The FSCA has published the final version of a guidance notice on how intermediaries may be remunerated when a member’s interest is transferred from one retirement annuity (RA) fund to another.
Section 14(7) of the Pension Funds Act (PFA) deals with the transfer of individual member (or non-member spouse) interests between RA funds. Section 14(7)(a) provides that an RA fund may not prohibit such transfers, while section 14(7)(b) imposes conditions regarding the remuneration that intermediaries may receive in relation to such transfers.
The main objective of Guidance Notice 1 of 2023 (RF) is to ensure a consistent interpretation and application of section 14(7) of the PFA and other intermediary remuneration provisions in the Regulations to the Long-term Insurance Act (LTIA) and the General Code of Conduct, the FSCA said in a communication issued on 20 February.
Click here to download Guidance Notice 1 of 2023 (RF).
The Authority said three key aspects of the guidance notice are:
- When applying section 14(7)(b)(ii) of the PFA, sub-sections 3A(1)(a)(iv) and 3A(1)(d) of the General Code of Conduct must be applied together with the provisions of the PFA.
- Any fees and commissions for financial services rendered after the transfer of interests that exceed the maximum allowed for in the LTIA Regulations must meet the requirements of sub-section 14(7)(b)(ii)(bb) of the PFA.
- The PFA, as primary legislation, prevails over the LTIA Regulations in respect of the inconsistency that exists in relation to the remuneration payable when an interest is transferred from one underwritten RA fund to another.
The publication of Guidance Notice 1 of 2023 follows a public consultation process that started in July 2022, when the FSCA published a draft version of the notice and invited stakeholders to comment. The FSCA said it received 60 comments from eight industry stakeholders.
Read: FSCA issues draft guidance notice on remuneration following RA fund transfers
The FSCA said five main issues were raised during the public consultation process. These were:
1. Transfers to non-member spouses
Industry comment
Paragraphs (a) and (b) of section 14(7) refer to a member’s interest or a non-member spouse’s interest. However, paragraph 18(a) of FSRA Conduct Standard 1 of 2019 specifies that a transfer of a pension interest, awarded in terms of section 7(8) of the Divorce Act, to a non-member spouse does not fall under the ambit of section 14. The guidance notice should exclude these transfers.
FSCA’s response
Paragraph 18(a) of FSRA Conduct Standard 1 of 2019 deals with the requirements of section 14(1) of the PFA. It states that a transfer of a pension interest, awarded in terms of section 7(8) of the Divorce Act, to a non-member spouse is not considered to be a “transfer of business” as contemplated in section 14(1).
The term “transfer of business” should not be confused with “transfer of interest”. Section 14(7) is aimed at ensuring that members and non-member spouses can transfer their interest (in the fund).
The exclusion in paragraph 18(a) of the FSRA conduct standard does not extend to section 14(7) of the PFA.
2. Fees for post-transfer services only
Paragraph 3.3 of the draft guidance notice states: “Sub-section 14(7)(b)(ii) deals with the payment of fees and commissions for financial services rendered by an FSP or representative after the transfer of interests.”
Stakeholder comment
It has always been understood that the fees and commissions referred to the fund-based fee that the client and FSP/representative agreed to when the transfer was being effected for, among other things, the advice rendered to the client in relation to the transfer.
FSCA’s response
This understanding is not correct. Sub-section 14(7)(b)(i) of the PFA prohibits fees or commissions payable for the facilitation, intermediation, or recommendation of the transfer itself.
Sub-section 14(7)(b)(ii) specifically deals with financial services after the transfer in respect of the transferred interest of the transferring member or the non-member spouse.
3. Fee must be agreed to annually, whether or not it increases
Paragraph 3.8 of the draft guidance notice states:
“Any fees which are negotiated with, and agreed to in writing, by the transferring member or non-member spouse must either be payable by the transferring member or non-member spouse personally (per sub-section 14(7)(b)(ii)(bb)(A)) or, the transferring member or non-member spouse must authorise the fund or administrator to pay such negotiated fee (per sub-section 14(7)(b)(ii)(bb)(B)). Provided these requirements are met, there is no prescribed maximum cap on the amount of such negotiated and agreed fees.”
