Reg­u­la­tor fines Dis­cov­ery Life and Re­gal for pay­ing fi­nan­cial ad­vis­ers ‘sign-on bonuses’

Weekend Argus (Saturday Edition) - - FRONT PAGE - AN­GELIQUE ARDÉ

Dis­cov­ery Life and Re­gal Fi­nan­cial Ser­vices have been fined R2.5 mil­lion and R200 000 re­spec­tively by the Fi­nan­cial Ser­vices Board (FSB) for en­gag­ing in the banned prac­tice of pay­ing “sign-on bonuses” to fi­nan­cial ad­vis­ers, ac­cord­ing to a state­ment is­sued by the FSB this week.

Sign-on bonuses re­fer to the pay­ments that fi­nan­cial ser­vices com­pa­nies make to ad­vis­ers to at­tract them to sell their prod­ucts, but have re­sulted in the wide­spread mis-sell­ing of poli­cies. The pay­ment of such fees was banned in late 2014.

The pay­ments in­cluded “es­tab­lish­ment and re­straint fees” to cover the cost to the ad­vis­ers of es­tab­lish­ing them­selves in a new busi­ness, and to tie the ad­vis­ers to the com­pany for a cer­tain pe­riod.

An ad­viser who re­ceived a signon bonus was ex­pected to bring a cer­tain amount of new busi­ness to the com­pany for a spec­i­fied pe­riod. Typ­i­cally, an ad­viser would do this by rec­om­mend­ing that clients who had taken out poli­cies with the com­pany for which he or she pre­vi­ously worked switched to poli­cies from the com­pany pay­ing him or her the sign-on bonus.

It was un­likely that an ad­viser would dis­close to clients that he or she had been paid a sign-on bonus, and there­fore it was un­likely that clients who trusted an ad­viser would ques­tion a rec­om­men­da­tion to move busi­ness, or, in the case of new busi­ness, ask why one prod­uct was rec­om­mended over an­other.

There was a case of an ad­viser be­ing paid a sign-on bonus of R1.7 mil­lion by Old Mu­tual in 2012. Old Mu­tual de­fended the fees as com­pen­sa­tion for the ad­viser giv­ing up his in­de­pen­dent bro­ker­age and the con­tracts he had with var­i­ous fi­nan­cial ser­vices com­pa­nies.

But the FSB was of the view that the pay­ment of these fees was to the detri­ment of con­sumers, be­cause they served as an in­cen­tive for fi­nan­cial ad­vis­ers to “churn” poli­cies – in other words, to in­duce their clients to re­place their poli­cies, ef­fec­tively mov­ing their busi­ness to the com­pany of­fer­ing the ad­viser the bonus.

In Septem­ber 2014, Per­sonal Fi­nance re­ported that com­plaints about com­pa­nies lur­ing ad­vis­ers with sign-on bonuses, and the con­se­quent churn­ing by ad­vis­ers, had forced the FSB to “act im­me­di­ately” to stop the pay­ment of these in­cen­tives.

The FSB had noted an in­crease in the pay­ment of sign-on bonuses in light of an im­mi­nent clam­p­down by the reg­u­la­tor through pro­pos­als known as the Re­tail Dis­tri­bu­tion Re­view (RDR). Although the pro­pos­als had yet to be pub­lished, they were ex­pected to sug­gest an end to sign-on bonuses.

The ban on sign-on bonuses was there­fore in­tro­duced in De­cem­ber 2014 in terms of changes to the code of con­duct un­der the Fi­nan­cial Ad­vi­sory and In­ter­me­di­ary Ser­vices (FAIS) Act, the pri­mary leg­is­la­tion gov­ern­ing the ren­der­ing of fi­nan­cial ad­vice.

The state­ment is­sued by the FSB this week says that Dis­cov­ery Life paid R840 000 in bonuses to four ad­vis­ers one day af­ter the code was changed, and that Re­gal also paid a R100 000 bonus to one of the four, although it’s not clear when.

There may be good rea­sons for an ad­viser to sug­gest you switch a pol­icy from one com­pany to an­other.

In terms of the FAIS Act, when a pol­icy is switched, you must be pro­vided with:

• A com­par­a­tive anal­y­sis of both prod­ucts;

• De­tails of the re­mu­ner­a­tion the ad­viser will earn di­rectly or in­di­rectly from both the re­place­ment prod­uct and the prod­uct that you ter­mi­nate; and

• A record of ad­vice that doc­u­ments the im­pli­ca­tions of the switch and why the re­place­ment prod­uct is bet­ter suited to your fi­nan­cial needs.

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