Professionals: Life » Press Room

Intermediary Status and Remuneration under review

By Paul Kruger

Moonstone Information Refinery (Pty) Ltd

One cannot help but gape in surprise at how quickly facts can attain woolly wings and become a nightmare.

During presentations in Cape Town and Johannesburg, the FSB outlined plans to investigate a number of matters which were first raised in 2006 during the review of remuneration exercise in respect of long-term savings products.

Some sensitive issues were raised as points for discussion i.e. fees replacing commission for investment business and as-and-when commission being considered for risk business.

The background document sets out the objectives as follows:

…to ensure that the definition of intermediary services and related remuneration structures in the insurance sector –

• promote appropriate, affordable and fair advice and services to potential and existing policyholders; and
• support a sustainable business model for financial advice.

It is envisaged that the contributions will assist the FSB in formulating a comprehensive discussion document for public consultation on these issues.

The document contains a lot of information outlining the Regulator’s perspective on the matter, and asks for feedback and comments on specific issues.

It concludes:

The FSB looks forward to a constructive engagement on the issues outlined in this letter, guided by the twin principles of promoting appropriate, affordable and fair advice and services to potential and existing policyholders, and supporting a sustainable business model for financial advice.

Your contributions will assist the FSB in formulating a comprehensive discussion document which can form the basis for extensive public consultation.

The first deadline for feedback from the industry representative bodies is 30 March 2012. The information received will then be used to draw up a discussion document for public consultation as outlined above.

This document was published on 11 November, and introduced at the venues mentioned above.

Imagine therefore my surprise when I received the following enquiry less than a week later:

I was hoping to get any updated information regards the "proposed" no commission on investment products going forward. I have heard from a few people in the industry that it seems the FSB has moved up all the intended dates to implement these changes. My main question is, do these proposed "fee only" earning apply to pure risk products also or do you have any insight as to the structure of commission/earning on risk only products.

Secondly has there been any suggestion that the standard short term-as-and when commission structure is also going to be changed or amended?

I have a lot of empathy for those who feel threatened by rumours such as the above doing the rounds, but I have no sympathy for those who maliciously start these rumours for personal gain.

Yes, it is a very serious matter, and we are going to have to put in a lot of work to ensure a fair outcome for practitioners but consultation will always get one further than confrontation.

Moonstone has successfully applied for inclusion in the discussions, and will apply its intellectual capital and industry experience to ensure a fair outcome, not only for our clients, but for the industry as a whole.

We suggest that those who want to take part in the process contact one of the following industry bodies, depending on their membership:

ASISA
SAIA
FIA
FPI
SAUMA

You can also join the “Stry Doms” if you prefer confrontation.

Part 2…

The National Treasury’s Discussion Paper on Contractual Savings in the Life Insurance Industry, published in 2006, ultimately led to a change in commission structures for contractual savings products (limiting the extent of up-front commission to 50%) and the introduction of capped early termination charges.

The Discussion Paper also raised concerns about the need to clarify the status in which an intermediary acts (in particular, the question of when an intermediary can be said to be providing independent advice) and the need to introduce a level playing field across different sectors in the structure of intermediary remuneration for investment products.

The Discussion Paper also suggested that a review of remuneration structures should be extended to risk business. These were collectively described as Work Stream 2 issues. To date, progress on these issues has been limited.

The recently published Call for contributions: intermediary services and related remuneration in the insurance sector now aims to address these issues.

“2.2 With respect to the status in which an intermediary acts, the 2006 Discussion Paper concluded that: “The triangular association – whereby the intermediary provides advice to the policyholder but is incentivised by the insurer, who then recoups such costs from the policyholder – is fundamentally flawed. A commission-receiving intermediary cannot, by definition, be thought to be truly independent.” Measures to better align the incentive structure of intermediaries with the interests of the client, set out in the Discussion Paper include:

• requiring intermediaries to declare themselves to a prospective policyholder as either an insurer agent (i.e. a tied agent or an independent broker), or an independent financial advisor – the distinction being that insurer agents are remunerated by one or more insurers only and independent financial advisors are remunerated by the customer only;
• requiring that only independent financial advisors may describe themselves as “advisors” or “providing advice”; and
• improving the quality of investment advice through higher standards of intermediary education and implementing a system of accreditation.”

