The following proposal are being discussed in March and April with the intention of them becoming effective in July of 2016. This will involve amendments to the FAIS General Code of Conduct, the Long Term Insurance Act and the repeal of section 8(5) of the Short Term Insurance Act.
- Commission on Life Policy
The FSB has agreed that it is not feasible to prohibit commission until such time as the advice fee framework is finalised. Their biggest concern is that there is insufficient disclosure to clients when a replacement is done and that these replacements are incentivised by upfront commission. Responsibility for replacements will lie with both the advisor and the Product Providers.
The definition of ‘replacement policy’ will be amended and will include the replacement of one policy with another, as well as the reduction of cover on one policy or increasing cover on another policy. The obligations currently placed on advisors to inform the new PP at application stage remain although a new format for replacement advice records will be introduced.
Product Provider will need to appoint a specific person to review advice records and confirm in writing that it complies with the disclosure standards. Payment to advisor may not be made without this confirmation. Where an advisor does not submit a record of advice, the Product Provider will have to report this to the Regulator. The new Product Provider must inform the old Product Provider of the replacement and provide them with the record of advice. This replaces the advisors’ duty to inform the old product provider. The 30 day cooling off period only begins once the record of advice is sent to the old insurer. Any findings by the new Product Provider in terms of client advice records submitted, must be submitted to the Regulator. Product Providers will have to submit reports to the Regulator regarding replacements and the Annual Compliance Report will be updated to include replacement statistics.
- Commission Regulation Anomalies and early termination values on “legacy” insurance Policies
The Long Term Insurance Act is to be amended to ensure the same commission basis to variable premium increases on “legacy” investment products as is applied to new investment policies.
- Conflicted remuneration on Retirement Annuity transfers
This concerns the transfer of accumulated benefits from one RA fund to another. There is concern over the combined impact of early termination charges on existing product and commission and charges on the new product.
Transfers of this nature will require specific disclosure obligations on advisors when recommending transfers and also covers transfer between living annuities. The advisor must ensure that the client understands the impact of termination charges, commission and other charges on replacing the existing product. This will necessitate that where applicable, retirement fund trustees and Product Providers monitor the adequacy of disclosures.
- Equivalence of reward
Currently ‘tied-advisors’ have an unfair advantage by earning remuneration and incentives above that allowed for ‘non-tied’ advisors, with some ‘tied’ advisors are able to offer similar products and supplier choice as ‘non-tied’.
The FSB also has concerns with regard to the implementation of benefit structures which appear to be aimed at circumventing the prohibition of sign on bonuses and are tending towards deviation from the principle of Equivalence of Reward.
The FSB will look at non-cash incentives, lump sum payments structured as retention bonuses, restraint of trade or any other disguised incentives to influence production, benefits that are provided to select individuals rather than advisors or groups of advisors. Particular attention will be paid to arrangements made after the publication of RDR discussion document (November 2014) in a review of current remuneration models.
- Remuneration for selling and Servicing Short Term Insurance Policies.
Section 8(5) fees (Short Term Insurance Act) are viewed by the FSB as being inconsistent with RDR objectives. This section has been repealed by the Financial Services Laws Amendment Act although the effective date has not yet been finalised. An appropriate fee mechanism will be put in place to replace section 8(5). Fees will need to be agreed to by the client and it must be clear to customers what services are being provided, resulting in more stringent requirements regarding disclosures.
- Short Term cover cancellations
Client consent is required regardless of whether it is a single replacement or an entire book. However, if the cancellation is by the insurer, the original insurer must hold the risk for 30 days after the date where proof is received that the client is aware of the cancellation OR until the original insurer receives proof that the client has secured new cover (whichever is the shortest).