Blog: How Does Regulation BI Impact Life Settlements? – ThinkAdvisor

What You Need to Know

  • Insurers would prefer policyholders to surrender unwanted life insurance.
  • A life settlement generates several times more cash for the policyholder than a surrender does.
  • A life settlement also upholds the insurer’s obligation to pay the death benefit.

The SEC approved Regulation Best Interest (Reg BI) as a consumer protection measure in 2019. Depending on your advisory role, the rule may have fundamentally changed the way you do business — or it may be business as usual, just with extra paperwork.

To recap, Reg BI:

  1. Raises the legal standard of care brokers provide
  2. Requires brokers to explain recommendations and their associated risks in writing
  3. Defines new obligations for broker-dealer organizations
  4. Specifies that only RIAs can call themselves advisors
  5. Requires general disclosure of advisory roles and fees in a Form CRS

Most of these Reg BI changes target brokers specifically, though the Form CRS disclosure applies to RIAs and brokers.

From Suitability to Best Interest

Before the SEC passed Reg BI, your recommendations as a broker only had to be suitable to your client’s strategy. Recommending securities that generated higher commissions was legally acceptable if the recommendation fit with the client’s needs and strategy. Reg BI changes that, mandating a stricter standard of working in your client’s best interest. Under Reg BI, you also must disclose the commissions you earn and other conflicts of interest.

Although the Reg BI standard is higher than the suitability standard, it is still considered by many to be less strict than the fiduciary responsibility RIAs must follow. Fiduciary responsibility means you are working primarily for the benefit of the client. Not only are you working in the client’s best interest, but you are also prioritizing the client’s needs above your own.

Standards of Care and Life Settlements

So how does Reg BI impact life settlements?

To be clear, the SEC focuses on securities, and life settlements are not securities. But the passing for Reg BI points to a larger dynamic: The U.S. government wants to protect consumers from the conflicts of interest that inherently exist in financial services. After the SEC passed Reg BI, the National Association of Insurance Commissioners (NAIC) adopted its own best interest standard specifically for annuity recommendations. Some states have subsequently taken up the NAIC rule. Others, like New York, have mandated even stricter and broader standards for insurance agents.

Life settlements are part of this conversation because they have a history of conflict. Insurers would prefer policyholders to surrender unwanted life insurance. A surrendered policy is profitable for the insurer because it cancels the insurer’s obligation to pay the death benefit. But a life settlement generates several times more cash for the policyholder vs. a surrender. It also upholds the insurer’s obligation to pay the death benefit.

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