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Binder Agreements and Fees under RDR

The FSB’s views of the current landscape of the industry are contained in Section 2 of the retail distribution review discussion document, and are broken up in sector specific sections.

Binder agreements and related fees received a lot of attention prior to the publication of this document, and from the detailed discussion it is evident that the Regulator is still not satisfied with certain practical outcomes.

We publish below extracts from the discussion document which outline the background to this matter, and provide links to a summary of the proposals relating to both the outsourcing of services, as well as remuneration for such services.

Those affected by the above need to consider the proposals very carefully, and provide feedback to the Regulator. We have seen clear evidence that reasonable feedback receives the necessary attention, so please make your voice heard while you still can.

“Juristic representatives” will be disallowed from providing financial advice. The juristic representative model undermines the customer’s ability to appreciate the capacity in which advice is provided and any potential conflicts of interest, and also undermines effective oversight of fair customer outcomes by both the regulated entities concerned and the regulator. The effect will be that any individual natural person providing advice must either be a tied adviser of a product supplier, an independent adviser or a multi-tied adviser in its own right, or a representative of a juristic intermediary that is authorised to provide advice in its own right. In other words, the concept of providing advice in the capacity of a “representative of a representative” will disappear.

As a general standard, and to address potential conflicts of interest, the outsourcing of product supplier functions or activities (as opposed to true intermediation activities connecting product suppliers and customers) to financial advisers will be prohibited, other than in the case of specific identified and regulated functions. Permitted activities in the insurance space include binder activities (subject to the binder regulations) and issuing of policy documents on behalf of insurers. This general standard does not impact on outsourcing to third parties who are acting solely as agents of the product supplier in respect of non-customer facing activities, and who are not intermediaries or associates of intermediaries.

Maximum insurance binder fees payable to multi-tied intermediaries, per binder activity, will be prescribed. Although further consultation will take place on the appropriate caps, comment is invited on initial indicative fee caps for different types of binder activities, ranging between 1% and 3% of premiums.

Where an intermediary is not a binder holder, an outsourcing fee – at a proposed flat rate of R100 per policy – may be paid over and above commission or a service fee for issuing policy documents on behalf of an insurer.

The as-and-when remuneration model for short-term insurance will be retained, to provide for sales commission for the selling of a policy and service fees for on-going servicing and maintenance of the policy. The level of these commission and service fee payments will continue to be subject to regulated caps and other regulatory requirements, with further technical work and consultation to be undertaken to determine what the new maximum commission and service fee levels should be. The current provision allowing for additional fees over and above commission (through section 8(5) of the Short-term Insurance Act), will be removed. Short-term insurance advisers will be able to earn advice fees from customers, separately from commission, subject to the requirements applicable to such fees.

New conditions will be imposed for short-term insurance cover cancellations by intermediaries and insurers, to improve policyholder protection.

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