Baby Boomers preparing to fund their retirement years have fueled an annuity sales boom at banking companies since the spring of 2007, and regulators are stepping up their scrutiny of financial services institutions that sell them.
The most recent bank annuity sales data, in the Kehrer-Jackson National monthly report for April, showed overall sales up 53% for the year to date and 48% for the 12 months since April 2007. The more conservative products, fixed annuities, have led the way this year with sales up 114% since January and 131% since April 2007. Sales of variable annuities, the more volatile product, rose only 6% from January. The monthly survey is done by Kehrer-Limra, a Princeton, N.J., consulting firm.
Regulators have been watching annuities, especially after discovering that Citizens Financial Group in Providence, R.I., had sold inappropriate variable annuity contracts to elderly clients from October 2003 to March 2005. Fines were imposed on the company.
Citizens Bank said in August 2005 that to strengthen its broker-dealer unit it would take steps including banning gifts from product suppliers to persuade customers that "they are receiving independent, unvarnished advice."
Meanwhile, Financial Industry Regulatory Authority, or FINRA, a nongovernment regulator for U.S. securities firms, has been making stricter rules. It published announcements in April about Rule 2821, which includes requirements that broker-dealers make a reasonable effort to understand client needs and to train advisers who sell complex annuities. And the Securities and Exchange Commission is proposing a rule to expand its annuities oversight.
As a market regulator, the SEC already has authority over variable annuities. On June 25, the SEC proposed standards for determining when equity-indexed annuities, whose payouts are based on the performance of market indicators, must be treated as securities and subject to the investor protections embodied in its rules.
"Working with our state regulatory counterparts, the SEC has made cracking down on fraud in this area a top priority," SEC Chairman Christopher Cox said in a statement June 25.
Some states have begun to crack down on annuity fraud. Florida enacted the John and Patricia Seibel Act, which increased the penalties for unfair annuity sales practices to as much as $250,000, from $100,000.
Some banks anticipated such developments. SunTrust Banks Inc. in Atlanta, for example, has been carefully documenting profiles of its annuity customers for many years. This way, if regulators ever ask the bank about its sales practices, it will have evidence that its recommendations were appropriate to their customers' needs.
SunTrust has also been following annuity guidelines issued by the SEC and FINRA since the agencies began to issue them in the mid-1990s.
"These products fill an important need for our clients, and we want to make sure our practices are the best they can be," said Paul Field, a senior vice president at SunTrust Investment Services. The regulators' and banks' interests are aligned on this matter, he said, because both are trying to make sure that clients comes first.
Annuity providers are making an effort as well. For example, Metropolitan Life Insurance Co. in New York educates bank compliance people about its products so that they understand how an annuity is appropriate for various client needs and how to fully disclose product risks. "We've always believed it's important to tell the whole story and make sure the broker has all the information," said Myrna Solomon, the head of the bank channel at MetLife Investors Distribution Co.
And state regulators have taken a recent step further. The National Association of Insurance Commissioners said in May it had created a Suitability of Annuity Sales Working Group to recommend standards for the industry on who is responsible for annuity sales.
The group is modeled after Wisconsin's Annuity Sales Suitability Advisory Committee, which has been working on the problem for months.
Richard Lindsay, a senior vice president in the life and annuities division at Symetra Financial, a Bellevue, Wash., insurer, said regulatory risk exists for banks that sell complicated annuities, such as those with minimum withdrawal benefits guaranteed against market downturns.
"If I were a distributor I wouldn't want to kill the goose over a guarantee that didn't work out the way it was intended," he said. "We need to be more thoughtful and make sure we're doing right by the customers."