FSB takes Action on Sign on Bonuses

Scarcely a week after announcing its intent to investigate the impact of sign-on bonuses on churning, the Regulator called for a special compliance report to be completed by FSPs registered as Long-term insurers.

The scope of the report includes both investment and risk policies.

As with the investigation into causal event penalties, which led to the Statement of Intent, the FSB identified a specific period for the special compliance report. It would have been an impossible task to go back to when the practice first occurred.

The reporting period is from 1 September 2012 to 31 March 2015.

The special compliance report consists of three schedules which affected FSPs are required to complete.

  1. Schedule “A” sets out to determine whether the FSP offered and/or paid sign-on bonuses. This is broken down into two time frames: 1 September 2012 to 31 August 2014 and 1 September 2014 to 31 March 2015.
  2. Schedule “B” needs to be completed where FSPs indicated that they paid sign-on bonuses between 1 September 2012 to 31 August 2014. Product providers have to provide details of all recipients of sign-on bonuses, including names, ID numbers, amounts and dates involved. It also has to list the number of new policies written by the recipient for the specified period, as well as the number of replacements during the corresponding period as a percentage of new business written.
  3. Schedule “C” deals with payment of sign-on bonuses after this date, up to 31 March 2015 and requires the same information as in Schedule B. The information will show whether product providers continued to pay sign-on bonuses to FSPs, other than new entrants, as was indicated in the draft Board Notice. On 1 September, the FSB invited comment from the industry on its intention to ban the paying and receiving of sign-on bonuses. Only two weeks were allowed for comment, as the FSB was concerned about “…the possibility of an escalation in the practice the amendment intends to prohibit…”

It is likely that any increase in the payment of sign-on bonuses in the period between 1 September 2014 and 3 December 2014 to FSPs other than new entrants will be viewed in a serious light.

Other Pertinent Questions

  1. Affected product providers are required to indicate whether sign-on bonuses paid to new entrants were linked to performance criteria.
  2. They are also required to disclose whether they have systems and procedures in place to monitor inappropriate replacement products.
  3. Those FSPs who does not have the required information to complete Schedules B and/or C must provide a detailed explanation as to why it is not able to supply the information.

The special compliance report, duly signed by the FSP’s compliance officer, needs to be submitted to the FSB by 30 April 2015.

Sign-on bonuses first surfaced long before 1 September 2012. The success achieved by the “developer” led to a number of other companies following suit. A small FSP, who suffered serious financial loss as a result of churning after his ex-rep was “bought” by another company, commented: “Company A designed incentivised churning, Company B perfected it.”

It is likely that the whole issue of churning will finally be addressed. In particular, the disclosure on whether providers have“…systems and procedures in place to monitor inappropriate replacement products…” will be interesting. Having such controls in place is one thing – applying it strictly to ensure a fair outcome for consumers is something totally different.

Perhaps an audit of the required Replacement Policy Advice Records (RPAR) will reveal just how effective it was in the fair treatment of customers.

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