Monday, May 16, 2016

MetLife Fined $25 Million by FINRA

Are Variable Rate Annuities a good investment?

MetLife has agreed to pay $25 million to settle charges with the Financial Industry Regulatory Authority (Finra) for misleading thousands of customers over variable rate annuity investments. The fine is said to be the second largest fine Finra has ever levied.

While the MetLife said in a statement that it had cooperated with the Finra investigation, the company neither admitted or denied any wrongdoing as part of the settlement - this is customary in settlements between regulators and financial firms and is designed to prevent the potential of additional civil, or criminal, legal actions.

What are Variable Rate Annuities?

Variable annuities offer tax advantages to risk-averse and older investors who are looking to invest in stock and bond funds. These investors can get lifetime payments of a guaranteed-minimum amount regardless of how the underlying funds perform. However, the market declines of the 2008 financial crisis exposed insurers to large losses. In 2009, MetLife and other firms launched new, less-risky and more expensive versions of the products and induced customers to replace existing variable rate annuities with new ones, while charging upfront commissions of 5 to 7 percent.

MetLife's Failure to Supervise

Finra found MetLife consistently failed to supervise its sales force which, in turn, did not provide sufficient information to their customers and that the fees caused harm to the investors.

According to the settlement, in some cases MetLife overstated the cost of a customer's existing variable annuity contract and the replacements resulted in an increase of about 2 percent annually. Salespeople also failed to advise customers that certain features of their existing annuities would be eliminated. In fact, in a sample of 35,500 replacement applications, 72 percent contained at least one error that understated the value of the existing contract. Between 2009 and 2014, MetLife sold about $3billion in replacements annuities and made $152 million in commissions.

The $25 million settlement involves a $20 million fine and $5 million is to be reimbursed to customers. While the company was not accused of pitching the replacements, MetLife was cited for not properly supervising the replacement activity. Before replacing a customer's variable annuity, brokers are required to make sure the new product is suitable, compared to the customer's existing contracts.

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