Causal event charges and TCF

If the Pension Fund Adjudicator had her way, causal event charges would be levied very differently, if at all.

In a case reported on in FANews on 3 August 2017, the product provider, in response to a complaint, submitted that it subscribed to the principles of Treating Customers Fairly (TCF) and that the complainant was appropriately informed before, during and after the time of contracting.

The PFA’s response to this assertion was anything but flattering.

She found that the causal event charge was lawful in terms of Regulation 5 of the LTIA and within the limits of 30% permitted, and that the PFA therefore “…has no reason to interfere with the imposition of such charges as they comply with the stipulated Regulations in terms of the LTIA.”

Ms Lukhaimane added that, although lawful, the actions of the respondents could hardly be described as “…being anywhere near the letter and spirit of the TCF principles.”

“The respondents should actually refrain from quoting TCF principles when levying causal event charges as the charges are obscure and cannot be translated into value for members of retirement annuity funds.”

“That a settlement was reached in terms of the Statement of Intent does not in any way address the unfairness and absence of value that often accompanies the levying of causal event charges.”

“This Tribunal has on countless occasions called for the implementation of the Retail Distribution Review. Although this will still not remove the obscure charges, it is at least a long overdue development that will ensure that entities like the respondents deliver a semblance of what their products promise.”

What does the future hold?

Details on the future treatment of causal event charges are contained in the latest “Amendments of the Regulations under the Long-Term Insurance Act, 1998 and Short-Term Insurance Act, 1998”, published in July 2017. This document was sent to commentators with a request for further feedback on the proposals by 4 August 2017.

As pointed out above, the current maximum causal event charge that may be levied is 30% of the actuarial valuation of the fund at the time of the event.

The new proposals envisage a maximum of 20% on or after 1 January 2018 but before 1 January 2019, with this percentage being reduced on an annual basis to an eventual maximum of 5% from 1 January 2029 onwards for fund member policies.

The proposals contain a number of general principles for the calculation of causal event charges, including the stipulation that “An insurer must, where the actuarial basis provides for a charge percentage that is less than the maximum prescribed charges, apply the lesser percentage in calculating causal event charges and in determining their cumulative effect.”

The word “must” is quite important here. I recall when the first guidelines were published, the Regulator, rather sarcastically, used the “may”.

Will this conform to TCF principles?

The PFA, Ms Lukhaimane, viewed the following TCF outcomes as applicable in this matter:

  • Customers are given clear information and are kept appropriately informed before, during and after the time of contracting;
  • Customers do not face unreasonable post-sale barriers to change products or switch providers.

Anyone but an actuary (and a good one at that) who has ever tried to establish how causal event penalties are calculated, failed dismally. In fact, most were told outright that it is so complicated, they will not understand it, and will therefore not be provided with the calculations.

Concerning the second principle, there can be no doubt that exorbitant causal event charges are used as a stick to dissuade clients from moving their funds to another provider, which is obviously in direct contrast to the desired outcome.

If TCF is already part and parcel of the desired outcomes, as we are often informed by the Regulator, one has to ask if phasing in changes to the maximum causal event charges over ten years is really in the best interest of clients.

After all, this is about them in the first place, not so?


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