The UAE Insurance Authority has published draft regulations consolidating rules on insurance broking, online broking transactions, appointment criteria and qualifications for top positions in insurance broking companies and investment advisers.

It prescribed criteria for filling positions including chief executive, operations manager, compliance officer, specialist or professional staff, branch executives and sales staff.

Most advisory firms in the UAE are taking steps to abide by the Insurance Authority’s norms for deploying qualified advisers.

They prescribe minimum qualification or certification levels for financial advisers in the wake of increasing competition and complaints.

There has been rampant mis-selling of investment products, putting the reputation of many investment advisory firms at risk.

The draft regulations had proposed curbing the untrained specialists who sell investment products after the regulator received a number of complaints from residents about mis-selling, hefty commissions, upfront fees and surrender charges for savings products collected by investment advisers.

Dearth of quality advisers

On the issue of prescribing minimum qualification and certification for financial advisers, Navin Nihalani, founder and chief executive, Compass Insurance Brokers, said: “That’s the first step that should be implemented.

“Experience can also be allowed as a replacement for the same initially. But a continued education programme should be implemented which is the need of the hour and it should be linked to individual adviser licensing by the regulator.”

Nihalani had said there was an absolute dearth of quality advisers and it’s time the industry implemented standardised qualifications.

“The new draft may have both pros and cons. If implemented, this could do good for the industry. But they should allow experience as a replacement for education in some positions. Also they should not restrict life and GI sales people to do both activities as long as they are qualified to do both,” he said.

Krishnan Ramachandran, chief executive of Barjeel Geojit Financial Services LLC said, on top of prescribing minimum qualification and certification, advisers must undergo a minimum period of internship and acquire experience before they start advising clients.

Ashok Sardana, managing director of Continental Insurance Brokers, is of the view that investment firms should hire only qualified people who want to service their clients. He agreed with others and suggested that advisers must have qualifications before offering any financial solution.

“It should be mandatory for all advisers to be qualified to some level to provide advice as they are dealing with people’s life savings and retirement funds, and therefore firms cannot have non-qualified advisors advising people.”

CII’s training help

Gaenor Jones, regional director of the Chartered Insurance Institute (CII), said: “Those companies who continue to value the importance of regulation and who support their employees in their attainment of professional qualifications will continue to prosper.

“Ideally, the HR function should be putting robust and appropriate training plans in place for their employees so that they have achievable time-considerate objectives to meet, enabling advisers to study and attain qualifications without any negative impact on their day-to-day obligations,” she said.

“We fully endorse and support any drive to raise professional standards in the financial planning and insurance sectors, and that endeavor starts with encouraging advisers to attain minimum qualifications on which they can build a wealth of tailored qualifications appropriate to their career path and chosen areas of expertise,” she added.

CII is working closely with HR professionals to identify needs and address the requirements, before providing relevant study materials and examinations. The institute offers a wide array of qualifications for the insurance and financial planning sectors.

These are available in both English and Arabic and are appropriate for both newcomers to the sector, as well as more senior stalwarts.

The new year, however, dawned with the optimism of taming the pandemic and a positive outlook on growth.

International Adviser asked a cross-section of advisers in the UAE to take stock of last year and crystal-gaze the prospects for the new year.

Vaccinate to victory?

Advisers in unison said the 2021 outlook is positive and promising in view of the prospects of containing the pandemic and regaining investor confidence.

Ashok Sardana, managing director, Continental Insurance Brokers, said: “Now that vaccines have come and are being used widely, the fear of the virus spread has somewhat subsided and growth prospects are becoming rosy.

“The attitude depends more on us than on our surroundings. The outlook for 2021 is of course positive.”

Krishnan Ramachandran, chief executive of Barjeel Geojit Financial Services, is of the view that 2020 has been a year of consolidation and opportunities for advisory business on the whole.

“There were periods of uncertainly especially; during March, April and May. But after this period of lull the investment horizon showed signs of improvement month-on-month.

