The Insurance Authority (IA) in the UAE has published what it calls a final draft on the sales of life products that proposes the introduction of a 4.5% commission cap on the sale of lump sum portfolio bonds or offshore bonds.
According to the document - Draft Board of Directors' Decision Pertinent to Regulations for Life Insurance and Family Takaful -, published January 31, the regulator also outlines an overall cap of 90% on commissions of savings products over the full term of the policy. Currently, the fees can range from around 6% up to 15% in some cases.
The ruling - while only a draft at this stage - could see a large number of financial advisers within the region forced to take a dramatic cut in earnings or potentially move to a fee-based model.
"Commission of any type for investment advice creates a conflict of interest that is difficult to manage. Having said this – any steps forward are an improvement on the existing status quo," AES International's Sam Instone
"These commission limit rules apply to all types of Life policies, whether sold to individuals or groups, regardless of the policy term and distribution channels," the regulator said.
It is unclear as to when it this draft ruling might be implemented with insiders from within Dubai financial services circles telling International Investment that some parties believe that the rubber stamping of the ruling could be "imminent", while others are predicting a delay as long as "post 2020".
Sam Instone, pictured left, director at AES International, said: "In my view it will mean little material change and the marketplace needs a quantum shift from 1986 to post 2012 (RDR) in order to instill any form of confidence.
Insurance-based investment is expensive, opaque, inflexible and easily mis-sold regardless of what explicit limits may put in place. This is why it died in developed markets and will eventually die in developing ones.
"Commission of any type for investment advice creates a conflict of interest that is difficult to manage. Having said this - any steps forward are an improvement on the existing status quo," Instone added.
The stricter requirements will bring change to how the industry operates in the UAE and some fear the impact it will have. However, the draft does allow a two year "alignment period" for companies to implement the proposed regulations after final approval.
"The life insurance industry in the UAE will be fundamentally altered as a result of new upcoming regulations. Restrictions on indemnity commission and caps on overall fees and commissions charged to customers will apply. Compliance will be upheld with enhanced client disclosure, including cost, as well as a new adviser licensing process and approved list of authorised funds for retail investors," said the secretary-general of Emirate Insurance Association, Farid Lufti, at an industry conference in Dubai, as International Investment reported in its Middle East special report.
Under the proposed new rules, a broker can act as an ongoing financial adviser, separate to their role as an insurance producer or products sales person.