FSB takes aim at adviser incentives that harm you
The financial services industry regulator is concerned that you, the consumer of financial products, are being made to switch products for the wrong reasons. As a result, it is clamping down on product providers that place their own financial interests ab
Financial services companies that offer financial advisers significant cash lump sums, often in the millions of rands, and other incentives, such as share options, to switch employers, often to the detriment of consumers, are in the firing line of the regulator, the Financial Services Board (FSB).
The FSB’s recently published draft regulations aim to strictly control conflict-of-interest situations where the interests of consumers are placed below those of, for example, financial product providers and their sales forces.
The regulations are due to be partially implemented in October this year, with the full force of the regulations in place by April next year. But Gerry Anderson, FSB deputy executive in charge of market conduct, warns that even now financial advisers should tread wearily, because the financial advice ombud will take the payment of incentives into account when making determinations on advice issues.
Incentive packages for independent advisers and representatives often come with tough sales targets that are seen as a major cause of the product-switching (known in the industry as “churn”) scourge undermining the wealth of individuals.
If you switch investment products, you have to pay both disinvestment and reinvestment fees, while on risk life assurance products you may be moved into products that, over the long term, could be to your detriment.
The main beneficiaries of the unacceptable churning of products are commission-earning advisers and the product providers that gain from the switch.
The FSB has warned that the practice of setting sales targets without quality objectives will be banned from April next year with the implementation of proposed conflict-of-interest amendments to the code of conduct of the Financial Advisory and Inter mediary Services (FAIS) Act.
The FSB is concerned that the sign-on incentives are one of the factors driving the high level of product chur n in the financial services industry.
The FSB is also concerned that a large volume of the churning is now occurring with risk assurance products because of changes to commission structures for life assurance investment products. From January 1 last year, the commission on life assurance investment products was reduced from 100 percent paid in the first two years to 50 percent paid upfront and the balance paid as and when premiums are paid.
The regulations, however, do not affect risk products. Industry figures now indicate that most of the churning has switched to risk life assurance, because advisers can make a bigger killing.
Commissions are paid upfront within the first two years and are often equivalent to more than the total amount you pay in premiums over the first year. After two years, there are no penalties for the adviser if the policy is cancelled, and the whole process can be repeated. So commissions are paid on premiums for many years into the future that will never be collected, leaving life assurance companies exposed to financial risk over time.
Jonathan Dixon, the FSB deputy chief executive in charge of insurance, says the FSB is now reviewing the upfront commission rules that apply to risk life assurance because of the dangers of systemic threats to the industry. The costs could eventually result in premiums escalating, as life assurers attempt to protect themselves from the losses.
ATTRACTIVE LURES FOR AGENTS
The practice of luring agents with significant sign-on incentives was started by Discovery Life after it launched in October 2000, and particularly after it entered the investment market three years ago. But Discovery denies that, at any stage, it attached sales targets to these sign-on packages.
Discovery Life did not have its own sales force when it launched, so it has been using a wide range of sign-on incentives, including cash payments, share options and loans against commissions yet to be ear ned, to poach advisers from other companies.
However, Momentum, which has resorted to using the same tactics to recruit trained sales staff, has a direct link between the sign-on incentives and tough sales targets, with staff who do not meet their targets having to repay the money.
The victim companies claim that the companies using these sign-on packages are stimulating the churning of products, because sales targets are aggressive.
Suzanne Stevens, Discovery’s corporate communications manager, says Discovery does not make any bonuses contingent on aggressive sales targets. Discovery will only employ representatives who meet Discovery’s minimum performance requirements for productivity, minimum education standards, compliance requirements, continuing professional development and a requirement to sign a code of conduct. She says the sign-on amounts are less than the amount the adviser would have earned in future commissions. The future share options are, however, linked to sales.
Stevens says that when churning does take place it is in the best interests of the policyholder.