Anyone in the UAE hoping for a reprieve from the planned changes to commission levels and disclosure looks set for disappointment.
The Insurance Authority (IA) has published its “Draft Board of Directors’ Decision Pertinent to Regulations for Life Insurance and Family Takaful” at the end of January.
But the release was largely in line with a previous draft, known as Circular 12, effectively ignoring much of the feedback by the industry gathered since its release in early 2017.
Commission cap
The key decision by the IA is to implement a cap of 4.5% on the sale of lump sum portfolio bonds or offshore bonds, replacing a system where fees could be anything from 10-15%.
The draft also proposes an overall cap of 90% on commissions over the full term of the policy.
“This means a big drop in income for advisers,” said Philip Rose, director of Halwyn Marketing Management, a Securities and Commodities Authority (SCA)-regulated promoter of financial products and services.
Rose also noted that, under the proposed rules, indemnified commissions would be restricted to 50% of annual premium in the first year, with the rest drip fed over the term of the product. This mimics, to some extent, the situation in Singapore.
“There will be a minimum clawback period of five years. This creates a huge liability for advisers,” he told International Adviser.
Rose estimated that commissions, including the establishment fees on portfolio bonds and initial periods on regular savings plans, will drop significantly – potentially by 50% or more due to the caps.
“This will inevitably lead to casualties among advisers and firms that cannot adapt their business model to a UK RDR-style ‘service-fee-on-AuM’ (Assets under management) approach quickly enough.”
Life companies in the same boat now
For life companies, he said it meant those based outside of the Isle of Man or considering leaving it for another jurisdiction to avoid the island’s Conduct of Business Code and commission disclosure rules are now all in the same boat with regards the UAE market.
The new rules proposed by the IA also allow for a broker to act as an on-going financial adviser, separate to their role as an insurance producer or products sales person.
The draft states advisers can charge a fee for this investment advice; provided those fees are not recouped from the product offered; the customer is fully aware of them; and the fees are considered to be part of total commissions and therefore in line with the overall commission limit rules.
Tom Bicknell, a partner in the Dubai office of law firm Pinsent Masons, said the new investment adviser role would work alongside SCA’s current financial consultancy licence, which allows holders to offer the full range of financial advice.
“Perhaps the most interesting development in the draft rules is the move away from a licensing category of ‘Insurance Intermediaries’ to the more nuanced ‘Insurance Producers’ and ‘Investment Adviser’ licensing categories,” he told International Adviser.
Bicknell noted there were still questions around the qualifications and experience requirements for the Insurance Producers though he said one key development here was that the licence renewal period had been extended from one year to two.
However, he added: “The draft rules recognise the reality that whilst life products can continue to be sold by an IA-licensed broker/insurer, individuals employed by these entities may not always be suitably qualified to provide investment advice.”
“The introduction of licensed investment advisers as being able to provide investment advice to life product holders (and that the same cannot be provided with out such a licence) as a separate and additional service to the sales process allows for product holders to obtain investment advice in parallel to their insurance broker and, if appropriate, pay a separate fee for the same (which can fall outside of the commission cap).”
While not clear at this stage, Bicknell pointed out the draft rules seemed to indicate these new investment advisers can be employed by non-IA licensed entities, which could presumably allow for SCA-licensed financial consultants to advise product holders.
“It’s not clear from the draft proposals what the criteria for this licence will look like, though its likely it will rely heavily on the SCA’s promoters licence,” he told International Adviser.
Fund performance
The draft proposals from the IA also include details on a ”free look” period for customers and rules on transparency for all charges and fees, and provisions for calculating the surrender value of a policy,
“The surrender value, at any time of the policy, should be set in a way that the profit of the company should not be greater than or equal to what would have been obtained if the policyholder had not surrendered,” the IA rule sates.
The rules require the insurance broker to provide the historical performance of at least the top five funds to the policyholder where the performance of the policyholder’s account is dependent on either an internal or external fund. This will have to include at least five years of fund performance or all years if the fund has not yet been in existence for five years.
The need for a fully-executed risk management document still applies and the ongoing requirement to provide an illustration after sale upon the product holder’s request presents an ongoing burden on product issuers, said Pinsent’s Bicknell.
Bicknell said, given the time already taken by the IA on gathering feedback from its previous drafts (Circular 33 and Circular 12), it seems likely this is the last version of the rules and these could now be gazetted – which would mean they come into law quite quickly.
Though the draft does allow a two year “alignment period” for companies to implement the proposed regulations.
