The Retail Distribution Review (RDR) sees unequal benefits accruing to certain distribution channels as a problem requiring change.
The current Regulations applicable to the Long-term Insurance Act provide that the Registrar may determine how the principle of equivalence of reward must be achieved. The Registrar of Insurance has however not to date issued any determination, and the principle of “equivalence” is largely ignored by long-term insurers in practice, with insurer representatives often earning remuneration significantly in excess of the corresponding quantum of commission that would have been payable to an “independent intermediary” for similar volumes of business.
Where the concept of equivalence is considered, this has typically been interpreted as applying to the aggregate remuneration paid across an insurer’s their full complement of representatives, rather than at the level of individual representatives.
There were stark differences in feedback from stakeholders on the need to strengthen equivalence of reward provisions. Some of the arguments put forward by commentators ignore the fact that differences in the structure and level of remuneration may lead to an unintended migration from the independent intermediary model to tied advice models.
While an argument was made that it will be important to allow flexibility to support remuneration of new tied adviser recruits where their initial commission earnings may not be sufficient to afford them a living, other commentators felt strongly that reforms were necessary to strengthen equivalence of reward provisions to achieve a more level playing field between tied agents and independent advisers.
Guided by this objective of promoting a more level playing field, the proposal is that equivalence of reward provisions will be strengthened by applying equivalence at an individual intermediary level, but within bounds to provide for support for new recruits. The strengthened equivalence provisions will include prohibitions on recruitment and incentive practices that create opportunities for arbitrage in favour of tied advice models.
In addition, although the principle of equivalence of reward is currently not included in the Short-term Insurance Act or its regulations, consideration will be given as to whether this concept should be introduced into the short-term insurance environment to mitigate potential risks of arbitrage between tied and non-tied advice models in the future framework.
The proposals indicate that a “total cost to company” approach will be followed, whereby all benefits payable to the adviser are taken into account in applying the principle. This includes commissions, fees, salary-based payments, allowances, medical and pension benefits, non-cash incentives, participation in conferences and events, share options, etc. So-called “sign- on bonuses” and all forms of production or other performance incentives or rewards, whether or not they are conditional or deferred, will also be included.
Specific standards will be set to clarify and strengthen the principle of “equivalence of reward” as the basis on which long-term insurers may remunerate their tied advisers.