The UAE Insurance Authority (IA) is pushing ahead with tough new regulations to transform the way savings, investment and life insurance policies are sold, offering investors better protection.
The IA issued a second draft Circular No (12) last week, firming up its proposed overhaul of the life insurance and family takaful business.
Among the proposals, the IA plans to impose maximum limits on the indemnity commission advisers can earn, and ban them from recouping fees from the investment or insurance products they sell, which currently gives them an incentive to recommend those paying the highest fees.
After collecting written comments from the industry, the IA issued the follow-up document within its stipulated six-month period, enforcing many of the measures in its original Circular (33) published last November. Its initial draft came after the body “noticed an alarming amount of complaints” from policyholders who had seen their gains swallowed by high upfront commission fees, with harsh penalties for exiting the plans early.
Under the new regulations, advisers must clearly illustrate all fees and charges the client is likely to pay over the full term of the policy.
Policyholders will also benefit from a 30-day “free look period” during which they can cancel without penalty.
Financial industry professionals have welcomed the IA’s bid to “raise the bar of regulation”.
Peter Hodgins, an insurance lawyer at Clyde & Co in the UAE, said the latest draft should ensure intermediaries are properly qualified and registered, and consumers receive proper advice, but he felt the draft regulations could be strengthened.
“I still do not think that the draft regulations go far enough,” he said. “Personally I would like to see a clear allocation of responsibility for the advice given to customers.”
In other measures, the IA has confirmed plans to limit maximum commission on savings products to 4.5 per cent of the annualised premium, with an overall cap of 90 per cent over the policy term.
First-year indemnity commission will be capped at 50 per cent of the annualised premium, or 50 per cent of total commission, whichever is lower. According to Mr Hodgins, there were previously no maximum commission requirements for life insurance business.
Where an adviser or intermediary sells through multiple distribution channels, the cost of each channel should be clearly set out, with no cross subsidisation.
Maximum commission on pure protection products will be limited to 10 per cent of annualised premiums, with an overall cap of 160 per cent over the policy term.
For a single premium policy, maximum commission must not exceed 10 per cent.
Advisers and intermediaries can still impose upfront, fixed, advice, management or trailing fees, provided these are clearly set out to customers. They cannot be recouped from the product provider and must form part of the overall maximum commission limits.
All commission must be repaid in full if the policy is surrendered within the “free look period” of at least 30 calendar days, with the policyholder free to cancel without explanation.
The new rules will only apply to policies written after the regulations are published in the Official Gazette.
At that point, companies must align their fee structure with the new rules and comply with new rules on commission abuse.
They will have one year to comply with rules on indemnity commission and disclosures, and pure protection business. For other rules, the alignment period is two years.
Nigel Sillitoe, chief executive at the research and consultancy firm Insight Discovery, said distributors will find the proposed new commission caps challenging. “Some will frantically be looking to create new products to make sure they comply, while others will be conducting full strategic reviews of their licensing.”
Lawyer Mr Hodgins questioned how the IA’s regulations will interact with the Emirates Securities & Commodities Authority (SCA), which has weaker rules on commission and disclosure. “This gives advisers and intermediaries considerable scope for regulatory arbitrage,” Mr Hodgins said.
Steve Cronin, founder of WiseUAE.com, a non-profit community for expat investors, said investors must educate themselves to the dangers. “You should learn how to invest your own money rather than relying on a financial adviser who may not have your best interests at heart.”
Life insurance companies and family takaful operators have been set a deadline of May 11 for any further input. The IA stressed that “absolutely no extensions” would be granted beyond that date.
business@thenational.ae
Follow The National's Business section on Twitter