We reported last week on the publication of proposed amendments to the Regulations made under the Long-term Insurance Act, 1998 (“LTIA”) and the Short-term Insurance Act, 1998 (“STIA”) for public comment. This included reforms to the Retail Distribution Review and the draft amendments to the Binder Regulations.
Feedback to commentators notes that substantial input was received on amendments relating to the introduction of binder fee caps for financial advisers. To this end, the main commentators were asked to “…provide further substantive insight into how activities are segmented and to make proposals on what would constitute reasonable and commensurate remuneration for the performance of such activities so as to mitigate any risk of the remuneration potentially resulting in conflicted advice.“
Based on the comments received, the FSB is in the process of formulating proposed revisions to the draft Regulations to be submitted to the National Treasury for consideration.
A cover note with feedback to commentators summarised the discussion on remuneration as follows:
Fees for Binder Functions
The draft Regulations gave effect to Proposal ZZ of the RDR, which proposed binder fee caps for non-mandated intermediaries (“NMI”) authorised to render “advice” as defined in the Financial Advisory and Intermediary Services Act of 2002 (“FAIS Act”) (“NMI advisers”) or their associates.
This elicited extensive stakeholder comments, particularly from players in the short-term insurance sector. Most comments argued against capping and raised concerns that a “one size fits all” cap is inflexible and would not cater for the wide variations in the actual costs of binder services in different cases. Concerns were also raised that the fee cap percentages proposed in the draft Regulations were not adequately motivated, with some stakeholders arguing that the proposed caps were unreasonably low.
The FSB remains of the view that the current principle-based approach to setting binder fees has proven inadequate to address the significant conflicts of interest that arise when an NMI that provides advice also performs binder functions. Considerable evidence points to a wide range of interpretation of the current principles among insurers that has led to persistent conflicts of interest, resulting in business being placed by NMI advisers that also perform binder functions in a way that is influenced more by conflicted incentives than it is by the best interests of customers.
In order to give effect to the core principle that binder holders should not be remunerated differently by different insurers for performing similar activities, further engagement took place with the main industry commentators to explore a solution that would achieve a common understanding across role players on what would constitute a “reasonable and commensurate” fee for specific binder and binder-related activities and detailed criteria that may be considered by the FSB when determining whether remuneration meets these principles.
Following further industry proposals, the FSB believes that the introduction of revised caps on binder fees will mitigate the inherent conflicts of interest for binder holders who are NMI advisers. A robust analysis of substantive inputs received from industry associations and the data received through Information Request 3 of 2016 were performed and, based on the outcome of such analysis, the FSB revised the proposal on binder caps for NMI advisers for both short-term and long-term policies. This proposal is still subject to further technical work, specifically in as far as it relates to:
Fees for policy data administration services
In response to industry input, the FSB is now proposing that the definition of “services as intermediary” under both the LTIA and STIA Regulations should not be aligned at this stage, as was the original intention. Further activity segmentation work needs to be done during later RDR phases to ensure that a holistic approach to remuneration is adopted.
Policy data administration services are explicitly included in the definition of “services as intermediary” as it cannot be treated as outsourcing, as was initially proposed in the draft Regulations. For purposes of remuneration, Policy data administration services will now be carved out from the normal commission regulations and an additional fee may be paid for PDAS if the relevant operational requirements are met.
The majority of commentators raised concerns with the fee cap proposed, arguing that the proposed cap is too low, does not adhere to the principle of commensurate remuneration and was not informed by scientific evidence.
To more appropriately accommodate some of the concerns that were raised and to provide industry with an opportunity to transition into the new requirements, specific transitional provisions are proposed in respect of the new requirements that apply to binder functions.
These matters will be discussed in great detail at our Regulatory Update Workshops in September.