A financial journalist recently asked me to edit an article she wrote for a national newspaper
on the various types of intermediaries that exist in the market place. It was evident from her initial draft that there is limited knowledge on this subject. After reading the above, I could not help but wonder just how important this is in the bigger scheme of things. If it is that important to the client, then surely the current disclosure document provides enough information? If not, set different requirements, but please look at the reality.

The document goes on to compare definitions of advice and intermediary services in the FAIS Act with those in the various insurance acts, and comes to the conclusion that it differs.

• In terms of the FAIS Act, advice is defined separately from other intermediary services;
• In terms of the insurance laws, advice is not separately mentioned, but can be seen as forming part and parcel of “any act directed towards entering into” a policy (in the case of upfront advice) or “maintaining or servicing” a policy (in the case of ongoing advice), both of which are key elements of the definition of services as an intermediary
• In terms of the insurance laws, the definition of services as an intermediary covers not only the initial act directed at entering into a policy, but also covers subsequent maintenance and servicing activities in relation to a policy; and
• In terms of the Long-term Insurance Act, the definition of services as intermediary also extends to “providing administrative services in relation to a policy”; in terms of the Short-term Insurance Act, the definition of services as intermediary extends in a similar way to “receiving, submitting or processing claims under a short-term policy”.

This becomes even more important when one realises the impact this has on remuneration options:

Precisely because the remuneration payable in respect of services as intermediary is limited to regulated commission, there has been a lot of interest and debate over a number of years as to what precisely falls within the scope of this definition – mainly driven by the desire to argue for additional remuneration for undertaking services that fall outside of this definition. Recently, there has been an added imperative to seek regulatory clarity, arising from the Supreme Court of Appeal decision in Maree v C Booysen t/a NVM Beleggings & Versekeringsadviseurs (307/09) [2010] ZASCA 44 (31 March 2010). This decision implies that section 49 of the Long-term Insurance Act (and the Regulations) prohibit an independent intermediary from accepting any remuneration from the insured, insurer or any third party in relation to intermediary services rendered, otherwise than in the form of commission provided for in the Regulations. This interpretation prohibits the payment of independent advice fees even where no commission is paid and runs counter to Directive 132.A.ii issued by the Registrar of Long-term Insurance on 30 January 2004. [Note that although this decision relates to long-term insurance business, it does impact on short-term insurance business. Section 8(5) of the Short-term Insurance Act read with the definition of “conflict of interest” and section 3A(1)(iii) of the FAIS General Code has the effect that a person cannot be charged a fee for a service for which commission was paid. Given the broad and all encompassing scope of the definition of intermediary services, this leaves no or limited services for which such an additional fee may be charged].

The first set of specific questions from the Regulator to intermediary bodies reads as follows:

How can the definition of “services as intermediary” be further clarified?

Specifically:

• Should the definition of services as intermediary in the insurance laws continue to include all activities supplemental to the sale of an insurance policy?
• If there is a view that the definition should be separated into component parts, how could the separate activities be categorised? In particular, should “advice” form an explicit component of the definition of “intermediary services”? Or should “advice” be defined and dealt with separately from the definition of “intermediary services”?
• Should there be a distinction between the upfront activities directed at entering into a policy and the ongoing activities aimed at servicing a policy?
• What type of services provided to a policyholder might fall outside of the definition of services as intermediary?
• Should the definitions of “advice” and/or “intermediary services” in the FAIS Act and the insurance laws be aligned, and if so, what suggestions are there in this regard?
• How, if at all, should referrals, introductions or “lead” generation be dealt with for purposes of these definitions?

If nothing else comes from this exercise other than the alignment of the various pieces of legislation impacting on the industry, then it will already be a major achievement.

At the moment it feels a bit like walking under a flock of seagulls, all suffering from diarrhoea. You have no way of predicting which one is going to hit you next.

Our recommendation in 2006 was that it was the ideal opportunity to split advice and service, which are two totally different offerings. The initial advice should be paid for if accepted by the client and not cancelled in the cooling-off period. There is no justification for clawing back commission if the client decides to buy a new car six months down the line, and can now no longer afford his premium.

Service fees are on-going, with the client able to cancel if dissatisfied.

This recommendation is still valid today.

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