In a number of determinations over the past few years, the FAIS Ombud ruled against FSPs who did not follow the laid down procedures, prescribed in the FAIS Act, when replacing existing business. It is heartening to see that the authorities are now addressing the disparity between what happens in the market, and what the FAIS Act prescribes.
A document entitled Contractual Savings in the Life Insurance Industry was sent to industry bodies in November 2011, calling for input on addressing industry issues. Late last year, the Regulator provided feedback on the input received, and its thinking as a result of this.
”… there has been a significant up-tick in the churning of risk products in recent years, partly driven by competition in the offering of up-front incentives. This not only increases the risk of miss-selling, but also puts upward pressure on overall cost levels in the industry, which ultimately leads to higher premiums for consumers than would otherwise be possible.”
Concerning the feedback and solutions received, it reflects the following:
- There is a need to distinguish between “good” and “bad” replacements
- There is great difficulty in doing so
- More emphasis should be placed on the replacement process – and enforcement thereof
- There were split views on whether to ban commission on replacements, or to only pay as-and-when commission
- There was a minority view that normal commission should be paid
Good and Bad Replacements
The “need” to distinguish between the two, expressed above, is almost as great as the “difficulty” in doing so.
There is an Afrikaans saying: “As jy ‘n hond wil slaan, sal jy altyd ‘n stok kry.” Advisors often find themselves in a precarious position where they have to choose between replacing an existing policy, or admitting that the existing one still complies with the client’s needs. It is not too difficult to convince an uninformed consumer that your product is better, particularly if a temporary moral memory loss, coupled with financial pressure, occurs at the same time. This is churning.
Then there is of course the reality that old products have become obsolete, or the client’s circumstances have changed to such an extent that his current provision no longer addresses his needs adequately. This is replacing.
If one follows the guidelines contained in the FAIS Act, the moral dilemma should not be a problem, provided you are honest with your client, and yourself. Please click here to download an extract from the General Code of Conduct setting out the guidelines. The work involved, alone, should deter anyone but the sternest churner from continuing, but, then again, they are the least likely to conform, not so?
Enforcement of Replacements
The input from the industry, reflected above, appears to indicate that the problem can be resolved by addressing commission issues. This, in my view, makes a mockery of the feedback. This is nothing other than a smokescreen designed to avert attention from the real cause of churning.
While many product providers follow the moral road when dealing with churning, there are also those who do not.
- If you are a relatively new product provider needing to build a client base, there is no easier way of doing it than providing a product that appears to be a lot cheaper than what is available in the market, and bribing advisors to churn the opposition’s products.
- If a company’s shareholders measure the success of the company in terms of the growth of new business, then replacing old business with new makes absolute sense. It may appear a bit incestuous, but never mind the quality – feel the width.
- Some of the existing controls in the industry would do more towards the conservation of trees, if it is discontinued, than effectively halting churning.
If the Regulator is serious about addressing churning, and I believe he is, then his focus needs to be on the cause, not the symptom.
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