Following on from a recent draft document calling for input from the industry, the Registrar has now published a directive on the maximum causal event charges which may be deducted under Part 5A and 5B of the Regulations issued under the Long-term Insurance Act.
The Statement of Intent, signed in 2005, aimed to address transparency and unfair deductions from contractual savings products. The industry undertook, in the Statement of Intent, to abide by agreed maxima on the occurrence of certain contractual events prior to the completion of the policy term. The Regulations were amended in December 2006 and January 2009, respectively, to give effect to the Statement of Intent.
The agreement led to the industry calculating unfair deductions as far back as 2001, and refunding affected clients.
From a number of rulings by the Pension Fund Adjudicator, and recently also the FAIS Ombud, it became apparent that certain insurers were acting in a manner which was inconsistent with the spirit, intent and purpose of the Statement of Intent and the Regulations. The Directive states, interestingly enough, that these actions are also not in line with the fair outcomes for customers envisaged in terms of Treating Customers Fairly (TCF) principles.
The purpose of the new directive is to address these anomalies.
Application of the Regulations
The Directive then sets out how the quantum of causal event charges should be determined:
Insurers may deduct a causal event charge each time that a causal event takes place. However, to give effect to the purpose of Part 5 of the Regulations, insurers must adhere to the following principles:
- When calculating causal event charges, the insurer must take into account the cumulative effect on a policy’s investment value of charges that have already been deducted in respect of previous causal events;
- On the occurrence of a second or subsequent causal event on a policy, the causal event charge for that second or subsequent event must therefore be determined taking into account the cumulative effect of that charge and all prior causal event charges on the policy’s investment value;
- More particularly, the insurer must ensure that the cumulative effect of multiple causal event charges during the life of a policy does not result in the policy’s investment value at any time being reduced by a greater proportion than would have been the case if, at the time of the first causal event, the maximum causal event charge had been deducted.
Affected product providers are called upon to adhere to these principles. Those who have previously applied Part 5 of the Regulations in a manner inconsistent with the Regulations and this directive are required to do the following:
1. For every policy that has not come to an end subsequent to the happening of a causal event, adjust the investment value of the policy in accordance with the principles. Certain time frames and events are specified. The adjustment must be made no later than the earliest of the following events in relation to the policy concerned
2. Where a policy has come to an end, and a complaint regarding the investment value as at the date the policy came to an end is received from the former policyholder, irrespective of the complaint being received directly from the policyholder or via the financial services provider of the policyholder, the Pension Funds Adjudicator, the Ombud for Financial Services Providers, the statutory ombud or any other ombud, determine the amount that would have been payable if the investment value had been determined in accordance with the above principles, and pay the policyholder any resultant shortfall.
3. Improved monitoring and oversight controls must be implemented immediately to ensure, pending the rectification of operating systems (where necessary), that the insurer adheres to the Regulations and this directive.
4. The Registrar, to facilitate compliance with the Regulations or this directive, may direct an insurer to provide information on affected policies and to take such measures as may be necessary to rectify any non-compliance with the Regulations.
Failure to comply with the Regulations or this directive may be referred to the Enforcement Committee of the Financial Services Board.
The Registrar indicated that it intends to follow up the publication of this Directive with required reporting by insurers on their compliance therewith, as well as an independent audit of the responses to ensure that there is not systemic non-compliance or serial errors. Where it appears that there are problems, the Regulator may call for a complete audit.