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

Weekend Argus (Saturday Edition) - - GOODPOSTER -

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.

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.

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.

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