Insurance and investment customers in the UAE are set for a more transparent and protected regime after the UAE central bank issued guidelines on fees, charges and commissions levied by banks and finance companies offering savings and investment and non-capital guaranteed products.
The central bank issued a circular on 13 June 2021 to all financial institutions operating in the UAE that offer structured conventional life insurance and takaful investment and savings products.
The circular states that banks and finance companies should get a ‘licensed financial institution’ (LFI) licence and can resume selling such products only after obtaining a no objection letter from the central bank.
Clarity
This circular follows an earlier notification to banks and finance companies in May 2017 directing them to stop offering savings and investment and non-capital guaranteed products until the central bank issued a governance policy on issuance of such products.
With this, there is clarity on banks and finance companies offering savings and investment and non-capital guaranteed products, said Anand Singh, senior associate in the insurance and reinsurance practice at law firm BSA Ahmad Bin Hezeem & Associates, Dubai.
Singh clarified that, as a next step to the life insurance regulations capping overall commissions payable to intermediaries, this circular requires that all fees, charges, commission and expenses need to be disclosed to customers.
Given the commission levels on bancassurance business, once disclosed to customers, this will undoubtedly lead to more customers walking away from banks in search for better value for money, he said.
The circular stipulates that the regulations are applicable when an LFI is offering such products, which include the consumer protection regulation and the consumer protection standards issued by the central bank in 2021, in addition to the previous directions issued by the Insurance Authority.
Several additional requirements are suggested by the apex bank which say when an LFI is offering investment products, they should be categorised under three heads: disclosure & transparency, appropriateness & suitability assessment and institutional oversight.
Singh said the mandatory requirement to carry out appropriateness and suitability assessment for each customer is a welcome development.
“However, the condition that variable compensation must be deferred by six months after transaction will further push out IFAs from an already bleeding market,” he said.
Total transparency
The LFIs are directed to declare to the customer in a simple format (in English and Arabic) the fees, charges and commission that will be levied on the customer, at inception and through the period of the cover, including charges applicable on withdrawal and ramification of such withdrawal.
“The LFI must obtain signature from each customer on a written disclaimer that they understand the risk and are aware of all fees, charges, commissions and expenses,” said the circular.
Finance companies and banks are ordered to obtain a new disclaimer at least 60 days prior to changing the terms of the products already offered by LFIs.
The benefit illustrations must indicate how premium paid will be used with percentage allocation for fees, commission and charges for each of the parties involved, ie the bank, broker and insurance company.
Further, an independent team at the LFI must carry out appropriateness and suitability assessment for each customer based on income, investment experience, knowledge and net worth, to whom the products are offered, and the customer must attest by signature that the appropriateness and suitability assessment was performed.
“Each such product must be reviewed and approved by an internal product approval committee, that shall comprise risk management and compliance. Similarly, when being offered by a Takaful (Islamic insurance) operator, the approval of Internal Sharia’ah Supervision Committee of the LFI is required along with monitoring of Sharia’ah compliance,” the circular stipulates.
“Any variable compensation that is paid to employees offering the products must be deferred for a minimum period of six months after the transaction has occurred,” the circular said.
Consumer first
The central bank has also issued consumer protection regulation and consumer protection standards which require increased disclosures and transparency while selling credit life policies.
“Such regulations are definitely setting a high benchmark for the overall life insurance and investment market in the UAE. With consumer benefits at the forefront of these regulations, they will definitely help UAE attain a gold standard in terms of investment and life insurance market,” Singh said.
