Could it happen here? The regulators' response to scandals in the mutual fund and insurance brokerage industries may hold some harsh lessons for life insurers.

As the scandals that rocked the mutual fund industry came to light over the past year and a half, life insurance companies largely managed to stay above the fray. They watched from the sidelines as revelations of trading abuses by highly regarded fund complexes spurred regulators to put in place a raft of reforms designed to protect investors and ensure that such misdoings could never recur.

Now the stakes for life insurers have been raised by New York state Attorney General Eliot Spitzer's investigation of property/casualty brokers and insurers. The allegations have a familiar ring--biased customer advice, based on distributor and manufacturer interests, not the interests of the customer; inadequate disclosure of compensation arrangements; and business models with inherent conflicts.

As the investigation moves closer and closer to the life insurance industry, one can only wonder when our industry's distribution arrangements, compensation structures, and disclosure practice will come under scrutiny.

It seems inevitable that life industry practices will be examined, if only because of the fiduciary nature of the customer relationship that underlies both the life insurance and asset management businesses. Both businesses depend to a unique degree on the trust of those who rely on them for their long-term financial well-being. When that trust is violated, the repercussions are profound. Life insurers learned that lesson years ago when they had to deal with lawsuits in the wake of the "market conduct" debacle.

The nature of some of the issues related to the mutual fund scandals, and the extension of Spitzer's investigation, raise questions that the industry needs to examine. The range of real or alleged improprieties in the mutual fund and commercial brokerage areas is extensive and unsettling and includes:

* Condoning illegal activity (late trading and bid rigging);

* Placement of the interests of one investor class above another (market timing);

* Inconsistent application of pricing structures (breakpoint pricing failures);

* Inappropriate use of shareholder funds for non-customer activities (soft-dollar payments);

* The appropriateness of charges to customers for costs unrelated to their business (12b-1 fees):

* Structures based on volume-placed tiered commissions from insurers to customers' agents/brokers (property/casualty brokerage); and

* Lack of disclosure of costs and distribution deals to customers (property/casualty brokerage and mutual funds).

Most of these allegations of wrongdoing have challenged long-standing, acceptable practices within the mutual fund and property/casualty brokerage industries. Are there lessons to be learned here and potholes to be avoided by the life insurance industry? Possibly.

It could be argued that the objectivity of the advice offered by a life insurance agent is not as integral to the sales process as it is for a broker, since life agents are often perceived as not independent, but aligned with a particular carrier. In fact, the legal agency relationship would appear to be between the company and the producer. That is, the producer is actually the company's representative and may have little legal obligation to the prospective or actual policyholder to offer the "best" product. Nonetheless, an agent's product offerings and recommendations are often influenced by relative commission levels and by the benefits he or she receives from the carrier placing the business. Compensation schedules that yaw by the total volume of business placed are common, and there is no disclosure of costs or distribution arrangements.

Speculating on the direction and pace of regulatory activity is very dangerous. But in the current climate, regulatory scrutiny of life and annuity distribution practices seems likely, since our business raises many red flags:

* The product is complex and poorly understood by the buyer;

* The advice of the distributor is crucial to the client's decision to buy;

* The level or extent of producer training has declined in recent years;

* There is no disclosure of the cost structure or the compensation and benefits paid to the distributor for the sale; and

* Sales incentives tend to influence the distributor to recommend the best product for him/or her, not for the customer.

The life insurance industry should examine its current compensation and disclosure practices and take steps to ensure that the reputational damage recently sustained by other financial institutions will not be visited upon the industry yet again.

Robert W. Stein, a Best's Review columnist, is chairman of Global Financial Services for Ernst & Young. He may be reached at [e-mail].