UAE eyes stricter regulation of infamous 25-year savings plans

Restrictive 25-year savings plans that are being sold to expats in the UAE could soon become a thing of the past as the country’s Insurance Authority eyes stricter controls on commissions.

Wealth management firm Globaleye said new regulation regarding the payment of upfront commission is currently in the consultancy phase as the Insurance Authority seeks advice from providers.

But it said the expectation is that new stricter regulation is imminent that will place the UAE’s rules for financial products more inline with the US, UK, Singapore and Hong Kong.

Personal finance firms in the UAE are already putting new systems in place to cope with the changes, according to the company.

“At present the legislation allows commissions made on the sale of financial products that are sold in the UAE, like some other markets, to be paid up front,” said Globaleye’s vice president Alex Herbert.

“The issue this can sometimes cause is for some financial product sales to be driven by commission rather than advice where the best outcome for the client should be paramount.”

A quick trawl through the internet reveals dozens of complaints from expats in countries including the UAE who have fallen victim to restrictive saving schemes often sold through cold calling or even business network LinkedIn.

The plans typically involve the client committing to monthly payments for a fixed term ranging from 10 years to 25 years.

However, under current regulation the majority of the commission for selling these products is paid upfront, under a system known as indemnified commissions.

This means that all of a client’s initial payments are going towards paying the sales agent’s commission, which is often in the range of 2-4 per cent.

For a 25-year plan with a commitment of $1,000 a month the commission payout can be as much as $12,000 on the first day the buyer pays into the scheme.

The insurer, which owns the product, will then seek to recoup the commission by imposing heavy penalties on customers who seek to leave the plans early.

On some 25-year plans, it is more than 10 years before the customer is able to withdraw the same amount they put in, assuming they keep up payments.

Some analyst estimates suggest savers sticks with these plans for an average of 7.6 years before seeking to withdraw.

As a result, customers often complain of being mis-sold the schemes or not being made fully aware of the terms and conditions when they signed up.

Under the expected new system, the seller will not receive the full commission for the transaction upfront.

Instead payments will be made over a period of time in a system designed to encourage a relationship in the interests of the client.

Globaleye said the new legislation would help consumer confidence and boost transparency.

“Globaleye embrace the regulation as long as it is enforced since the UAE still has many unregulated products and distributors,” it said.

However, Herbert also expressed concern that it would make it more difficult for new advisors to come into the market.

“Already we have seen in the UK a dearth of new talent in this industry which has had the unintended consequence of less people getting advice. The statistics show that the UAE population is saving less, their pensions are poor and their insurance cover inadequate – people need advice,” he said.