Fair-treatment reforms already benefiting you

The principle-based Treating Customers Fairly regime may be introduced officially only in 2016, but the Financial Services Board has your interests at heart in its current attempts to combat unfair practices in the insurance industry, writes Bruce Cameron

The financial services industry will have to fully apply the six Treating Customers Fairly (TCF) principles by 2016 when legislation enshrining the new approach to financial regulation is expected to be promulgated.

However, the Financial Services Board (FSB) says it is not sitting around waiting for that date to begin ensuring that the industry treats you fairly – it is already starting to apply the principle-based regulatory structure in conjunction with existing rules-based regulation.

In principle-based regulation, broad principles of behaviour are set and participants have to show that they apply the principles in the services and products they provide. It is more difficult for participants to dodge around the principles as they can do with the rules-based regulations.

In all-day presentations to the financial services industry in Pretoria earlier this month and in Cape Town this week, the insurance section of the FSB detailed how it was going about improving the market conduct of the life assurance industry.

Jonathan Dixon, the FSB’s deputy chief executive in charge of insurance, says market conduct is an important part of ensuring the stability of the South African financial services industry.

TCF provides the over-arching framework for market conduct to ensure that you are sold an appropriate product, with the appropriate service, and that your reasonable expectations are met, whether it is a life assurance or banking product.

Dixon says the FSB has already taken action or is planning to take action on a number of insurance practices in terms of TCF. At the briefings, various FSB executives detailed measures taken or being contemplated. These include:

◆ Responses to draft directives published in 2012 have highlighted the need for a major review of the regulation of funeral assurance. Measures already taken include the following:

❑ The maximum benefit has been increased from R18 000 to R30 000 because the FSB found that, with the lower limit, consumers were being sold multiple policies; and

❑ Policyholders can now choose to take the full benefit as a cash lump sum or have the funeral expenses paid on their behalf. In the past, some assurers would pay out a cash value equal to only the actual – but lower – costs of a funeral.

Among other things under consideration is how insurers sell a policy to a funeral parlour or burial society, which in turn signs up members as the beneficiaries, who as a result have little or no protection.

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These are events such as when you can no longer afford to pay premiums or want to switch to another product, allowing the life industry to apply penalties that reduce your investment value.

Action has already been taken to stop “doubledipping” by life assurers when more than one causal event occurs and the combined penalties are in excess of the allowable maximums. Discussions are to be held with the industry about moving away entirely from the controversial penalties.

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This includes intermediaries being paid for services in addition to getting their commissions. For example, action was taken against Old Mutual earlier this year for a structure called Servco, which paid financial advisers for outsourced services in a way that could have created conflicts of interest in advice given to consumers.

◆ These include life assurance products that use derivatives as underlying investments. Most of these products offer performance linked to an index, but don’t invest in the assets in the index. Instead they use use derivatives to replicate the performance of a market index.

◆ These are schemes in which a single policy covers many members, with the premiums being the same for all members. These policies are often in the name of the entity selling the policy, with the “members” not having the same protection as individual policyholders.

◆ The problem is that these often do not provide much value for consumers.

◆ Dixon says there are also questions about whether these policies always offer consumers value.

◆ Often, inducements to consumers have little to do with assurance and can camouflage shortfalls in the assurance product.

◆ The FSB is considering prohibiting clauses in policy contracts that are one-sided and to the detriment of policyholders. This includes clauses that allow a life company unilaterally to cancel a policy if the policyholder becomes a higher risk, leaving policyholders without cover when they need it most.

◆ This includes a requirement that product providers will have to give you key information documents, which will make it easier for you to compare products.

◆ Dixon says that, often, built-in annual premium escalations result in assurance premiums becoming unaffordable, resulting in the cancellation of policies. The escalations may see the elderly being driven out of the risk pool, to the benefit of the life assurance company, which then do not have to pay a benefit.

◆ Dixon says there is no reason why honest policyholders should, in effect, be paying for dishonest policyholders. He says there needs to be more focus on combating fraud to ensure that honest policyholders are treated fairly.

◆ The FSB has already started taking action against misleading advertising, but this will move from responding to complaints to reviewing advertising to ensure it meets the requirements of TCF. Guidelines are to be issued to support this shift in emphasis. Issues being considered include requiring advertisers to state that high-profile people such as sportsmen and radio personalities who endorse products are being paid to do so.

◆ These may lure you into buying a product without detailing the costs and benefits of the product.