MetLife to Pay $25 Million Finra Penalty Over Variable Annuities

In a rare black eye for MetLife, a brokerage industry regulator said MetLife failed to help customers properly compare old and new versions of variable annuities, leading some clients to give up versions of products that were cheaper and had more-generous features than new ones.

The $25 million MetLife agreed to pay to settle the allegations with the Financial Industry Regulatory Authority is the second-largest fine Finra has ever levied. The largest, a $50 million penalty against Credit Suisse First Boston Corp. over allegedly inflated commissions for hot initial public offerings, was in 2002.

MetLife neither admitted nor denied the Wall Street watchdog’s findings, which concerned alleged violations between 2009 and 2014, according to the settlement. In a statement, the company said in a statement that it “fully cooperated with the FINRA investigation.”

Shares of MetLife, which is slated to report earnings Wednesday, declined 2.3% to $44.79 on a rough day for financial stocks.

“This is kind of a perfect storm,” Finra Chairman Richard Ketchum said in an interview with The Wall Street Journal. He said 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.”

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.” He added: “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 [exchange-traded funds] or whether it’s something like variable annuities.”

Variable annuities, popular with older, risk-averse investors, offer tax advantages to invest in stock and bond funds. For an added fee at many insurers, investors can get lifetime payments of a guaranteed-minimum amount even if the underlying funds perform poorly.

Steep stock-market declines in the 2008 financial crisis exposed the potential dangers of such generous guarantees to the insurers, and by 2009 they were launching new, 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 urge 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.

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5 Things to Know About the Settlement
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.

“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.

The settlement includes a $20 million fine and $5 million to reimburse customers, Finra said.

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.

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, in order to collect extra commissions they weren’t entitled to.

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 that 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.

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