“This period also witnessed the rise of the retail and mass affluent investors who actively participated in the markets and have reaped good returns and offered prospects to rebalance their portfolios.”

Navin Nihalani, founder and chief executive of Compass Insurance Brokers, believes 2020 was one of those years where Wall Street became a fantasyland that was unaffected by events in the real world.

“It’s been a bull market like never before and almost everyone has made money in the markets even with passive instruments like ETFs and index trackers. There is a massive difference between valuations and earnings of most companies which has created the perfect platform for markets to crash.”

Turnaround and after

How will the new year play out for advisers and investors?

Ramachandran says most macro-economic indicators, globally, have turned around and there are expectations of the growth momentum getting back on track in 2021 and beyond.

“The focus for advisors in 20201 will be on identifying value creating propositions and risk mitigating investment opportunities for their clients.”

Nihalani advises that investors should exercise caution soon as the rally is held up by some serious quantitative easing programmes and stimulus packages.

“The next tumble for the markets, which might still be far away as there’s yet steam left in certain sectors, will be devastating if people don’t exercise caution.

“I strongly believe the need for active investment advisory will be highlighted heavily in this new decade as people will realise that passive investments can be very expensive when markets collapse.”

Regulatory measures

Last year saw some significant regulatory measures after a long gap.

The implementation of the BOD49 regulations by the UAE Insurance Authority has been perceived as a game-changing exercise, which forced the advice market to change track.

Sardana said businesses should adapt to the new environment. “We have to work smarter. Add new solutions to what we offer to our clients. Collaborate with different advisers who offer other specialised solutions.

“Sometimes a big jolt is required to get out of our comfort zone,” he said.

The market kept guessing about the prospects of big ticket consolidation and the exit of small players following the implementation of BOD49 regulations.

“Many brokers will consolidate which is the regular way to go with new regulations,” said Sardana

Ramachandran agrees with Sardana. The prospects of consolidation will continue to happen in a much faster pace. Advisory firms need to re-invent their business models & processes and create an environment of mutual trust.

He said the new regulations are bound to create more transparency and establish best practices in the insurance sector.

“This will benefit both the customers and brokers alike in the long term.”

Was it really game-changing?

But Nihalani  does not see any big ticket consolation.

“Consolidation is a complex subject and even though the Insurance Authority allows for mergers I don’t see a lot of those happening at the moment.

“It has already triggered the exit of smaller players who are getting acquired by the bigger ones.

“Mostly it’s book and advisor acquisition than an actual license acquisition at this stage as the IA license isn’t as affordable as in other more regulated jurisdictions around the world.”

When others call it game-changing, Nihalani says the recent regulations as yet to earn a game-changing qualification. “BOD49 isn’t final yet as we are yet to see some slight amendments.

“As a lot of advisers leave the industry due to the same and a lot of clients are orphaned, it’s going to be difficult if  markets actually collapse and a lot of clients are left without the right advice at the right time.

“These changes definitely favour the clients more than the adviser in terms of product charges but in effect don’t favour either as the cost of good advice is ‘immeasurable’.”

The watchdog is looking to consolidate rules on insurance broking, online broking transactions, appointment criteria and qualifications for top positions at insurance broking companies.

The draft comprises 38 articles in 13 chapters that cover matters relating to insurance broking; covering licensing and registration, governance, obligations of the insurance broker and the insurance company’s obligations towards the broker, the rights of the insurance broker, solvency, financial reports and disclosures, mergers, dispute settlement, supervision and penalties.

The draft prescribes the criteria for filling positions in broking companies; including chief executive, operations manager, compliance officer, specialist or professional staff, branch executives and sales staff roles.

The general manager or chief executive must possess a university degree in insurance, financial science, law, or insurance-related science or its equivalent duly certified; or an Associateship of the Chartered Insurance Institute (ACII) in London or a certificate approved by a similar professional institute.

