Investors in the UAE received good news towards the end of last year.
The Insurance Authority announced it was preparing to ban questionable sales tactics by financial advisers on long-term saving plans.
For the many policyholders locked into poor-value investment plans that had yielded them little return and their adviser a hefty upfront commission from the insurer behind the plan, the news was a relief.
“The IA is deluged with complaints which is why it has decided to take action,” says Nigel Sillitoe, chief executive at research and consultancy firm Insight Discovery, who says the UAE is following the rest of the world in moving towards tighter regulation and clearer disclosure of fees and commission.
“The Qatar Financial Centre Regulatory Authority has bought in regulations based on the UK’s Retail Distribution Review (RDR) and it is only a matter of time before other countries start implementing disclosure as well. We have also seen it in Singapore, South Africa, Hong Kong, Poland and India. Ultimately, this will get rid of the rogues.”
While the IA was initially eyeing a fast implementation of its proposals, it has now bowed to industry requests for a two-year delay before new regulations are enforced, meaning the overhaul will take longer. Earlier this month, the regulatory body issued a new draft and opened a fresh consultation on its plans to tackle high fees and hidden commissions, following a meeting with international life companies and law firm Clyde & Co, which asked for the delay to the changes.
“Product providers and advisers firms will need to rework their customer base and change how advisers are remunerated. They need new products, new systems and extra training. It cannot be done overnight,” says Peter Hodgins, an insurance lawyer at Clyde & Co in the UAE.
The delay comes just weeks after the IA initially announced its plans to introduce tough regulations in November. Then it proposed to change the way savings, investment and life insurance policies are sold, in response to what it called “an alarming amount of complaints” from policyholders.
Under Circular No (33) of 2016 (Life Regulations), the IA pledged to compel sales advisers to provide customers with a detailed breakdown of fees and commission spanning the entire life of their insurance policy.
The circular, distributed to insurers and brokers, said that heavy commissions and upfront fees gave “poor policy value” to customers, particularly if they surrendered in the early years of the plan.
As further protection, all plans must offer a mandatory cooling off period, allowing customers to cancel within 20 days of purchase.
The IA’s proposed rules also set a maximum commission of 4.5 per cent for savings products. They also planned to ban upfront commissions based on the full value of an insurance policy, known as an indemnity commission.
Under another proposal, plans would have to include a minimum level of death benefits, which may be worth 25 per cent of the value of a single premium product held by under 45-year-olds.
“A lot of people in the industry were expecting its proposals but were surprised at the pace of change,” says Mr Sillitoe. “The IA did not consult the industry and Circular 33 came as a bolt out of the blue.”
However it appears the regulatory authority was moving too fast for the industry to keep up. Financial advisory companies “need time to adjust their business models, and move away from upfront indemnity commission to charging fees instead,” says Mr Sillitoe. “The changes have to be made at a measured pace.”
He points out that when the UK financial services regulator introduced the RDR, which forced independent financial advisers (IFAs) to shift from charging commission to fees, it caused massive industry upheaval and persuaded many IFAs to quit, reducing access to advice.
It means that cleaning up the system is set to be a long job leaving UAE residents looking to invest vulnerable until the process has been completed.
British expat Debbie, who does not want to reveal her full name, is one of a number of victims who have already approached the IA.
She and her husband Chris had always been suspicious of financial advisers and paid a high price for letting their guard down.
The married couple contacted an adviser with a head office in Dubai shortly after moving to the UAE in 2007. Debbie, 49, says: “We wanted to make a Sharia will but despite his initial reservations, my husband was persuaded to transfer all his UK pensions into a plan recommended by the wealth manager.
“He told them he was a defensive and cautious investor, but despite this they put all of his money into an aggressive fund, and lost a large part of it.”
In 2011, he invested two lump sums totalling £163,314 (Dh739,380), which was put into high-risk funds run by a well-known international insurer and a specialist fund manager. Today, that money is worth just £92,034. They have lost £71,280, almost 45 per cent of their original investment.
Debbie adds: “We will actually get less than that, as the surrender value is just £84,443, after deducting additional charges of more than £7,500.”
She says that as a “defensive and cautious investor”, a fact acknowledged by their adviser in writing, Chris should never have been exposed to this level of volatility. “However, it now seems that the company has ‘lost’ all of the original paperwork.”
Chris sadly died in 2015 at the age of 57, and Debbie, who now lives in the UK, is seeking compensation.
Disappointed by the adviser’s response, she took their complaint to the IA in May 2015, which offered its support if she decided to take legal action to win compensation.
The loss has cast a shadow over Debbie’s life and she is now pondering her next move. “I am a single mother with three children, so life isn’t easy. All I want is our original money back.”
The IA’s plans to reduce the amount of indemnity commission from product providers should help to protect clients from high charges and poor aftersales service says Sam Instone, chief executive of fee-based advisers AES International. “The next stage should be to introduce rules to ensure the explicit and transparent disclosure of these commissions to the client,” he says.
“Ideally, it should then introduce a fee option which would more fully align the interests of brokers with their clients – as has been done in the UK.”
Mr Instone says mis-selling victims are most likely to have bought long-term investment products such as QROPS and other pensions, contractual regular savings plans, education schemes or life insurance. “The IA’s proposed new regulations should raise awareness that they may have been affected by a high initial charge in buying what is actually an expensive and inflexible product. It may help by drawing their attention to the problem sooner rather than later.
“That way, they can take required action to get the investment reviewed, reduce the charges, and set their financial plans on a much better track.”
Mr Sillitoe warns, however, that the IA’s proposed changes may only have only a limited effect. “The IA isn’t the only financial services regulator in the UAE, there is also the Securities and Commodities Authority, the Dubai Financial Services Authority and the UAE Central Bank. If the IA introduces disclosure but the others don’t, where does that leave investors?”
Unless there is a level playing field across the entire industry, consumers will remain at risk, he adds.
Mr Hodgins agrees: “The changes will not go as far as they have in the UK, which has moved entirely from commission to fee-paying structures, but it will go a long way to addressing public concerns.”
The next hurdle he adds will be enforcing the changes. “This is always a key point in the Middle East. We are seeing regulatory change but the pace of enforcement is not keeping up. However, the IA is coming up to speed. We will see a change in market conduct as a consequence.”
Mr Hodgins also fears the overhaul could drive advisers and investment business out of the UAE. “Many consumers could choose to buy in their home country instead, and may actually get less protection as a result.”
He also points out that any legislation will not be retrospective, which means it will do little to help victims of previous mis-selling cases.
However, he is pleased to see the IA “is alive to injustice in the life sector” and is taking action to help consumers. “The other regulators might get it, given time.”
For now, anybody with a complaint should contact their adviser first and if dissatisfied with its response, approach the relevant regulatory authority.
For others looking to invest over the long-term, they must tread carefully.
Mr Instone says the danger with using a commission-based adviser is that they have a conflict of interest, and may be tempted to recommend a product that pays the most commission rather than the right one for your needs.
He adds: “Also, the commission-based broker receives their entire payment on the day the policy comes into force, which gives them little incentive to deliver ongoing support.”
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