The consolidation set forth last year in the UAE’s financial advisory segment is set to see more activity as well as disruption with the new regulations set to take effect on 15 April 2020.
The UAE Insurance Authority has introduced caps on all fees and payments to brokers and financial advisers for life insurance policies and investment products.
But as reported by International Adviser in March 2019, “a sort of consolidation is already taking place as the UAE’s financial services industry is set for a complete overhaul with up to 80% of current advisers getting ready to leave the market”.
The regulation, known as BOD49, will like see M&A activity in the region kicked up a gear.
Fixing an overall cap
The rules fix an overall cap of commission paid to the insurance intermediaries and advisers and distribution channels.
Such caps depend on the nature and tenure of the insurance and investment product, said Anand Singh, senior associate in the insurance and reinsurance practice at law firm BSA Ahmad Bin Hezeem & Associates.
He explained that pure protection products such as term policies only provide an indemnity linked to the life of the insured, but no other cash value return.
Under the new regulations, the commission limit for such policy is capped at 10% of the annual premium, but with an overall cap of 160% of the annual premium across the life cycle of the product.
For savings and investment products, which have a cash or return value attached to them, the cap limit is a combination of the cap limit for the insurance portion of the premium and the investment portion of the premium.
No hiding of charges
The rules stipulate that the insurer, through the adviser, is required to provide a benefit illustration which provides details of the plan, such as the premium payment mechanism and the premium amount.
They should also detail the benefits under the policy, including the insurance, protection and cash value or return on investment, and the premiums towards each component, net of all fees and charges.
In short, they should list full details of all the applicable fees and charges.
“This means that there can be no hidden charges. The illustration document should include the applicable premium a customer will pay under the policy, including what portion of the premium forms the commission,” Singh added.
The customer is required to pay only the premium specified under the proposed policy and all fees and charges towards commissions, payouts, administration and management of the product are part of the premium and these charges must be stated clearly in the benefit illustration.
The adviser can collect an additional fee from the customer towards advice and management of the product, but only if the customer is willing to pay.
The capping of the upfront commission and other stipulations are bound to disrupt the way advisers do business and make profit.
The regulations are revolutionary in nature as they address issues related to mis-selling, upfront payments, overall unspecified commission payouts, fees and charges associated with investment products.
This will redefine the way advisers conduct business, said Singh.
As per the existing practice, intermediary payments are not disclosed to customers and are directly or indirectly built into the pricing of the products, thus leaving the customers in the dark as far as commissions and fees are concerned.
Tough time for some
“Smaller financial advisers and brokers will have tough time to make both ends meet with the capping of the upfront commission and the requirement for more disclosures. They will be left with the option either to find new ways to strengthen their revenue streams or shut down,” Sajith Marakar, managing director, Consolidated Services Bureau, surveyors based in Abu Dhabi, UAE.
Many have already taken action by changing structures and turning online to cut cost and stay afloat.
“The flip side is that insurers are happy at the events, as they increasingly realise that the broker link is waste and can pass on the benefits to customers to increase business,” Marakar said.
“They will now come out with innovative products with better margins.
“Overall, it’s a positive turnout. All these should happen around April 2020,” he added.
