At times in the United Arab Emirates the pace of change resembles the movement of tectonic plates. Little appears to happen for long periods and then suddenly there is a seismic shift in the landscape. Since 2016 all three of the financial services regulators in the United Arab Emirates (UAE), the Insurance Authority (the IA), the Emirates Securities & Commodities Authority (the SCA) and, latterly, the Central Bank (the CB), have moved to develop regulations impacting in the life insurance and the investment and savings markets which will fundamentally change the regulatory landscape for the industry.
Overview of the Regulatory Changes
The SCA was the first mover in its regulation of the sector. In mid-2016 it issued Board Decision No. (9/R.M) of 2016 Concerning the Regulations as to Mutual Funds (the 2016 Fund Regulations). The 2016 Fund Regulations were followed by Board Decision No. (3 / R.M.) of 2017 Concerning the Organisation of Promotion and Introduction (the PIRs). The 2016 Fund Regulations overhauled the previous regulation for funds (Board Decision No. 37 of 2012 Concerning the Regulations as to Mutual Funds (the 2012 Fund Regulations)).
The 2016 Fund Regulations continued the previous requirement for all funds offered in the UAE to be registered and for foreign funds to be promoted by a “local promoter”. However, for the first time, the SCA has required that funds offered for investment via life insurance products be registered with the SCA before they are promoted to consumers in the UAE.
The PIRs also extend the SCA’s supervisory regime to generally encompass the promotion of a wide range of financial products (including securities, commodities contracts, derivatives and structured products) and the introduction of financial services and activities. The key features of the PIRS include:
- The introduction of requirements for the registration of all financial products.
- Entities wishing to act as a promoter of financial products to be licensed by the SCA to hold an additional AED1 million of capital for these purposes.
- Licensed financial institutions and financial intermediaries wishing to act as an introducer of financial services to obtain the approval of the SCA
- The notification by a promoter immediately upon the commencement of the promotion of a Financial Product and a requirement for a licensed Promoter to obtain the prior approval before promotion units in funds.
- The introduction of disclosure obligations and suitability requirements upon a promoter.
The IA issued Circular No. 33 on 1 November 2016 proposing fundamental changes to the regulation of the life insurance industry. Following industry consultation, a substantially revised set of draft regulations were produced on 25 April 2017 with Circular No. 12 (Circular 12). In summary, the regulations proposed in Circular 12 would:
- Cap total commission payable to entities involved in the sale and distribution of insurance products (Insurance Intermediaries) by reference to the type of product and whether it is single premium or regular premium. These proposals also substantially restrict Indemnity Commission by limiting it to 50% of the first year commission or the total commission (whichever is lower). The remaining commission is to be paid on a linear basis over the premium payment term of the policy.
- Prohibit the use of fees, such as access fees, advice fees, trailing commission etc.) to circumvent the restrictions.
- Restrict surrender charges, particularly in the initial policy term, to those required to mitigate the expenses of the insurer.
- Require warnings on “savings products” where the total protection benefit is less than 10% or there is no protection benefit being provided.
- Introduce “free look” periods for life insurance products and mandatory disclosures to be provided to customers, including a requirement for investment illustrations based on a specified rate of return and details of the charges to be deducted. There are ongoing obligations to revise these illustrations in specified circumstances or as requested by the customer.
- Insurers must provide details of the Top 5 funds available to policyholders for investment and a separate fund performance report for the policyholder’s chosen portfolio.
- Require all life insurance products to be approved by the Insurance Authority and to be certified by a pricing actuary.
- Define “Insurance Intermediaries” broadly as including any person selling or conveying insurance products to policyholders, including internal sales representatives, tied agents, independent agents, tied agents, brokers, financial advisors and banks. The draft regulations require all such Insurance Intermediaries to be licensed by the IA and prohibits them from dealing with insurers who are not licensed by the IA.
- Require individual Insurance Intermediaries to have minimum qualifications and to be registered with the Insurance Authority. Such registration is renewable annually and the draft regulations refer to continuing professional development requirements for such individuals in order to continue to be eligible to be licensed.
Prohibit “commission abuse” (i.e. churning) by Insurance Intermediaries.
The CB issued Notice No. 135/2017 on 11 May 2017 (the CB Notice). It was unclear whether the CB Notice was intended to entirely prohibit the distribution by banks of “savings and investment” products provided by insurers or merely stated that new distribution arrangements will not be approved. However, the Banking Federation appears to be interpreting the CB Notice as providing for the latter option.
Impact of Regulations
There will be an element of overlapping regulatory oversight of the investment industry. For example, Insurers and Insurance Intermediaries face the prospect of being regulated both by the Insurance Authority and the SCA (with the latter requiring the funds offered for investment through life insurance products to be registered with the SCA and for those entities involved in the promoting of these funds to be registered with the SCA as a “Promoter”). At this stage it is still unclear how the PIRs will apply to entities licensed by the Insurance Authority selling unit-linked insurance products.
However, to the extent the PIRs to apply this would require insurance brokers to obtain an SCA license as a “promoter” in order to advise on the funds available for investment by a policyholder. The same would appear to be the case for life insurers who have direct sales teams. Bancassurance is likely to be particularly complicated with sales staff at banks potentially having to comply with the new policy from the Central Bank (once issued), the Life Insurance Regulations (once issued) and the PIRs from the SCA.
Invariably there will also be a period of regulatory uncertainty pending:
- the issuance of the regulations for the life insurance proposed by Circular 12 in final format;
- guidance from the SCA as to the application of the 2017 Fund Regulations and the PIRs to insurance sector entities; and
- the issuance “policy” referred to be the Central Bank in Notice No. 135/2017.
Increased cost to the industry will as be a result of the new regulations. Under the PIRs all intermediaries will be required to hold an additional AED1 million of capital in order to be eligible for the promotion licence. We understand from the SCA that this will be in addition to any capital required for any other licence held by the intermediary. For financial advisors licensed under the FC/FA Regulations this will mean that their capital requirement will increase from AED1 million to AED2 million.
For insurance brokers, who had their minimum capital requirement increased to AED3 million pursuant to Insurance Authority Decision No. 15 of 2013 (the Broker Regulations) are likely therefore to have to further increase their capital if they wish to be registered with the SCA as a promoter for the purposes of their life insurance business.
However, there will also be costs to be borne across the industry:
- Insurers will be required to redevelop their products, terms of business with Intermediaries and banks and their systems to comply with Circular 12 and the Central Bank’s policy for the sale of savings and protection products via banks.
- Funds will be required to register with the SCA to comply with the 2017 Fund Regulations.
- Providers of non-insurance contractual savings products will need to register their products with the SCA.
- Intermediaries will have to renegotiate the remuneration of their staff
The changes to the regulations may also have a number of unintended consequences, including:
- Increasing regulatory uncertainty as industry players are required to comply with the requirements of multiple regulators;
- Reducing the range of investment options available to customers through the restriction on the offering of funds to those registered with the SCA;
- Reducing the range of insurance products available (at least in the short term whilst insurers develop products to satisfy the requirements of Circular 12);
- Reducing the number of intermediaries as a result of the increased capital requirements and, particularly in the insurance broking sector, the reduction in income as a result of the changes to commission pursuant to Circular 12.
- Increasing arbitrage as providers and intermediaries seek to take advantage of the less prescriptive SCA regime.
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This article was originally written by Peter Hodgins, Senior Partner at Clyde & Co