COMPLIANCE PROCEDURE FOR BANCASSURANCE PRODUCTS SUITABILITY
Bachir El Nakib, Senior Consultant Compliance Alert (LLC)
The scope of this procedure is to determine whether the divisions / departments / branches are applying the Bancassurance Products Procedures set to comply with the Insurance Law, the Insurance Control Commission, and the Anti-Money Laundering regulations, to assess the adherence to policies & regulations, to assess whether the staff members have general awareness of the dangers of money laundering and to identify whether the branches are exposed to Money Laundering Dangers.
PROCEDURE OF INSURANCE SUITABILITY PRODUCTS
Suitability is based on a presumably elementary and unobjectionable concept that advisors shouldn’t sell a product to anyone who doesn’t have a need for it and whose financial resources and risk profile make buying such a product inappropriate.
1. What is suitability?
It’s the process of assuring that clients buy a life insurance or annuity product for the appropriate reasons. That means they fully understand its features, benefits, conditions, and limitations. This doesn’t happen automatically or easily. It requires an advisor to diligently uncover client information and preferences and to apply professional analysis and judgment. It also requires a structured approach for uncovering, documenting, and saving client information so that it can be easily recalled in the event of a future dispute.
2. Why is suitability important?
Suitability is crucial because it ensures that every product sold is consistent with customer needs, resources, and risk profile. It also builds a strong relationship between customers and their advisors and insurance companies, not just today, but for decades to come. It also prevents customer complaints and errors-and-ommissions-insurance claims, reduces the likelihood of regulator inquiries and sanctions, and enhances the industry’s overall reputation with the public.
3. What is the suitability determination process?
At its highest level, this process typically involves five distinct steps:
a) Reviewing the prospect’s income and expenses, net worth, and liquidity.
b) Knowing the person’s short- and long-term goals, especially the prospect’s potential needs and plans to withdraw funds from the product in
c) Discussing the prospect’s appetite for risk.
d) Determining the person’s marginal tax rate.
e) Being clear on the prospect’s life stage and the stability of his or her income stream.
4. What type of suitability documentation is required?
It’s important to record information about the client’s situation, resources, appetite for risk, as well as specific comparisons between an existing client product and a proposed replacement. Most companies require or prefer that advisors use their suitability form, but they may allow the use of a homegrown form if it collects the same data.
5. How long should suitability records be retained?
In compliance with AML/CFT law and Insurance Control Commission requirements, to retain suitability worksheets and other documents related to product analysis and client discussions for at least 10 years.
6. What specific suitability red flags are companies and regulators looking for?
There are nine major triggering alerts, involving cases where the customer:
a) Will retire prior to the termination of the surrender-charge period. This may increase the person’s need and desire to withdraw funds that trigger a surrender charge.
b) Is in a 15 percent tax bracket or less. This suggests the product’s tax feature may be of limited benefit.
c) Has little or no investment or financial experience. This means the person may have little capacity to understand the products features, benefits, and suitability, perhaps resulting in a future complaint.
d) Has limited disposable income, say $2,000 or less per month or is bringing in less money than he or she is spending. This again increases the likelihood of withdrawing funds prematurely and incurring an unexpected surrender penalty.
e) Has limited liquid assets, again increasing the possibility of getting hit with a surrender penalty.
f) Has an aggressive or moderately aggressive risk tolerance, but still wishes to purchase the product.
g) Has replaced a similar product in the recent past, which may lead to another replacement in the near future.
h) Is expecting to use purchase bonuses to offset surrender fees in the case of a replacement. But person must be aware that bonuses may be retracted if the new product is surrendered early, thereby creating additional costs.
i) Has conflicting plans for accessing money. For example, the person plans to receive a distribution in a manner that conflicts with how he or she wants to receive that distribution.
7. When might a life or annuity product be unsuitable for a given prospect?
Here are some common examples:
a) The product has a surrender-charge penalty longer than the person’s life expectancy.
b) The purchase of the product ties up too much liquid assets.
c) The purchase is funded with the proceeds of a loan or reverse mortgage
d) The person wants to purchase the product with someone else’s money.
e) The prospect doesn’t understand the features, benefits, and limitations of the purchased product.
f) The person wants to replace an existing product with one that has essentially the same features and benefits.
g) The proposed replacement will generate more charges and fees than produce financial benefits for the insured.
When Onboarding a customer, the branch to report to Compliance Unit (Suitability Report) under conduct of business, which, among other things, explains why the branch has concluded that a recommended transaction is suitable for the client.
