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Illegal Incentives in the Motor Industry

Finance and Insurance Managers (“F&I managers”) in motor dealerships are registered representatives of financial service providers (FSPs), and as such they are bound by the provisions of the FAIS Legislation.

The Registrar is aware that certain motor dealers, their representatives and F&I managers are receiving incentives for selling specific products of a specific product supplier.

These incentives take various forms, including the provision of vouchers, paid for by the product supplier, for use at various merchants/retailers or travel agencies. The vouchers are loaded with points which in most cases exceed the immaterial financial interest threshold of R1000 per calendar year.

The product supplier incentivises F&I managers who sell the most policies. The FSP in this instance acts as a conduit between the product supplier and the F&I manager in receipt of the incentive, thus condoning the conduct.

Section 3A of the Code provides for instances when financial interest is allowed in the form of commission and fees.

Section 3A (1)(a) (vi) and (vii) also makes provision for a provider or its representative to offer to, or receive from, a third party, an immaterial financial interest or financial interest not referred to in the subparagraphs outlining commission and fee payments, for which a consideration, fair value or remuneration that is reasonably commensurate to the value of the financial interest, is paid by that provider or representative at the time of receipt thereof.

An immaterial financial interest is defined in the Code as “any financial interest with a determinable monetary value, the aggregate of which does not exceed R 1000 in any calendar year from the same third party in that calendar year received by a) a provider who is a sole proprietor, or b) a representative for that representatives direct benefit; or c) a provider, who for its benefit or that of some or all of its representatives, aggregates the immaterial financial interest paid to its representatives.

Section 3A(1)(b) of the Code provides as follows:

“A provider may not offer any financial interest to a representative of that provider for:

  1. giving preference to the quantity of business secured for the provider to the exclusion of the quality of the service rendered to clients; or
  2. giving preference to a specific product supplier, where a representative may recommend more than one product supplier to a client; or
  3. giving preference to a specific product of a product supplier, where a representative may recommend more than one product of that product supplier to a client.”

Offering the incentives described above gives rise to a serious conflict of interest in that the incentive offered exceeds the immaterial financial interest threshold. The F&I manager, as a result of not only association with the product supplier but also the incentive or the financial reward being offered, is encouraged or enticed to give preference to a specific product supplier.

Furthermore he/she recommends to the client the product of the product supplier even in circumstances when other products could have been recommended, thus rendering financial services in a biased manner which may be prejudicial to the client.

The Code places a duty on all providers and representatives to render financial services with, inter alia, a duty of due care, skill and diligence. Representatives are required to give quality service to clients and not to give preference to quantity of work secured.

The Registrar warns providers and representatives who are participating in this conduct to refrain from doing so as this attracts regulatory action.

In our experience, a warning such as this is normally followed by onsite visits to FSPs in the sectors where such transgressions are committed.

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