UAE expat investors to benefit from ban on upfront commissions

Published:  15 Dec at 6 PM
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Expats working in the UAE are expected to benefit from the emirates’ insurance regulator’s decision to ban up-front indemnity commissions taken by financial advisors working within the expat sector.

The regulator’s decision was taken in order to align the industry with jurisdictions such as the UK and Hong Kong, whose regulations have been changing over the past several years to facilitate the phasing out of upfront commissions. The moves are understood to be the result of a huge number of reported financial mis-selling and actual fraud by IFAs chasing generous up-front payments from offshore insurance companies.

The UAE’s decision has resulted in internationally well-known, some say infamous, offshore insurance giants such as Friends Provident International, Generali and Zurich making formal requests to the UAE authority to hold off the implementation of the ban until alternative products can be launched. Many popular expat destinations have long been happy hunting grounds for commission-hungry, unqualified and often illegal salespeople preying on financial novices without disclosing their commissions and how they are paid.

Offshore bonds and life-insurance based products are easily mis-sold to inexperienced expat clients, with full commissions calculated on the total value of the investment paid to FAs as soon as the deal is done. Some pension saver products run for a full 20 years, with the first few years of savings taken by the insurer to cover the commission. Investors are locked in for the full time as cancelling the deal early results in huge penalty charges.

The UAE Insurance Authority’s proposal is that total commissions charged by FAs must be spread over the life of the policy and paid out in equal monthly instalments. The proposal is a welcome game-changer, as the majority of pension savers caught up in the insurance-linked trap either cannot afford to continue their monthly savings amounts due to changes in circumstances or decide to withdraw early and take the losses.

It’s not yet certain when the new regulations will come into force, but the UAE authority is only giving insurance companies and brokers two weeks to re-jig their products, a task which could take up to two years. Brokers in the emirates believe larger firms will find ways to survive, but many smaller advisory companies may be forced out.

Internet warnings about these products and the IFAs who push them to unwary expats have been circulating online for some years, but haven’t been able to dent the numbers of new investors taking them on. It’s to be hoped this legislation and others similar will protect those new to pension savings and insurance-linked investments by removing the incentive of high up-front commissions.
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