By Aruna Viswanatha and Leslie Scism
MetLife Inc. agreed to pay $25 million for allegedly misleading
customers as they bought retirement-income products and surrendered
older versions that sometimes were cheaper and had more generous
features, regulators said Tuesday, in one of the largest such
settlements to date.
The insurer's MetLife Securities Inc. unit "made negligent
misrepresentations and omissions to customers" when replacing their
variable annuities, an increasingly popular investment for
retirees, making them seem better for the customers than they
actual were, said the Financial Industry Regulatory Authority, the
brokerage industry's regulator.
The violations took place between 2009 and 2014 and affected
"tens of thousands of customers," Finra said.
MetLife neither admitted nor denied the Wall Street watchdog's
findings, according to the settlement. The company said in a
statement that it "fully cooperated with the Finra
investigation."
"This is kind of a perfect storm," Finra Chairman Richard
Ketchum said in an interview. The investigation into MetLife found
both "meaningful conflicts with respect to fees" and "a consistent
failure in supervision with respect to clearly providing the
information a customer needs," he said.
Mr. Ketchum said that while he didn't expect similar cases
against other firms, complicated products "have shown up as an area
of investor harm for a period of years."
"We continue to see firms have problems managing their
supervision with respect to more complex products, whether those
are structured products, whether those are the more complex ETFs
[exchange-traded funds], or whether it's something like variable
annuities," he said.
Variable annuities are popular with older, risk-averse investors
and offer tax advantages over investing directly in stock and bond
funds. For an added fee at many insurers, investors can receive
lifetime payments of a guaranteed minimum amount even if the
underlying funds perform poorly.
Steep stock-market declines during the 2008 financial crisis
exposed the potential dangers of such generous guarantees to the
insurers, and by 2009 they were launching less risky and more
expensive versions of the products.
Consumer advocates and other critics say agents, financial
advisers and others who are licensed to sell the products have a
financial incentive to encourage consumers to replace an existing
variable annuity with a new one. That is because insurers typically
pay upfront commissions of 5% to 7% for the sales.
The Obama administration is counting on a new rule from the
Labor Department to address the problem. The so-called fiduciary
rule, which goes into effect next year, requires financial advisers
and others who sell investment products for retirement accounts to
act as fiduciaries, putting their clients' interest first.
Finra said the MetLife settlement, which includes a $20 million
fine and $5 million to reimburse customers, is the second-largest
fine it has ever levied. The largest, a $50 million penalty against
Credit Suisse First Boston Corp. over allegedly inflated
commissions for hot initial public offerings, came in 2002.
According to the Tuesday settlement, MetLife sometimes
overstated the cost of a customer's existing variable annuity
contract, which in some instances increased a customer's cost by 2%
annually. The firm also sometimes failed to tell customers a
proposed replacement would reduce or eliminate features of their
existing variable annuity, Finra said.
Finra said it sampled some 35,500 applications that MetLife
representatives submitted for replacement contracts, and found that
72%, or about 25,560 applications, contained at least one error
that understated the value of the contract being replaced, Finra
said.
"The understanding of the advisers providing those
products...understanding the fees and what people were giving up
with respect to their existing contracts versus the ones they were
passing on...just wasn't there. And the error...occurred again and
again," Mr. Ketchum said.
MetLife sold at least $3 billion in variable annuities through
replacements between 2009 and 2014, and made $152 million in
commissions off the products, Finra said. It didn't have an
"adequate supervisory structure" that made sure brokers had
accurate information about the replacement products, the regulator
said.
Finra didn't accuse MetLife of promoting the replacements but
instead cited the company's failure to properly supervise the
replacement activity. It said that the company's registered
representatives weren't provided "adequate training or guidance on
how to conduct a comparative analysis" of products, and that
"deficient systems and procedures" were evident.
The investigation dates back to March 2012, when MetLife fired
two New York brokers after receiving customer complaints that the
brokers had inappropriately transferred them into new variable
annuities.
Finra investigated the terminations and barred the two brokers
from the industry in 2014, according to regulatory records, saying
they had "carried out a scheme" for seven years to submit false
paperwork around putting customers into new retirement products, so
they could collect extra commissions to which they weren't
entitled.
As Finra investigator Kevin Link dug into the brokers' case, Mr.
Ketchum said, he realized the "numbers didn't add up," and
unearthed more systemic issues.
Mr. Ketchum said investigators didn't find any evidence of
improper pressure to move customers into the new products, but that
there was an emphasis on the business. "There was clearly a
significant push to sell replacement products," he said.
Before recommending that a customer replace a variable annuity,
brokers are required to make sure the recommendation is suitable
for the customer and compare it with the customer's existing
contracts.
In November, MetLife had warned it may face a "significant fine"
from Finra over the issue. The insurer is in the process of
divesting its retail business as part of an effort to slim down and
respond to a shifting regulatory environment, and separately signed
an agreement in February to sell its sales force to Massachusetts
Mutual Life Insurance Co.
The problems cited by Finra at MetLife surprised many who know
the company. "They are one of the most compliance-centric insurers
in the industry," said Colin Devine, principal of insurance
consulting firm C. Devine & Associates. He noted that the
problematic sales cited by Finra are a small fraction of the more
than $50 billion in total variable-annuity sales by MetLife from
2009 to 2014.
Write to Aruna Viswanatha at Aruna.Viswanatha@wsj.com
(END) Dow Jones Newswires
May 03, 2016 17:42 ET (21:42 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.
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