MetLife Fined by Government for Deceptive Variable Annuity Practices
May 22, 2016By Levin Papantonio Law
The 25-million dollar fine recently levied against financial services and insurance giant, MetLife, demonstrates the need investors have for greater federal protection. MetLife agreed to pay the fine, to settle allegations that the company sometimes overstated the cost of a customer’s variable annuity contract and that the company failed to tell customers a proposed replacement would impact features of their existing variable annuity. The result is that customers ended up paying more annually and had some features of their investment lost or downgraded.
The Financial Industry Regulatory Authority levied the multi-million dollar against MetLife after it sampled more than 35,000 applications MetLife representatives submitted for replacement contracts. Regulators found that 72% of the contracts contained at least one error that understated the value of the contract being replaced.
“The understanding of the advisers providing those productsunderstanding the fees and what people were giving up with respect to their existing contracts versus the ones they were passing onjust wasn’t there,” explained FINRA Chairman Richard Ketchum, “and the erroroccurred again and again.”
Ketchum said MetLIfe wasn’t promoting replacements but failed to properly supervise the activity and make sure brokers had accurate information about the replacement products. However, FINRA said MetLife sold at least $3-billion in variable annuities through replacements between 2009 and 2014 and made $152-million in commissions off the products.
Others in the financial industry say the problematic sales are a small fraction of the more than $50-billion in total variable-annuity sales by MetLife from 2009 to 2014. Consumer advocates say agents, financial advisers and others who are licensed to sell the products are financially motivated to push replacement annuities because typically insurers pay upfront sales commissions of 5% to 7%.
“Calling these errors is generous,” said Peter Mougey, a securities and investment fraud attorney with the Levin, Papantonio law firm, in Pensacola. “Making full disclosure would reduce the number of annuity swaps and cost Metlife millions in commissions and fees. 72% of contacts don’t have errors; instead, the system is designed to put Metlife’s bottom-line in front of its customers.”
Supporters of stronger regulation are hoping a new federal rule will help. The United States Department of Labor is implementing the conflict-of-interest, or fiduciary rule, that will begin to take effect in 2017. It will require all professionals to recommend what is in the best interests of clients when they offer advice on 401 (k) plan assets, individual retirement accounts or other qualified monies saved for retirement.
Brokers are now under a less stringent suitability standard. The fiduciary rule will move them to charge clients set fees rather than receiving pay from commissions on products sold to them in their retirement accounts. Advisers who still want to receive commissions on annuities and other products will have the option of a “best interest contract exemption,” a pledge that adviser will act in the client’s best interest and earn reasonable compensation, or the client can sue in court. It also requires information on fees and potential conflicts of interest.
“This rule is going to force a bigger change than the industry expects,” said John Anderson, managing director of practice management solutions for the SEI Advisor Network. The court of public opinion may ultimately play a role in reducing or eliminating commission products.