No wonder
MetLife Inc. wanted to get out of the securities business.
Along with the new Department of Labor fiduciary rule making it more difficult and costly to work with clients' retirement accounts, the giant insurer's retail securities house,
MetLife Securities Inc., was socked last week with a $25 million penalty for massive compliance failures when switching clients from one variable annuity to another.
When not in the clients' best interests, these so-called 1035 exchanges have been an easy way for ethically challenged advisers to gouge clients and rack up commission dollars.
NOT A THING OF THE PAST
In recent years, brokerage executives have characterized the faulty switching of variable annuities — a high-commission product that pays advisers 6% to 7% — as a poor business tactic that the industry had a handle on. Bad variable annuity switches were supposed to be a thing of the past.
Not so, in the case of MetLife Securities, home to 7,238 advisers.
In its largest penalty ever relating to variable annuities, the
Financial Industry Regulatory Authority Inc. on Tuesday fined MetLife Securities $20 million and ordered it to pay $5 million to customers “for making negligent material misrepresentations and omissions on variable annuity replacement applications for tens of thousands of customers,” according to the Finra statement announcing the penalty. “Each misrepresentation and omission made the replacement appear more beneficial to the customer, even though the recommended VAs were typically more expensive than the customers' existing VA,” the statement read.
LUCRATIVE BUSINESS
From 2009 to 2014, MetLife Securities' variable annuity switching business generated at least $152 million in gross dealer commission, a whopping amount. Indeed, MetLife Securities' variable annuity replacement business “constituted a substantial portion” of the firm's business, according to Finra.
Thousands of MetLife Securities clients were affected. According to Finra, the firm misrepresented or omitted at least one material fact relating to the costs and guarantees of customers' existing variable annuity contracts in 72% of the 35,500 replacement applications the firm approved. The firm's principals ultimately approved 99.79% of variable annuity replacement applications submitted to them for review, even though nearly three quarters of those applications contained materially inaccurate information.
MetLife spokesman John Calagna said the firm cooperated with Finra's investigation and was pleased to put the matter behind it.
TAKE HEED
The independent broker-dealer industry should take heed of this fine. The huge penalty isn't only bad news for MetLife Securities, which announced in February it was being sold by its parent to Massachusetts Mutual Life Insurance Co.
Finra's action against MetLife is truly a shot across the bow for all independent broker-dealers, many of whom eke out razor-thin profit margins of 1% to 2% and would buckle at the knees if hit with a penalty as severe as the one MetLife Securities received.
If Finra was examining variable annuity sales practices at MetLife Securities, it surely was examining them at a host of other firms.
And once those bureaucrats start hunting for violations, they usually find them.
When asked about the MetLife Securities penalty and whether it was a harbinger for the industry, Finra spokeswoman Michelle Ong pointed to the organization's 2015 examinations priorities letter.
“Finra's focus on sales practice issues with variable annuities — both new purchases and 1035 exchanges — will include assessments of compensation structures that may improperly incent the sale of variable annuities, the suitability of recommendations, statements made by registered representatives about these products and the adequacy of disclosures made about material features of variable annuities,” according to the letter.
Translated, that means broker-dealers should look out. There will be more variable annuity switching penalties to come.