The draft regulations come in the wake of investment advisers in the UAE demanding the regulator prescribe minimum qualifications or certifications for financial advisers after the implementation of BOD49 regulations, which addressed issues related to mis-selling, overall commission payouts, upfront payments and fees and charges associated with investment products.

The draft stipulates that candidates for the top job must have successfully passed at least three training courses in insurance or insurance brokerage, and have practical experience in the insurance or insurance broking of not less than 10 years, or less than five years if he holds a higher academic qualification.

The experience required for a UAE national is at least five years, or two years if he holds a higher academic qualification.

What advice firms demand

Almost all advice firms support appointing qualified advisers to sell financial products; not only to ensure transparency for customers but also to maintain their own credibility.

“There is need for industry-recognised qualification for advisers. It should be mandatory for all advisers to be qualified to some level to provide advice,” Ashok Sardana, managing director of Continental Insurance Brokers and Apps zum Aktienhandel, said.

“We’re dealing with people’s life savings, retirement funds, etc., and we can’t have non-qualified advisers advising people.”

Navin Nihalani, founder and chief executive of Compass Insurance Brokers, concurs.

“Unprofessional or unqualified adviser, who does not understand the products, would mislead customers into buying investment products which may not serve their purposes.

“Credentials, such as the CFP or CFA designation, can give the confidence that your adviser has undergone rigorous professional education and passed qualifying exams that enable them to give sound advice.”

Sajith Marakar, managing director, Consolidated Services Bureau, surveyors based in Abu Dhabi, UAE, agrees.

“There is a felt need for appointing qualified professionals not only in top positions but field staff as well. The allegations about mis-selling of financial products are found to originate from entrusting the sales job to unqualified people.”

Online broking terms

The advent of the digital era has redefined the interaction between insurance sales practice by the brokers and the insurance companies.

The draft regulation requires the broker to develop and operate a website or smart app by setting standard technical interfaces for electronic linking with an insurance company.

The objective is to exchange information electronically with the insurance company’s IT systems for the purpose of exchanging basic customer information.

It is also aimed at enabling the insurance company to assess the insured risks.

Further,  it requires providing the customer with a price offer for the insurance policy, the payment mechanism, and policy information, once issued by the insurance company.

The draft regulation proposes that the broker has to conduct the insurance request, by sending and receiving insurance offers, in real-time through the technical communication interfaces between his website or smart application and the insurer’s systems.

When dealing with the insurance broker electronically, the insurance company has to display the price of insurance products in line with the standards of sound technical underwriting, and to notify the insurance broker by electronic means when the insurance policy is issued, and to notify him of all the information on the policy, including the date of commencement and end of coverage, and the limits of coverage.

The regulator stipulates that insurance companies should deal only with intermediaries or price comparison sites licensed by the authority.

“Once these regulations are implemented, the industry will see a revolutionary change in the way business is done that will bring in more transparency, efficiency and benefit to the customers,” Marakar said.

New changes are bound to force brokers to recast their business strategy anchored on technology which will ultimately lead to the elimination of laggards.

The UAE Insurance Authority implemented the BOD49 regulations on  life insurance with effect from 16 October 2020 after a particularly long gestation period.

The regulations cover insurance companies incorporated in the UAE and foreign branches of insurance companies licensed to carry out insurance operations either through a branch or an insurance agent.

The new rules address the most important issues relating to mis-selling, overall commission payouts, upfront payments to agents/brokers by insurers, fees and charges associated with investment products, the free-look period and mandatory benefit illustrations.

It was anticipated that the game-changing regulations will greatly affect businesses, triggering an exodus of smaller players from the market as revenues take a big hit.

Purpose not served

Many brokers feel that the purpose of the regulations has not been served as they are not benefiting the advisers or customers.

It was feared that  life products were going to get costlier for policyholders, thereby raising a concern whether the regulation can achieve what it intended.

