The UAE’s new investment rules explained


The Dubai Insurance Authority (IA) is now pushing for stricter regulations that will give investors better protection when it comes to savings, investments and life insurance policies.

The IA wants to ensure better treatment of consumers when it comes to their policies. After a number of complaints, the IA realised there is a long overdue move to regulate the way life insurance and investments contracts are being sold and marketed in the UAE.

One of the ways customers are cheated out of money is through investment advisers. Most investment advisers that are hired work on a commission rather than a fee basis – leading to them giving out biased information to the investor. For many investors, this leads to being locked in poor-value investment plans that yield them little return but leave their adviser with a hefty upfront commission from the insurer behind the plan.

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The UAE is now following in the footsteps of the UK and Hong Kong in introducing stronger consumer-orientated changes. The countries decided to put a ban on payments of indemnity commission several years ago as they found the commission provided a big injection of cash to the advisers, given by the policy payment. In simpler terms, a life company would pay a commission to a middle man based on the full value of the policy sold – with some policies, especially with life insurance-based products and offshore bonds lasting up to 25 years. So if a policy was a 25-year plan with a commitment of nearly AED 4,000 a month, the commission pay out can be as much as AED 45,000 – and that’s just on the first day.

Indemnified commissions – the money paid when a financial product is sold – is what’s currently under the IA microscope. When you’re investing into an insurance policy, it’s not uncommon to pay commission upfront to the advisers, so what the IA wants to achieve is to have customers pay the commission but spread out over the life of the policy, with commissions paid based on the premium collected and paid out in equal monthly instalments. This will obviously provide less of a financial burden for the client. That way all parties benefit – the client, the adviser and the insurance company.

Policyholders have been left feeling sour with their insurance companies after discovering their gains were being swallowed by high upfront commission fees. Along with that, they have also been penalised for wanting to leave a policy after the grace period. However, through the adaption of Circular No (33) of 2016, Life Regulations, investors will now be able to benefit from a 30-day ‘free look period’ during which they can cancel without penalty or any explanation.

Along with this, under the new regulations, insurance companies and their advisers must clearly illustrate all fees that will be required, along with charges that the clients are likely to pay over the full term of the policy.

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And although advisers and intermediaries can still impose upfront, fixed, advice management or trailing fees, it must be presented in a clear breakdown to the customer. Intermediaries can no longer earn from the product provider and advisers must abide by the overall commission limit. And if the policy is cancelled in the 30-day free look period then all the commission that was made must be paid back in full.

Regarding saving products – any product that is regarded to have a cash value – only a 4.5% commission should be deducted of the periodic premium throughout the life of the policy. And first-year indemnity commission will now be capped at 50% of the annualised premium, which is good news as there was previously no set maximum commission requirement for life insurance businesses.

The overall aim here is to ensure that consumers are being given the best advice possible available in the UAE market when it comes to these sorts of policies.

Still, when it comes to seeking financial advice for anything, it’s easy to be duped by commission-hungry agents that don’t have your best financial interests at heart. It’s best to look for a firm that is regulated by an established financial regulator such as the Dubai Financial Services Authority (DFSA), which enforces high standards and rules. And when looking for an adviser, search for someone who is professionally qualified with at least a UK level 6 certificate (someone that holds a relevant university degree). That way you can trust the person giving you advice and you won’t end up having to shell out unnecessary money.

Be careful, though, the new rules will only apply to policies written after the regulations are published in the Official Gazette. After publishing, companies have six months to implement the new standards. For now, there is a deadline of May 11 for life insurance companies. The IA has stressed that there will no extensions granted beyond that date.

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