Com­mis­sion struc­ture on life as­sur­ance sav­ings prod­ucts ‘is not sus­tain­able’

Weekend Argus (Saturday Edition) - - PERSONALFINANCE - BRUCE CAMERON

Pay­ing com­mis­sions up­front to fi­nan­cial ad­vis­ers on the sale of con­trac­tual in­vest­ment prod­ucts is not a sus­tain­able busi­ness model for the fi­nan­cial ser­vices in­dus­try, Jonathan Dixon, deputy ex­ec­u­tive in charge of in­surance at the Fi­nan­cial Ser­vices Board (FSB), says.

Dixon, who was speak­ing at an FSB road­show, is lead­ing a team that is re­view­ing the in­dus­try’s dis­tri­bu­tion mod­els (how it makes its prod­ucts and ser­vices avail­able to you). The re­view, for­mally called the Re­tail Dis­tri­bu­tion Re­view (RDR), may re­sult in re­forms to how fi­nan­cial ad­vis­ers are re­mu­ner­ated.

The re­view is a re­sult of the pub­lic out­cry about the penal­ties charged by life as­sur­ance com­pa­nies on their in­vest­ment prod­ucts. The out­cry led to the pre­vi­ous fi­nance min­is­ter, Trevor Manuel, lim­it­ing the penal­ties. The re­stric­tions in­tro­duced by Manuel also capped up­front com­mis­sions on life as­sur­ance in­vest­ment prod­ucts to 50 per­cent in the first two years of the in­vest­ment term, with the bal­ance of the com­mis­sion paid when you pay your pre­mi­ums.

Dixon says that the RDR will go fur­ther than study­ing ad­vis­ers’ com­mis­sions. It will aim at en­sur­ing that dis­tri­bu­tion mod­els for fi­nan­cial prod­ucts sup­port fair out­comes for you, the con­sumer.

He says the re­view will slot in with the re­vised ap­proach to reg­u­lat­ing the fi­nan­cial ser­vices in­dus­try in terms of the “twin peaks” model an­nounced by the Min­is­ter of Fi­nance in 2011. In terms of this model, the FSB will be re­spon­si­ble for mar­ket con­duct (treat­ment of con­sumers) and the South African Re­serve Bank will be re­spon­si­ble for en­sur­ing that the in­dus­try re­mains fi­nan­cially sound.

The FSB and Na­tional Trea­sury are de­vel­op­ing an in­te­grated leg­isla­tive frame­work for the con­duct of banks, long- and short-term in­sur­ers, pen­sion funds, col­lec­tive in­vest­ment schemes, as­set man­age­ment com­pa­nies and fi­nan­cial ad­vis­ers.

Dixon says it is also likely that fi­nan­cial prod­ucts that are cur­rently un­reg­u­lated will, to an in­creas­ing ex­tent, be cov­ered by this over­ar­ch­ing net.

The new out­comes-based reg­u­la­tory sys­tem based on Treat­ing Cus­tomers Fairly (TCF) will dove­tail with this leg­is­la­tion, as will the Fi­nan­cial Ad­vi­sory and In­ter­me­di­ary Ser­vices Act.

Dixon says a key change in the FSB’s role will be a move from pro­mot­ing con­sumer ed­u­ca­tion to pro­vid­ing ed­u­ca­tion.

He says the dis­tri­bu­tion land­scape in the fi­nan­cial ser­vices in­dus­try is com­plex and char­ac­terised by a wide range of mod­els that pose risks for con­sumers; con­tain con­flicts of in­ter­est; have high, and some­times hid­den, costs that af­fect prod­uct value; and pose risks to in­ter­me­di­aries, who are not al­ways ad­e­quately re­mu­ner­ated and whose value is of­ten not recog­nised.

He says that in­ap­pro­pri­ate in­cen­tives, such as up­front com­mis­sions, which are not a sus­tain­able busi­ness model, ex­pose in­ter­me­di­aries to reg­u­la­tory risk.

How­ever, not ev­ery­thing in the cur­rent dis­tri­bu­tion sys­tem is wrong, Dixon says. The pos­i­tive fea­tures in­clude the ease of pay­ing for ad­vice and the cross-sub­sidi­s­a­tion of the cost of ad­vice in favour of low­in­come cus­tomers.

These fea­tures should be ac­com­mo­dated in any new model through, for ex­am­ple, al­low­ing ad­vice fees to be paid in in­stal­ments, fa­cil­i­tated by the prod­uct provider, and by find­ing re­mu­ner­a­tion mod­els that will en­cour­age the pro­vi­sion of ad­vice and in­ter­me­di­ary ser­vices to the low-in­come mar­ket.

Dixon says the FSB’s think­ing on the pro­pos­als it would like to dis­cuss with Trea­sury in­clude:

◆ A move to a com­po­nent and ac­tiv­i­ty­based ap­proach to reg­u­lat­ing ad­vice and the sale of prod­ucts, which, in turn, will be linked to dif­fer­ent types of re­mu­ner­a­tion.

Dixon says the gen­eral prin­ci­ple should be that, when fi­nan­cial ad­vis­ers pro­vide a ser­vice to con­sumers, the cost of the ser­vice should be ne­go­ti­ated with, and paid for by, the con­sumer.

He says there could pos­si­bly be sep­a­rate charges for:

❑ Fi­nan­cial plan­ning and risk as­sur­ance plan­ning; ❑ Up­front prod­uct ad­vice; and ❑ On­go­ing ad­vice, with dif­fer­ent fee ranges based on the range of ad­vice.

The fees should be ne­go­ti­ated be­tween the ad­viser and the client, but the prod­uct provider could fa­cil­i­tate the col­lec­tion of the fees.

It is en­vis­aged that var­i­ous fees would be ne­go­tiable and would in­clude a flat rand fee, a “trail” fee, a per­cent­age of the pre­mium and time-based fees. The abil­ity to com­pare fees will be im­por­tant in or­der to pro­mote in­formed de­ci­sions.

You will be able to stop on­go­ing ad­vice fees (some­thing you can al­ready do but which is not en­trenched in law), and you will need to be fully in­formed of all fees.

◆ The clar­i­fi­ca­tion of the con­trac­tual re­la­tion­ships for dif­fer­ent forms of in­ter­me­di­a­tion, to avoid con­sumer con­fu­sion. This would in­clude your ad­viser telling you whether he or she is in­de­pen­dent or is a tied agent of a prod­uct provider, sell­ing the prod­ucts of the provider only, and the prod­ucts that he or she is en­ti­tled to ad­vise on and sell you.

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