In­sur­ers get guid­ance on bin­der func­tions

Business Day - Business Law and Tax Review - - BUSINESS LAW & TAX REVIEW - ERNIE VAN DER VYVER, JO­HAN HEN­NING & ZELDA SWANEPOEL

THE Reg­is­trar of Long-term and Short-term In­sur­ance has is­sued a draft in­for­ma­tion let­ter — 3/2013 — which aims to pro­vide guid­ance on the ac­tiv­i­ties that con­sti­tute bin­der func­tions within the mean­ing of sec­tion 49A of the Long-term In­sur­ance Act, No 52 of 1998 and sec­tion 48A of the Short-term In­sur­ance Act, No 53 of 1998.

The in­for­ma­tion let­ter also re­quires in­sur­ers to re­port on re­mu­ner­a­tion payable to bin­der hold­ers to en­sure that the reg­is­trar can ad­e­quately reg­u­late fees payable to bin­der hold­ers within the pa­ram­e­ters of the ap­pli­ca­ble leg­is­la­tion.

It is ex­pressly stated that the guid­ance set out in the in­for­ma­tion let­ter re­flects the man­ner in which the reg­is­trar in­ter­prets and will en­force such in­ter­pre­ta­tion in re­spect of bin­der func­tions. This is so not­with­stand­ing the fact that the doc­u­ment is merely an in­for­ma­tion let­ter and not in the form of a board no­tice or direc­tive.

The im­pact of the in­for­ma­tion let­ter is that the reg­is­trar deems cer­tain ser­vices set out in the an­nex­ures to the in­for­ma­tion let­ter as bin­der ser­vices and ser­vices an­cil­lary or in­ci­den­tal to bin­der ser­vices. The in­for­ma­tion let­ter pro­vides that if a per­son ren­ders cer­tain bin­der ser­vices and any an­cil­lary ser­vices, the in­surer will only be able to re­mu­ner­ate the bin­der holder for the bin­der ser­vices ren­dered and not for any of the an­cil­lary ser­vices.

The reg­is­trar re­gards such an in­ter­pre­ta­tion nec­es­sary in view of the opin­ion that cer­tain an­cil­lary or in­ci­den­tal ser­vices are re­quired to ad­e­quately ren­der the bin­der ser­vices and that such an­cil­lary or in­ci­den­tal ser­vices can­not be sep­a­rated from the per­for­mance of the bin­der ser­vices.

The print­ing and dis­tri­bu­tion of the pol­icy doc­u­ments are deemed to be an­cil­lary ser­vices to the bin­der ser­vices

An ex­am­ple is where a bin­der holder is au­tho­rised to en­ter into poli­cies on be­half of an in­surer and also prints and dis­trib­utes the pol­icy doc­u­ments to the pol­i­cy­hold­ers. By virtue of the in­ter­pre­ta­tion con­tained in the in­for­ma­tion let­ter, the print­ing and dis­tri­bu­tion of the pol­icy doc­u­ments are deemed to be an­cil­lary ser­vices to the bin­der ser­vices, and the bin­der holder may not re­ceive an ad­di­tional fee from the in­surer for the per­for­mance of th­ese an­cil­lary ser­vices.

The im­pli­ca­tion of the in­for­ma­tion let­ter is that in­sur­ers will not be able to pay ad­di­tional fees and/or com­mis­sion over and above the bin­der fee for any such an­cil­lary or in­ci­den­tal ser­vices ren­dered. This means that even if some of th­ese ser­vices qual­ify as in­ter­me­di­ary ser­vices or out­sourced ser­vices within the mean­ing of the ap­pli­ca­ble leg­is­la­tion, that com­mis­sion or out­sourced fees may not be paid for such ser­vices ren­dered.

Any other lim­i­ta­tions nor­mally ap­pli­ca­ble to such fees and/or com­mis­sion would then sim­i­larly not ap­ply.

Fur­ther­more, in terms of the in­for- ma­tion let­ter, an in­surer is not per­mit­ted to out­source an­cil­lary ser­vices to a third party if a bin­der agree­ment is in place. How­ever, a bin­der holder may out­source th­ese an­cil­lary or in­ci­den­tal ser­vices pro­vided that the bin­der holder pays third par­ties to whom the an­cil­lary ser­vices are out­sourced from the bin­der fee re­ceived from the in­surer.

Cer­tain clar­i­fi­ca­tions are also pro­vided in the in­for­ma­tion let­ter:

Any “en­ter­ing into” of a pol­icy live on the in­surer's sys­tems is not re­garded as a bin­der func­tion as the in­surer is at all times aware of its li­a­bil­i­ties.

The use of a black box sys­tem for en­ter­ing into poli­cies is re­garded as the bin­der ser­vice of “en­ter­ing into” (as de­fined by the bin­der reg­u­la­tions).

The adding of mem­bers to vol­un­tary group schemes by fu­neral par­lours is re­garded as a bin­der ser­vice ir­re­spec­tive of the fact that qual­i­fi­ca­tion re­quire­ments for mem­ber­ship to the scheme are set up­front by the in­surer.

The reg­is­trar also seeks to im­ple­ment a stan­dard­ised re­mu­ner­a­tion model and so calls on all in­sur­ers to com­plete An­nex­ure B to the in­forma- tion let­ter and to dis­close the fees cur­rently payable to their bin­der hold­ers. The reg­is­trar is of the view that such dis­clo­sures will en­able the reg­is­trar to com­pare the fees payable across the in­dus­try and to de­ter­mine what rea­son­able fees en­tail, which in turn will en­able the reg­is­trar to ad­e­quately mon­i­tor the pay­ment of bin­der fees.

It is stated in the in­for­ma­tion let­ter that the reg­is­trar will per­form in­ves­ti­ga­tions in the course of this year to de­ter­mine the ac­tual costs of cer­tain ser­vices and will de­ter­mine what con­sti­tutes a rea­son­able rate of re­turn to serve as a bench­mark for all in­sur­ers. It will be against th­ese set fees that com­pli­ance with the bin­der reg­u­la­tions will be mon­i­tored.

The reg­is­trar be­lieves that a stan­dard­ised ac­tiv­ity-based fee model may be more ap­pro­pri­ate for non-man­dated in­ter­me­di­aries due to con­flicts of in­ter­ests and the rel­e­vant stan­dard of the ser­vices so ren­dered.

How­ever, it is an­tic­i­pated that bin­der fees payable to un­der­writ­ing man­agers may vary due to the com­plex­ity of the ser­vices ren­dered and the lack of con­flicts of in­ter­est.

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