Secondary

Whistleblower

Causal event charges investigated

An article in Personal Finance titled, Whistle-blower helping FSB with research into penalties announces the contracting of an expert by the FSB to assist in monitoring adherence to prescriptions contained in Directive 153 which aims to curb the charging of excessive penalties.

The Financial Services Board (FSB) has contracted Rob Rusconi, the independent actuary who in 2004 blew the whistle on the high cost of saving for retirement, to help the regulator establish the extent to which confiscatory penalties are still a problem for retirement annuity (RA) policyholders.

The article also contains the following brief history of how matters evolved over the past 11 years.

2005: Then Pension Funds Adjudicator, Vuyani Ngalwana, hands down rulings against life assurance companies that imposed early termination penalties on retirement annuity (RA) policyholders. The life companies successfully challenge the adjudicator’s jurisdiction over the contracts they entered into with policyholders.

December 2005: Life assurers and the Minister of Finance sign the Statement of Intent. The assurers agree to pay R3 billion in compensation to endowment and RA policyholders on whom they have imposed early termination penalties since 2001. The life companies also agree to limit penalties on RAs sold from December 1, 2006 to 30 percent.

January 1, 2009: Life assurers agree to pay 50 percent, instead of 100 percent, of the commission advisers earn on RAs and endowments upfront and the rest as and when the contributions are paid. This supports limiting the penalties to 15 percent for policies sold after January 1, 2009, with the penalty reducing to nothing over the term of the policy. The maximum term for lump-sum policies is set at five years and for recurring-contribution policies at 10 years.

November 2013: As some life assurers are imposing the maximum penalty more than once if a policyholder makes more than one change to his or her contract, the Financial Services Board (FSB) issues Directive 153, which states that the maximum penalty applies cumulatively over the term of the policy, not to each causal event.

November 2014: The FSB publishes the Retail Distribution Review, which proposes scrapping upfront commissions on savings policies. This largely removes the rationale for penalties.

The appointment of Rusconi indicates that the Regulator is not convinced that all providers are acting in the spirit of the agreement and conforming to the conditions contained in Directive 153.

It is a sad reflection on the industry that, 11 years after the Statement of Intent, there remains doubt that all providers are acting in the spirit of the agreement.

The perception that commission as the cure for persistent problems still does not balance the risk carried between the three parties – the client, the product provider and the adviser.

Holding two of the three parties accountable for future losses of the third does not seem to be fair treatment of either the client or the adviser, particularly in view of the fact that events which lead to the charging of causal event charges are often beyond the control of neither.

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