The UAE Insurance Authority’s landmark regulations that set an overall commission cap on the sale of savings and protection products, life insurance and family Takaful products and ban on indemnity commission will come to effect from 15 October 2020.
The industry was anticipating a delayed implementation in view of the ongoing pandemic situation, but the authority has intimated to insurers and other financial services firms that the regulations will be implemented from the middle of next month.
The legislation, proposed four years ago, was published in the official gazette and the draft financial regulations were promulgated on 31 January 2019.
The industry was given six months to provide feedback. The initial implementation date set at 16 April 2020, which was extended by six months until 15 October 2020.
Who is affected?
The regulations apply to 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.
They also include companies engaged in the operations of Takaful (Islamic insurance), reinsurance and bancassurance.
The regulations set a cap on commissions for lump sum investments and fixed-term contractual plans and issued guidelines on selling of insurance and investment products to safeguard the interest of customers.
The measures include a cap of 4.5% on the sale of lump sum portfolio bonds or offshore bonds by advisers from financial companies.
This is in place of commission up to 10% paid by some insurers to the advisers on the sale of their products.
No indemnity commission
The new rules say that no indemnity commission — a sum paid upfront to advisers on the full value of an insurance policy — is allowed for regular premium policies and 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 remaining commissions must be paid out linearly over the remaining premium payment term of the policy.
The first year commission is subject to commission claw-back during the first five years of the policy, at a minimum.
Sales advisers are required to provide customers with a detailed schedule of fees and commissions for the entirety of a policy’s life cycle and customers have the option to cancel a policy within 30 days.
The fees paid to an investment adviser for providing investment related advice will be considered part of the total commission if the fees are not fully disclosed separately from all other charges or if the customer is not fully aware of the fees and services at policy inception.
As such, it must be in line with the overall commission limit rules.
If the fees are fully disclosed separately from all other charges and the customer is fully aware of the fees and services at policy inception, then the fees are not part of total commissions.
An industry insider said that the regulations are meant to discipline ‘investment specialists’ who sell investment products.
The regulator had received a number of complaints from residents about hefty commissions and upfront fees associated with conventional insurance and Takaful products.
“The question that is raised by the industry is whether the regulations will play out that advisers will have to settle for a fee-based regime or take a cut in revenue and change the way investment products are sold,” said DJ Sengupta, co-founder and managing partner of Capstone Insurance and Bankonus.
“Advisers will have to come clean as far as miss-selling by ‘unqualified sales force’ is concerned. They will be required to be transparent about fees and commission when dealing with retail and corporate customers,” said Aftab Hasan, secretary general, Insurance Business Group, and chairman, Risk Exchange DIFC Ltd.
Changes to licensing procedures have been suggested for investment advisers.
The regulations say: “No person may practice the profession of an investment adviser in the life insurance business unless such person is licensed and registered by the competent authority; No investment advisor can sell any life insurance product or Family Takaful product, unless they are also licensed and registered as an Insurance Producer by the Authority.”
Sajith Marakar, managing director, Consolidated Services Bureau, surveyors based in Abu Dhabi, UAE, said: “The regulations will have little bearing on investment advisers as life products form only a small portion of their portfolios.
“Life insurance products are not the mainstay of their business. Therefore, they need not be too much worried about the proposed stringent rules on indemnity commission.
“The commission limit rules apply to all types of life policies, whether sold to individuals or groups, regardless of the policy term and distribution channels.”