The U.S. Financial Industry Regulatory Authority (FINRA) on Tuesday fined New York City-based MetLife Securities, Inc. US$20 million, and ordered it to pay US$5 million to customers, for misleading clients about the costs and benefits of replacement annuities.
The firm settled the case without admitting or denying the charges, but consented to FINRA’s findings.
FINRA notes that the decision of whether to replace an existing variable annuity (VA) with a new product is a complex one, subject to regulatory requirements designed to ensure that clients get accurate information. However, FINRA found that, from 2009 through 2014, MSI misrepresented or omitted at least one material fact relating to the costs and guarantees of customers’ existing VA contracts in 72% of the 35,500 VA replacement applications that the firm approved.
“Each misrepresentation and omission made the replacement appear more beneficial to the customer, even though the recommended VAs were typically more expensive than customers’ existing VAs,” FINRA says in a statement announcing the penalty.
MSI failed to ensure that its reps obtained accurate information on the recommended VA replacements, and did not adequately train its reps to compare the relative costs and guarantees involved in replacing one VA with another, FINRA says.
The firm’s principals ultimately approved 99.8% of VA replacement applications submitted to them for review, FINRA adds, even though nearly three quarters of those applications contained materially inaccurate information.
Additionally, MSI failed to supervise, or to properly train its reps, on the sales of a complex and expensive rider on the VA contracts, the regulator says, an received misleading quarterly account statements that understate the total charges and fees incurred on certain VA contracts.
“MSI represented to customers that their existing VA was more expensive than the recommended VA, when in fact, the existing VA was less expensive; MSI failed to disclose to customers that the proposed VA replacement would reduce or eliminate important features in their existing VA, such as accrued death benefits, guaranteed income benefits, and a guaranteed fixed interest account rider; and, MSI understated the value of customers’ existing death benefits,” FINRA says.
The firm’s VA replacement business generated at least US$152 million in gross dealer commissions over a six-year period, FINRA notes.
“Variable annuities are complex and expensive products that are routinely pitched to vulnerable investors as a key component of their retirement planning. Firms engaging in this business must ensure that the information on the costs and benefits of these products provided to customers is accurate, and that their registered representatives are sufficiently trained to understand and explain the risks and complex features of what they are selling. These obligations take on even greater importance when a significant part of a firm’s marketing effort involves switching customers out of existing annuities,” says Brad Bennett, FINRA executive vice president and chief of enforcement.