After much deliberation, the UAE’s Insurance Authority finally signed the widely-anticipated Decision Pertinent to Regulations for Life Insurance and Family Takaful into legislation a few weeks ago.
Regulation BOD49, which was previously known as Circular 12, still needs to be published in the Official Gazette.
What is involved?
BOD49 involves an overall cap of 90% on commissions over the full term of life policies and indemnified commissions will be restricted to 50% of annual premium in the first year, with the rest drip fed over the term of the product.
Unsurprisingly, there has been a lot of speculation about how much it will affect the financial advice sector in the UAE.
Sam Instone, chief executive of AES International said to International Adviser (IA) that the changes are “small steps forward but it is progression along the right lines”, while Stuart McCulloch, market head of the Middle East at the Fry Group, told IA that it took too long to curb “business models which were stopped in the UK a long time ago”.
Walter Jopp, chief executive of Zurich Middle East, said during IA’s Fund Links Forum in October that this regulation is “not a million miles away” from a Retail Distribution Review-type scenario.
“For those based in the UK, we’ve lived through that; and, at the time, it was problematic and took a while to settle down,” he added.
“I think the UAE will go through a similar position. But the good thing about it is that we’ve had a couple of years or so to prepare.”
Stop passing on cost of industry inefficiencies
While much of the debate around BOD49 will be about its impact on firms, McCulloch highlighted how much clients can profit from this.
“Regulations that are designed to make things fairer and more transparent for clients leading to better client outcomes can only be a good thing,” he said.
“This will make advisers have to charge more realistic fees and take smaller commissions; which, to be honest, can still be high when compared to a fee-based and completely transparent model.
“However, anything that focuses on creating better client outcomes should be received positively.”
RS Prasad, managing partner at Capstone Insurance Brokers, told IA: “For too long, our industry has managed to pass on the cost of our own inefficiencies on to the products we design. The customer bore the brunt of this.
“Once this is implemented, customers will have access to products with better value. The whole industry will be forced to keep customer interest in mind.
“It is the best thing that could have happened to the customers who are the cornerstone of this industry.”
However, Instone does “not necessarily” believe it will help them.
“Circular 12 introduces standards broadly equivalent to those in the UK around 1990,” he said. “The outcomes clients can expect will still be highly variable and based upon the firm and individual they deal with.”
Clean up the sector?
One of the benefits of BOD49 is that this could be a chance for regulators in the UAE to clean up the sector.
Hannah Greenwood, director at Finsbury Associates, told IA that she believes this is the case and said the firm comes “across clients all the time that don’t understand the charges they are paying, or the long-term nature of the plan they committed to”.
“The upfront commission structure has also meant that some clients are not serviced after the adviser has been paid,” she added.
“The change in regulation will help address some of these issues. I also believe only those advisers that actually want a long-term career helping and advising their clients will now choose to be in the industry.”
But this sentiment in not unanimously held.
Instone does not think it would clean up the sector, as “there are still plenty of firms that don’t have licenses and these boiler rooms tend to do far more damage than licensed firms in any case”.
While McCulloch agrees that the “move in isolation will not clean up the industry as there is no panacea that can do that”, he believes “it is a genuinely positive step in the right direction” and will hopefully show a “clear direction of travel of future legislation”.
Facing significant strain
Financial services firms have had two years to prepare their business for these changes.
But how much will these commission caps affect the make-up of the sector?
“It’s going to put a huge strain on some of these firms, especially the financial adviser sector, where we know firms essentially receive indemnity commission, keep some for themselves and then pay the rest to the underlying salesperson,” Zurich’s Jopp said during a Fund Links Forum panel debate.
“I think that that model will come with a significant strain. While some of the bigger advice firms will survive, I think some of the smaller ones will not have the cash flow and reserves to survive.
“This means for some providers in that market, they have to change their products relatively quickly, if they’re going to be able to sell something in six months from now.”
Difference of opinion
However, during the same panel debate, David Kneeshaw, chief executive of insurer RL360, said that he is “not so sure that only the big advisers will survive”.
“I see that actually it’s the smaller, more nimble firms that don’t have a big history or a big hierarchy, that adapt quickly.
“They don’t have as much to change from the past. I don’t think it’s as simple as saying big survive, small won’t.
“I think it’s about how they’re run, how nimble they are, and how much baggage they don’t have that will determine what they do in the future.
“But I agree, if you’re an existing firm with a lot of baggage, you will need deep pockets to survive the transition.”
Survival of the fittest
Regulation is always a game changer, as the legislation could force some firms’ hands and they end up leaving the space.
Capstone Insurance Brokers’ Prasad added: “It will be a case of survival of the fittest.
“The advisers who are good at what they do and have done business in ethical ways and have kept the interest of their clients in mind will not only survive; they will thrive. The rest will disappear.”
During the IA event, Jopp said that BOD49 “could see new firms open up in the Middle East”.
“The life insurance market across the world is diverging. You’ve got Western Europe with relatively low growth and you’ve got emerging markets with high level of growth.
“So, there are opportunities in places like the Middle East for companies to enter those markets with new models and with more efficient solutions that actually can they can make significant headway.
“There aren’t enough companies in the UAE, there isn’t enough competition. I think the country would benefit from more.”
One of the shocks of BOD49 is that after it is gazetted, there will be a six-month implementation period for firms to adhere to it.
So, will this be enough time for firms to adapt?
Finsbury Associates’ Greenwood added: “There was originally talk of a two-year implementation period, so I do believe six months would have come as a bit of a shock to certain firms.
“The insurance companies may face a bigger challenge, as I believe the new regulations will require the introduction of some new compliant solutions for clients.
“But, as an industry, we have all known that these changes have been on the horizon and are now happening imminently, so firms should have been making preparations ahead of this.”
There will be a lot of debate about the short-term effects of BOD49, but the long-term gains for the financial advice sector in the Middle East could be huge.
It begs the question, what will the sector look like in five years’ time?
“It will look different, but hopefully this will be the first of many steps that regulators take to clean up the industry and make things fairer and more transparent for clients,” McCulloch said.
“This move is an improvement, but in isolation will not change the industry significantly in the next five years.”
Greenwood added: “Like any new regulation, I am sure it will come with teething issues, but I am excited to see the changes as believe this is something that the industry has needed for a while and will be extremely positive for clients in particular.”
Mike Foy, chief executive at Utmost Wealth Solutions, said during IA’s Fund Links Forum: “At the end of this process, we believe that it’s going to be a better industry, in terms of advisers, providers and customers.
“It’s the transition that’s interesting to get from where we are to say, two or three years down the track. It doesn’t mean because it’s upheaval that it’s all bad.
“Actually, it’s probably good in the medium to long term. But the next two to three years are going to be interesting.”