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UAE regulator clamps down on savings, investment and insurance policy sales practices

The UAE Insurance Authority (IA) plans to introduce tough regulations to fundamentally change the way savings, investment and life insurance policies are sold, in response to “an alarming amount of complaints” from policyholders.

Sales advisors will be obliged to provide customers with a detailed schedule of fees and commissions for the entirety of an insurance policy’s life cycle, with a mandatory option to cancel a policy within 20 days of purchase.

The proposed new regulations propose a maximum commission of 4.5 per cent for savings products, while commissions paid up-front based on the full value of an insurance policy, known as an indemnity commission, will be prohibited.

“The data provided by the industry revealed that both the conventional and takaful operators charge heavy commissions and up-front fees to policyholders, which is perceived to provide poor policy value to customers in the early years of the policy,” the Insurance Authority said in a circular distributed to insurance providers and brokers last month.

“The IA has also noticed an alarming amount of complaints from the policyholders that they are provided with no value if they surrender in the early years of the policy.”

Numerous UAE residents have found themselves burnt by buying into long-term products that seemingly offer attractive returns, only to find early gains eaten up by commission fees, with an inability to exit plans without incurring heavy penalties.

“The [new] regulations have the potential to fundamentally change the way life products are priced and sold in the UAE, and represent a long overdue move to regulate the manner in which life insurance investment contracts have been sold and marketed in the UAE,” said Tom Bicknell, a senior associate with the law firm Clyde & Co in Dubai. He said the new rules would bring the country into line with more developed markets such as the UK and Hong Kong.

The ban on indemnity commissions represents a dramatic shift in the way advisers have traditionally been remunerated, said Mr Bicknell.

“The ability for a product manufacturer to pay large upfront fees [albeit with the ability to clawback in the event of cancellation] has been one of the most important means for incentivising and thus driving product sales,” he said in a briefing note on the new regulations.

Such regulations, together with caps on commissions, are probably bad news for smaller advisory firms, according to Nigel Sillitoe, the chief executive of the Dubai-based market intelligence provider Insight Discovery. “The new regulations will lead to a shake out in the advisory market, but it’s definitely a good thing for consumers,” he said.

“Once the legislation is put in place, consumers will have more awareness about how much the adviser is receiving in commissions and what the full range of charges will be, which has been lacking here in the UAE for many years.”

It is unclear when the new regulations will come into effect and whether they will do so in their current format. The Insurance Authority did not respond to requests for comment.

“The industry is witnessing significant regulatory changes but I believe that this is definitely positive for all stakeholders involved – providers, brokers, and end-users, as it will define the benchmarks of best practice, giving clients the assurance of credible and trustworthy service,” said Tarun Khanna, the chief executive of Nexus Global, a financial advisory group.

“As a firm that strives to reach the highest levels of qualification through the continuous training and education of its professionals, we are confident that these changes will continue to offer Nexus opportunities for business development.”