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.”  ■