It’s important that within your suitability report you clearly explain to your client why you’re recommending your proposal and how it meets their financial goals and objectives. Guidance about suitability reports, they also mention how the report should:
a) Provide Balanced View,
b) Detail Cost and Charges Involved,
c) Highlight any potential penalties that may be linked to your recommendations
If the client is already saving for their retirement, but as part of your proposal you’re recommending they cancel their existing plan and transfer their benefits to a new plan with Bank Bancassurance, in addition to providing a like for like comparison, the Insurance Supervisory agency will also be checking to make sure that good and appropriate advice has been provided. To help with your advice process, we’ve highlighted below the following points which you’ll need to take into account when producing your suitability reports the following basic points to follow:
a) Knowing your client – finding out what their financial needs and objectives are.
b) Analysing their existing arrangements – reviewing their existing arrangements and identifying any shortfalls.
c) Researching new plans – identifying suitable new plans and their benefits.
d) Identifying suitable investment options – identifying their suggested attitude to risk and recommending suitable investment options.
e) Carrying out regular reviews – regularly reviewing their circumstances and ensuring their investment options remain suitable.
It’s important that a suitability report is produced in line with compliance requirements and that if you’re advising any client to transfer their existing plan to a new provider, that you’re delegated to do so, it’s in their best interests and it meets the Supervisory Insurance rules of the ICC.
CONTENTS OF SUITABILITY REPORT
Introduction and overview
Within this section you’ll need to provide your client with background information about your meeting and this report.
Here are some suggestions about what you may want to include:
a) details about you and your business
b) what their financial needs, objectives and their future goals are in planning for their retirement
c) information about the importance of reading this report alongside any illustration and key features you’re providing
d) details about any documentation you’re providing that outlines the services you’ll provide and their costs
Summary of your circumstances and objectives
* Within this section you’ll need to summarise their personal details that you discussed during your meeting.
* Within this part you’ll need to include details about the financial objectives you discussed with your client. Depending
on their needs and objectives, here are some suggestions about what you may want to include:
[These points may be suitable for a Personal Pension plan]
1. If they are not currently saving towards their retirement and they want to start.
2. If they are already saving but from your discussions you’ve identified that they’re not saving enough to provide them with the amount of pension they’ve said they want when they retire. You may also want to include details about the amount of pension they want to receive when they retire.
3. If they’ve had breaks within their working history and they’ve not built up enough National Insurance contributions to provide them with a full State Pension, they may want to pay into a separate personal pension plan.
4. If they are already saving towards their retirement but have more than one plan which they want to consolidate into just one. This may be because:
a) they want to reduce their plan charges
b) their existing pension provider doesn’t provide them with the flexibility or the investment opportunities/ performance they need
c) they are not happy with the level of service their receiving from their current provider.
[These points may be suitable for an Income Release plan]
1. If they are nearing their retirement age and they want to see what options are available to them or they want to take out a new plan that is flexible and doesn’t necessarily mean having to purchase an annuity straight away.
2. If they want to start taking an income from their plan and they want to choose the most appropriate way of doing so.
3. If they are already retired and they want to release additional tax free cash/income from their plan to possibly pay for their child’s wedding, help with a deposit for a house or pay off the remainder of their mortgage.
4. If they are already retired and are receiving an income/ pension but they want to continue contributing to a plan or look at reducing any potential tax liability.
[These points may be suitable for a self investment plan]
1. If they have outlined an interest in wanting to take an active role in choosing investments, why they may want to consider a Self Invested Personal Pension (SIPP) plan.
2. If they are a company director and they want to incorporate their business premises within their pension plan.
Attitude to Risk
Within this part you’ll need to include details about your client’s suggested attitude to risk. You may want to include information about how risk averse they are and the length of time they have until they retire. You should base your recommendation upon investment options that are suitable for them and which does not expose them to an unnecessary level of risk.
Here are some suggestions about what information you may want to include:
a) It’s important to explain to your client that the greater level of risk they take with their investment decisions, increases the chances of greater rewards as well as the possibility of greater losses.
b) You’ll also need to point out to your client that their investments can go down as well as up and they may not get back the value of their original investment.
c) If you’ve gone through a risk questionnaire with your client, you’ll need to discuss the outcome from this tool and ensure your client agrees with your recommendation and their suggested attitude to risk.
1. NEW CUSTOMER ACCEPTANCE RISK
a) Customer Acceptance Procedures may not prevent taking on money launderers as customers. Customer acceptance procedures could deter bona fide customers or cause customer dissatisfaction.
b) Money launders may be unwilling to give their true identity and background details (such as source of income).
Therefore, stringent customer acceptance procedures should help deter money launderers. Also, in the event of money laundering occurring, client personnel should assist and report immediately to the MLRO internal suspicious transaction report.
a) Lack of knowledge of customers
b) Customer resistance
c) Customers lack evidence
d) Pressure from competitors with weaker procedures
e) New customer types (e.g. new locations)
a) Evidence of individual customer identity required for all new accounts
b) Customers are educated as to why KYC documents (a passport, a driver’s license, a certificate of incorporation, a copy of annual report and accounts, a copy of the board resolution approving the relationship with the bank, among others) are requested
c) KYC Procedures are reviewed when moving into new markets
d) System customers profile updating of the standard KYC detail requirements
e) Look up to ensure validity of KYC details entered, other than the basic information entered, address, fixed telephone numbers, postcodes of known suspicious persons
f) Identifying customer facing staff who persistently fail to obtain sufficient relevant details to large cash injection into account
g) Private companies ultimate beneficial owners’ identification evidence should be sought
h) In the case of business / corporate accounts – KYC documents are obtained for the executive management / directors of the company
2. CUSTOMER IDENTIFICATION RISK:
The bank may obtain and retain insufficient know-your-customer information (initially or subsequently). If there is insufficient information about a customer’s characteristics, it will be difficult to assess whether transactions are suspicious.
