huge difference.

Research has proven that the higher the costs then the lower the statistical probability that an investor will receive good returns (despite what some advisors may say).

There are some very good managers available, but the higher the costs the greater the difficulty in beating the benchmark.

Often a fund will be shown to a client with healthy returns, however it does not reflect the other costs you have to pay such as platform fees, commissions, account charges etc. etc.

At the same time, paying lower fees does not automatically mean you get better returns, (price is what you pay, value is what you get)

However, there is generally a strong relationship between costs and performance.

The charts below shows the effect on investing 100,000 using a gross return of 6%

It then compares a 2%, 3% and 4% annual cost structure.

At 6% the 100,000 would grow to 320,000 in 20 years,

If you had a 2% fee then it would only grow to 220,000, a difference of 100,000.

If your fees were 4% p.a., then the investment wold only grow to 149,000

graphDo not forget that a portfolio should reflect your risk (diversify into other asset classes), and that emotional decisions tend to have a negative impact on performance.