UAE investors are still being mis-sold expensive fixed-term investment products due to a delay in the implementation of regulatory changes in the country’s financial advice sector, wealth experts have warned.
“Every delay means another investor suffers,” said Gordon Robertson, the owner of Investme Financial Services, a Dubai fee-based financial advisory firm. “Customers are not being protected right now because there is no disclosure and they are being fooled.”
Two final form regulations - set to revolutionise how savings, investment and life insurance schemes are sold in the UAE - are yet to be introduced by the UAE Insurance Authority (IA) and the Central Bank of the UAE, which both issued circulars on the matter earlier this year.
While the proposed changes will regulate the industry more effectively, experts fear the delay in their implementation will encourage “churning” where advisers switch their clients between products to cash in on high commissions.
Peter Hodgins, an insurance lawyer at Clyde & Co in the UAE, said there has been “something of a hiatus going on” with the risk that the status quo will continue for those involved in the mis-selling.
“If you haven’t implemented the regulations, what you are going to get is a period of time where the more unscrupulous part of the intermediary community simply goes out to try and get people to switch from one product to another specifically to generated commission for the advisers, ie churning.”
Mr Robertson said he was “sad” the regulation changes had not moved faster.
The IA’s second draft circular, released in April as a follow up to its 2016 release, reinforced plans to cap total commission payable to entities involved in the sale and distribution of insurance products, such as financial advisers; it also outlined plans to ban the use of charges such as advice fees and trailing commission fees on the products sold and restrict surrender charges.
“We’re edging ever-closer to the time when the sale of expensive, inflexible and opaque insurance products dressed up to appear like investment plans will come to an end,” said Sam Instone, the chief executive of AES International. “These plans have negatively impacted many people’s pensions, savings and investments and the Insurance Authority has done a great deal of positive work to address this situation.”
The Central Bank’s circular in May advised banks and finance companies to resolve all outstanding mis-selling complaints “amicably” and within a deadline of just 90 days. It also said it would not approve requests to market or sell “savings and investment” and “non-capital guaranteed/protected takaful/insurance products”.
Both circulars were issued after the authorities were inundated by complaints from unhappy investors.
Mr Robertson said he knows of advisers with assets worth millions of dirhams under their management that “earn a living milking the clients”.
“They are selling structured notes, getting upfront commission of about 6 per cent; they are churning the client’s portfolio all the time to generate revenues.”
He said a bank representative contacted him recently to sell him a savings product, without realising the nature of his work.
“The projections he made were based on long-term returns of 9 per cent but when he showed me the funds involved, only two in 40 had returns of 9 per cent and were very high risk,” said Mr Robertson. “Less than half had returns of 5 per cent long-term.
“How can you set projections for a client planning his retirement when you know as a company that this will not fulfilled? His projections were impossible to achieve.”
However, some investors who complained directly to the Central Bank about mis-sold investment products are having their problems solved.
In September, Nariman Alawadhi, the chief manager at the Central Bank, said that 100 clients have had money returned to them by banks thanks to the institution's clampdown.
“We get a lot of complaints about investment products. The consumer is ignorant and does not know much; at the same time the bank is not clear and does not tell you if this product is good for you or not,” she told delegates at a business platform on financial literacy.
Ms Alawadhi revealed that the Central Bank set up a separate consumer protection division in May to tackle complaints directly; previously, she said, this was run on an ad hoc basis and was part of the banking supervision department.
Mr Robertson said the insurance companies - the providers of fixed-term investment products – are also at fault as they know customers do not stay invested in long-term schemes.
“I asked one insurance product provider what the average holding period on their insurance savings policy was,” said Mr Robertson. “He said seven years. So I asked him what the average written policy is and and he said 15 or 25 years. So I said if you know that the average person is holding a policy for seven years that has been written for 15, 20 or 25 years, then you know from day one that the client is going to suffer. He said that is the problem of the adviser. The providers and the advisers all blame each other but they are all part of the same structure.”
Mr Instone says if the new regulations come into force, it will not end commission-driven salespeople selling inappropriate products.
“You cannot stop individuals from making poor decisions and being mis-sold by regulation,” he said.
“The way to prevent this is through education so retail clients understand the differences between financial salespeople who are paid to sell the most expensive products to them and professional advisers who have a fiduciary duty to act in the best interest of the client and provide transparent advice. Education is the only enabler of change.”