Stakeholder comment
Section 14(7)(ii)(bb) states that a fee in excess of the maximum commission must be agreed to in writing by the transferring member or non-member spouse annually. Must the fee be agreed to in writing annually even if the fee does not increase? Sub-section 3A(1)(a)(iv) of the General Code of Conduct provides for the client to cancel or stop this fee at any time. Is the intention, considering that a client has the option to stop the fee at any time, to negotiate and agree to the fee annually even though it stays the same?
FSCA’s response
The provision does not stipulate that such negotiation should take place only if there is an increase in the fee or commission. Even if the fee or commission remains the same, the services may have changed. The requirement in section 14(7) of the PFA is that the fee must be negotiated and agreed to in writing by the transferring member or non-member spouse annually. The fee for the service should be commensurate to the services rendered.
The reason the fee must be negotiated and agreed to annually is to ensure that the transferring member or non-member spouse explicitly agrees to such a fee, as this fee exceeds the maximum allowed for in the Regulations under the LTIA.
4. Fees after underwritten fund transfers
Paragraph 4.2 of the draft guidance notice states:
“The practical overall effect of the relevant provisions in Part 3A and Part 3B of the LTIA regulations, read in isolation, is that:
- Any remuneration payable for rendering services as intermediary, including any fees agreed to by the customer concerned (such as those contemplated in sub-section14(7)(b)(ii)(bb) of the PFA), would be subject to the maximum commission caps and other limitations of the LTIA Regulations if the transferee fund is an underwritten retirement annuity fund; and
- No remuneration is payable for rendering services as intermediary in relation to a fund member policy that is transferred from one RA fund to another. Accordingly, the fees contemplated in sub-section 14(7)(b)(ii)(bb) of the PFA would not be permissible where the transferee fund is an underwritten RA fund.”
Stakeholder comment
It is agreed to the extent that the remuneration is paid by the insurer – where there is a contractual nexus between the insurer and the FSP for the purposes of remunerating the FSP. However, section 14(7)(b)(ii)(bb)(A) provides for fees to be negotiated and agreed between the FSP and the member and paid by the member personally. It is not agreed that the commission regulations extend to remuneration paid directly by the client (member) as agreed between the member and the FSP and paid by the member.
FSCA’s response
Part 3A and Part 3B of the Regulations refer to “consideration provided to” or “consideration accepted by”. The commission regulations therefore apply both to the payer of such remuneration and to the recipient of such remuneration.
Therefore, an independent intermediary may not accept remuneration for rendering services as intermediary other than in accordance with section 49 of the LTIA and the provisions in the LTIA Regulations. The commission regulations therefore extend to the fees or commissions paid after the transfer contemplated in section 14(7) of the PFA in the case of an underwritten fund.
5. Relevance of the General Code of Conduct
Paragraph 5 of the draft guidance notice deals with the application of the General Code of Conduct to section 14(7).
Stakeholder comment
What is the relevance of this paragraph to the guidance notice? The provisions of the FAIS Act and the General Code of Conduct apply to fees and commissions payable on all retirement products, not only RA funds. It is suggested that it be removed. If this suggestion is not accepted, rather summarise the provisions of sections 3A(1)(a)(iv) and (d) of the code in the guidance notice to avoid having to search for these provisions.
FSCA’s response
The purpose is to remind the reader that the PFA should not be read in isolation. Even though the limitation on commission in the LTIA Regulations applies to fees and commissions related to an underwritten fund and not to a non-underwritten fund, the industry is reminded of the application of the General Code of Conduct in the case of an underwritten fund and a non-underwritten fund.
It is particularly important that the industry take note of the requirements in sub-section 3A(1)(d)(ii) of the General Code – namely, the prohibition on remunerating an intermediary more than once for the same service.
Further information
For more information about the contents of Guidance Notice 1, contact the FSCA’s Regulatory Framework Department at Johann.Vanderlith@fsca.co.za.