a) Inadequate current or historic information for identifying and profiling clients
b) Know your Customer information not being kept up – to- date during the course of the banking relationship
c) Diverse geographic location of clients
d) Records not retained for sufficient period (X years) from end of banking relationship
a) Lack of customer information on taking on customers
b) Lack of updating of customer information
c) Lack of retention of information to Compliance Unit Reporting Officers
d) Select a sample of cases which have been highlighted as suspicious but were not referred to the Compliance Unit Reporting Officers and ensure sufficient documentation is on file to support the decision
a) Procedures requiring specific information for different types of customers
b) Procedures for updating information about customers in the event of a change of circumstances / change in banking habits
c) Record keeping procedures established and enforced
d) System drop down boxes to assist staff with standard KYC details during the account opening process
e) Look up tables to ensure validity of KYC details entered other than the basic information entered e.g. Non Identification Customers, post codes of known suspicious persons
f) IT controls to prevent customer records being accepted when fields are incomplete
g) Identifying customer facing staff who persistently fail to obtain sufficient relevant KYC details
h) Maintain an internal register of accounts involving public sector officials to prevent handling of misappropriated government funds
i) Continually assess customer transactions against expected pattern of activity
j) Maintain regular contact with existing customers
k) Attention paid to changes in private company customer’s structure or ownership
l) Recorded details about transactions must distinguish between customers, location and form of the transaction
Client Suatabilaty Assessment.- A Client Suitability Assessment (CSA), Client Profile Questionnaire (CPO) or Risk Profile Questionnaire (RPa) for each client shall be undertaken prior to the acquisition of a variable life insurance contract as outlined by the ICC circulars to determine the client's understanding of, tolerance for and capacity in managing various risks.
lnvestment Policy Statement.- As a mandatory complement to ICC, the lnvestment'Policy Statement (tPS) must have been geneiated for a client. The IPS formalizes the investment of the client as well as an investment directive of the client with respect to the handlings of his investible funds. The IPS may be a portion of a product proposal that contains the fund allocation chosen by the client and the description of the funds together with the client's signature. The fund allocation indicated in the IPS may be different from the risk profile of the client as shown in the ICC circulars as long as the client's signature is affixed.
ln the event that the insurance company conducting Bancassurance activities has readily available pro forma IPS to be filled-up by prospective VUL policyholders, the same must be with the prior approval of the Bank Board lnsurance Committee.
Disclosure of Conflict of lnterest.- The insurance company shall disclose any material information which may give rise to an actual or potential conflict of interest to the client. The insurance company should take all reasonable steps to ensure fair dealings with client.
Below is a sample of a Disclosure of Conflict of lnterest statement thai may be adopted by the insurance company:
"The Manager makes investment decisions for the Funds based on the circumstances of each Fund and independently of decisions made for other funds. There are times when the Manager may take the same investments for a Fund and one or more other funds. This may create a conflict of interest if there is only a limited amount of the investment available, or if the investmenf is purchased at different times or at different pices for different funds. lf this happens, the Manager will aftempt to allocate the investment fairly between the Fund and other funds. Facfors the Manager consrders' in allocations include the size and timing of previous allocations, whetherthe security meets the objectives of the respective portfolios, the relative portfolio size and the rate of grovvth of the portfolios."
The Disclosure of Conflict of lnterest statement should be included in the product proposal and the policy contract and subject to the prior approval of the Bank Board lnsurance Committee.
Standard Disclosure Statement.- All promotional materials, PHS and VUL policies, should contain a standard disclosure statement which must substantially declare the following:
'This ls not a deposit product. Eamings are nof assured and pincipal amount invested is exposed fo risk of loss. This product cannot be sold to you unless ifs beneffs and risks have been thoroughly explained. lf you do not fully understand this product, do not purchase or invest in it."
"This is not a deposit product. Eamings are notassured and pincipal amount invested is exposed to isk of loss. For you to make an informed decision, the features, beneffs, and associated risks of the product MUST be thoroughly explained to you by a licensed representative of (name of insurance com . Make sure you fully understand this product before you purchase or invest in it. Should you need furlher information, please contact the Board lnsurance Committee secretary or (name of insurance company, location and contact number."
This Disclosure Statement shall be placed in the front cover of any material used within bank premises for the purposes of cross-selling VUL policies. The text should be in bold print with a minimum font size of 12. The insurance company may prescribe an alternate wording to the above disclosure statement as long as it is consistent with the above-quoted statements, and subject to the review and approval of the Bank Board lnsurance Committee.
Bachir El Nakib, Senior Consultant Compliance Alert (LLC)