Despite regular reminders, payments to advisers outside of what is legally permissible continue to make the news.
This topic was covered in some detail in FAIS Newsletter 23, published in March 2017.
Although the article refers specifically to motor dealerships, it contains information applicable to all products in the financial services industry.
Motor dealers, their representatives and F&I managers were receiving incentives, including vouchers, for selling specific products of a product supplier. The vouchers were loaded with points which could be changed for tangible goods which in most cases exceeded the immaterial financial interest threshold of R 1000 per calendar year.
Section 3A of the General Code of Conduct provides as follows:
“A provider or its representative may only receive or offer the following financial interest from or to a third party (our emphasis)
- Commission authorised under the Long-term Insurance Act, 1998 (Act No. 52 of 1998) or the Short-term Insurance Act, 1998 (Act No. 53 of 1998);
- Commission authorised under the Medical Schemes Act, 1998 (Act No. 131 of 1998);
- fees authorised under the Long-term Insurance Act, 1998 (Act No. 52 of 1998), the Short-term Insurance Act, 1998 (Act No. 53 of 1998 or the Medical Schemes Act, 1998 (Act No. 131 of 1998) if those fees are reasonably commensurate to a service being rendered;
- Fees for the rendering of a financial service in respect of which commission or fees referred to in subparagraph (i),(ii)or(,iii) is not paid, if those fees
(aa) are specifically agreed to by a client in writing; and
(bb) may be stopped at the discretion of that client;
- fees or remuneration for the rendering of a service to a third party which fees or remuneration are reasonably commensurate to the service being rendered….”
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 subparagraphs (i) to (v) above, 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 provider who is a sole proprietor, or
- a representative for that representatives direct benefit; or
- a provider, who for its benefit or that of some or all of its representatives, aggregates the immaterial financial interest paid to its representatives.
From the foregoing provision it is evident that the Act does allow for fees or commission to be paid, but same must be received within the confines of the law.
One should also note that 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:
- giving preference to the quantity of business secured for the provider to the exclusion of the quality of the service rendered to clients; or
- giving preference to a specific product supplier, where a representative may recommend more than one product supplier to a client; or
- 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, and encourages the dealership to give preference to a specific product supplier.
The representative must act in such a manner that clients receive all information about all products on offer in order to make an informed decision. The Code places a duty on all providers and representatives to render financial services with, inter alia, a duty of care, skill and diligence.
Then there is of course the old perennial conflict of opinion on so-called “administration fees” and other non-commission earnings which many FSPs charge clients without informing them or getting the client’s written consent. Don’t be surprised if this comes up for discussion during an FSB on-site visit. Claiming that you were misinformed will be about as helpful as Hansie claiming that the devil made him do it.