Commission on Orphan Policies – Part II

Tony, a reader in Durban, was one of several people who responded to an article on this subject in the Moonstone Monitor of 24 July 2014:

The issue of commission on orphan policies has been the bugbear of many hard-working intermediaries for many years.

Notwithstanding the fact that the case quoted seemed to infer that someone managed to get ongoing commission paid after the original intermediary had resigned, this is definitely the exception rather than the rule. I believe that if you operate as a Close Corporation, then companies will actually be paying fees/commission to the CC but not to individuals, so it is possible for someone to resign and the commission to continue being paid to the CC.

In my 29+ years in this industry, I have NEVER come across any company that was willing to pay the original ongoing commission to an intermediary who inherits an orphan policy. The only way we were able to get ANY commission on an orphan policy was if we were able to ADD something to the policy that would increase the premium and then we were only paid the commission which the increase generated. Otherwise we were expected to inherit the client, warts & all, and provide an ongoing service FREE of CHARGE – even dealing with conservation of policies (in the time before replacements were allowed).

The disgusting thing about this scenario is that the Life Companies NEVER reduced the clients’ premiums when they stopped paying commission on their policies. They simply continued collecting the gross premiums & allocated the commission portions to (very often) secret internal accounts. I uncovered a situation at one insurer some years ago where commission was being allocated to a “Verjaarsdag Projek” as well as another in-house account. Perhaps the Regulator should begin investigating THIS problem because, as usual, the focus has been on the ever-errant intermediary!

In recent years some companies allowed you to get commission paid on an orphan policy provided that the client signed specific documentation that authorised the payment. This has, of course, not been a problem with the Unit Trust (Collective Investments) industry and also not with Short-Term Insurance & Medical Aids. With Collective Investments, it’s a simple process of the client signing a new broker authorisation & voila, the fees are then paid to that person. However, with independent brokers, if you cancel your contract with a Unit Trust company, they immediately stop paying all fees – and will only recommence paying if the CLIENT authorises them to do so. There’s no such thing as a broker simply passing his client-base to another broker who then collects all the fees.

I received a lot of similar responses, all supporting the views expressed in the articles.

It is extremely important that the regulators of our industry address this practice as a matter of urgency.

In the event of a client becoming an “orphan” from the perspective of the product provider, steps should be put in place to ensure that this unwanted situation is rectified:

  1.  A replacement intermediary should be appointed whose first action should be to get a mandate, which includes a service level agreement, signed by the client to clarify the obligations of both parties.
  2. Failing this, all commission deductions should cease to be debited to the client’s account until such time as the client appoints a new intermediary.

The framework on which the first point is based already exists in current legislation. It just needs a bit of fine-tuning to include all parties involved in the transaction.

As Tony so rightly says above, the current reality is that a lot of client servicing by intermediaries is done free of charge, despite the client actually paying commission which could, and should, be applied to reward the intermediary for his time and expertise. Where there is no “fee for service” agreement in place, the prescribed commission will do very nicely, thank you.

The issue of commission debits in respect of “orphan” clients should form part of the proposed Retail Distribution Review. The purpose of the review is, after all, to ensure the fair treatment of clients, and the practice of skimming money off the client’s account without providing the expected service is indefensible, as is the practice of expecting an intermediary to work for free when funds are available to recompense him.

Perhaps consideration should be given to do away with the “retainer” format of on-going commission where orphan clients of life offices are concerned and replaced with a structured fee, based on an agreed hourly tariff for actual services rendered.

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