Life Bureau Filing Guidance Note

Guidance Date: September 6, 2019

Frequently Asked Questions Regarding Section 224.4(f) of Regulation 187

Regulation 187 takes a principles-based approach, setting standards that must be met but also affording significant flexibility in how producers and insurers meet those standards. Regulation 187 does not impose any particular systems, forms, or procedures for meeting the requirements of the regulation. Rather, producers and insurers are free to employ or add to existing systems, forms and procedures. Whatever approach is taken, the Department expects producers and insurers to be able to provide reasonable and reliable documentation of compliance with §224.4(f) of the regulation.

The Department has received questions about how the Department interprets this section of the regulation in specific scenarios as well as requests for feedback on various approaches that insurers are contemplating to achieve compliance with §224.4(f) of Regulation 187. The responses provided in this Q&A are limited to the scenarios presented. The addition, deletion, or modification of facts may change the Department’s responses. These responses do not represent a pre-determination of a producer’s or insurer’s overall compliance with the regulation. Compliance with Regulation 187 will be examined in the context of all relevant facts and circumstances. Also, these responses should not be construed as the Department requiring or favoring any particular approach to compliance.

Section 224.4(f) of Regulation 187 provides:

(f) A producer, or an insurer where no producer is involved, shall at the time of a recommendation:

       (1) disclose to the consumer in a reasonable summary format all relevant suitability considerations and product information, both favorable and unfavorable, that provide the basis for any recommendations;

       (2) document the basis for any recommendation made, subject to subdivisions (a) and (b) of this section and the facts and analysis to support that recommendation;

       (3) document, if relevant, the consumer’s refusal to provide suitability information, if any; and

       (4) document that a sales transaction is not recommended if a consumer decides to enter into a sales transaction that is not based on the producer’s or insurer’s recommendation.

I. Section 224.4(f) “at the time of recommendation”

Question: The requirements of §224.4(f) apply “at the time of recommendation”. Generally, when is the “time of recommendation”?

Answer: Recommendation is defined in §224.3(e) of the regulation to mean one or more statements or acts by a producer, or by an insurer where no producer is involved, to a consumer that:

       (1) reasonably may be interpreted by a consumer to be advice and that results in a consumer entering into or refraining from entering into a transaction in accordance with that advice; or

       (2) is intended by the producer, or an insurer where no producer is involved, to result in a consumer entering into or refraining from entering into a transaction. A recommendation does not include general factual information to consumers, such as advertisements, marketing materials, general education information regarding insurance or other financial products and general administrative services to the consumer. A recommendation also does not include use of an interactive tool that solely provides a prospective consumer with the means to estimate insurance, future income, or other financial needs or compare different types of products or refer the consumer to a producer, provided that the interactive tool is not used by a producer, or an insurer where no producer is involved, to satisfy any requirement imposed by this Part.

Accordingly, a recommendation occurs whenever the producer’s, or insurer’s, statements or acts constitute a recommendation under the regulation.

Question: If a producer recommends that a consumer purchase a policy, can the “recommendation” be viewed as occurring over the course of the sales process so that it would be acceptable to deliver the disclosure required by §224.4(f)(1) to the consumer at the time the policy is delivered to the consumer?

Answer: No, delivery of the §224.4(f)(1) disclosure at the time of delivery of the policy would not comply with the regulation. A recommendation occurs before the consumer acts on that recommendation. Accordingly, if a producer recommends that a consumer purchase a policy, the recommendation occurs before the consumer applies for the policy. One of the expected benefits of §224.4(f)(1) is that it will reduce instances of recommendations that are based on misunderstandings or miscommunications between producers and consumers. When a producer discloses to the consumer the relevant suitability considerations and product information that provide the basis for the producer’s recommendation, it affords the consumer an opportunity to identify and correct any misunderstandings or miscommunications about the consumer’s goals, needs, or personal/financial circumstances.

Question: In some instances, the initial recommendation made to the consumer may not be the same as the final recommendation. For example, a producer’s recommendation may change depending on the results of underwriting. When must the disclosure required by §224(f)(1) be provided in those circumstances? Could such scenarios be viewed as a single continuous recommendation in which the consumer would receive the §224(f)(1) disclosure only for the final recommendation?

Answer: The producer must, at the time of a recommendation, disclose to the consumer in a reasonable summary format all relevant suitability considerations and product information, both favorable and unfavorable, that provide the basis for any recommendations. Put another way, the producer must disclose to the consumer the “why” underlying the recommendation. If the producer makes an initial recommendation that the consumer take a particular action, the producer must also disclose to the consumer the “why” underlying that recommendation. If the producer later recommends that the consumer take a different action, the producer must disclose to the consumer the “why” underlying the new recommendation. Such scenarios are not viewed as a single continuous recommendation in which the consumer would only receive the §224(f)(1) disclosure for the new recommendation and receive nothing when the consumer enters into a transaction based on the initial recommendation.

II. Section 224.4(f)(1) “reasonable summary format”

Question: The §224.4(f)(1) disclosure must be provided to the consumer in a “reasonable summary format”. Could this disclosure be provided by email?

Answer: Regulation 187 does not impose any particular systems, forms, or procedures for meeting the requirements of §224.4(f)(1). However, on examination the Department will expect producers and insurers to be able to produce reasonable and reliable documentation of compliance. Providing the §224.4(f)(1) disclosure by email may be permissible if reasonably and reliably documented (e.g. retain a copy of the email in the customer file).

Question: The §224.4(f)(1) disclosure must be provided to the consumer in a “reasonable summary format”. Could this disclosure be provided orally?

Answer: Regulation 187 does not impose any particular systems, forms, or procedures for meeting the requirements of §224.4(f)(1). However, on examination the Department will expect producers and insurers to be able to produce reasonable and reliable documentation of compliance. Providing the §224.4(f)(1) disclosure orally may be permissible if reasonably and reliably documented (e.g. retain an audio recording of the disclosure being given or retain a subsequent writing between the producer and consumer confirming the disclosure that was provided orally and identifying when the disclosure was provided orally).

III. Section 224.4(f) and §224.6

Question: Insurers bear responsibility pursuant to §224.6 of the Regulation to supervise and train producers regarding their duties to the consumer when entering into a sales transaction involving the insurer’s product, including duties under §224.4(f). Some insurers intend to require their producers to complete documentation such as a customer profile with details associated with the basis for the recommendation, a signed certification or attestation from the producer indicating that a compliant recommendation has been made to the customer in accordance with §224.4(a) and (b) and that appropriate disclosure has been provided to the customer pursuant to §224.4(f)(1) and/or memorialize in writing that the disclosure was provided to the consumer to support the basis for the recommendation. Does the Department find any of these approaches objectionable?

Answer: Regulation 187 does not impose any particular systems, forms, or procedures for meeting the requirements of §224.6. Rather, insurers are free to employ or add to existing systems, forms and procedures. None of the referenced documents are required by the regulation but the Department does not object to their use as part of the insurer’s overall system of supervision. However, it should be noted that one or more of these forms, by themselves, may not fully satisfy an insurer’s obligations under §224.6. For example, an insurer who solely utilizes a producer attestation form but has no procedures in place to ever audit transactions to verify any of the attestations has not met its supervisory responsibilities. We note that pursuant to §224.6(c), an insurer is permitted to contract with a third party to establish and maintain a system of supervision, including auditing, for recommendations of sales transactions involving the insurer’s policies.