“There is no actual benefit to advisers or clients,” they said.

International Adviser previously reported that paths were being beaten towards the industry exit door, while others seem to have switched to selling products like credit cards.

“Customers are not happy as life insurance premium has shot up by as much as 60%. All regulated products such as life insurance, retirement planning, education planning have taken a big hit in revenues,” said Navin Nihalani, founder and chief executive, Compass Insurance Brokers.

“The big impact is on life advisers, as customers are buying lesser insurance than they need.”

In one example, a customer looking to buy $1m (£755,430, €842,820) worth of life cover now has to pay a premium of $22,500 – up from $14,000 in the past, a rise of nearly 60%.

Another example given showed a 33% increase in premiums to $20,000 from $15,000.

No details were provided about which products or companies were involved in the above examples.

No indemnity commission

The regulations disallowed indemnity commission for regular premium policies and stipulated that the commissions paid should be based on the annualised premium collected.

First year commissions must be capped at 50% of the annualised premium or 50% of the total commissions payable under the product, whichever is lower.

The remainder must be paid out linearly over the remaining premium payment term of the policy.

The first year commission is subject to claw-back during the first five years of the policy, at a minimum.

“Brokers find it a big deterrent. If he has to make the 50% on the first year of commission, he knows that it’s 10% every year for five years. Logically, he is getting the 50%, but if the customer stops paying, he has to return 40% back to the insurance company. Therefore, nobody wants to sell any product with the five-year claw-back condition. Further, brokers are finding it an accounting nightmare,” Nihalani said.

It was feared that the broker role would become redundant if insurance companies start selling directly, bypassing brokers.

None has started it yet, but it is rumoured that Zurich is contemplating setting up a direct sales force.

Insurance companies will naturally look to strengthen their direct sales channels if there is resistance from the broker distribution network.

“Advisers are forced to change track as they have to do something to survive. Already some are planning to turn into DSA (direct selling agencies) models.  It is understood that a few will be surrendering their broking licence to take up DSA licence,” Nihalani said.

Anand Singh, senior associate in the insurance and reinsurance practice at law firm BSA Ahmad Bin Hezeem & Associates, previously stated: “Most insurance brokers are unhappy with the regulatory development.

“The new regulations are not sustainable and that if the distribution channel is not sufficiently incentivised, brokers will lose the motivation to sell these products and therefore have an adverse impact on the life insurance market.”

The firm’s licence to operate was withdrawn in January for “breaking IA laws and regulations” according to a note put out by the regulator and seen by International Adviser, though the company claims the problems were largely down to the actions of one of its senior executives.

At the heart of the problem was a client complaint about the miss-selling of a Cayman Island-based fund which had offered a high return with capital protection features.

Compass claims not to have had terms of business with the fund but acknowledged one of its clients had been sold the investment without the knowledge of the management team and that the “email” records of the transaction had been deleted by the executive before the IA could make its checks.

Established in 2006, Compass Insurance Brokers LLC is one of the leading non-resident Indian focused firms in Dubai providing individuals and corporates with advice, financial planning and services to protect, invest and grow their wealth.

New broom

Navin Nihalani, chief executive and managing partner of Compass said: “We are back to being fully functional”.

Nihalani said that full cooperation was given to the IA to investigate the matter thoroughly and that the senior executive was suspended for a period of 2 months. The client has since withdrawn the complaint.

“The regulator has been very understanding and helpful and we are extremely happy to be over this minor hiccup and ready to forge ahead with full vigor.

“We have put in place additional layers of compliance to our systems to ensure full transparency with all our clients and the Insurance Authority.

“We intend to cooperate with the regulator as always and look forward to their guidance and support in developing robust mechanisms to improve organizational efficiencies.

“Our anthem of the year for Compass Financial Solutions is ‘Bigger, Better, Brighter 2019’. The focus is on delivering a better experience to our clients with a team of compliant advisers and products,” he said.