How much justification is there for certain payments, over and above commission? Are you within the law in terms of certain levies you charge your clients?
Billy Seyffert, Head of Compliance and Legal Services, recently asked me whether I was aware of such a fee on my short-term cover. I was not, but when I checked, there it was. A monthly deduction of 1.2% of my premium, over and above the commission, which is also clearly indicated in the addendum to the contract.
Let me be very honest with you: I read through the recent circular from the FSB on what may, and what may not be charged by, or paid to, intermediaries. I then tried to study Directive 159 (A) (i) which it refers to.
Rather than try and explain my insight, or lack thereof, let me share with you how the editor of Personal Finance experienced it.
: …the Financial Services Board (FSB) sent an information letter to the short- and long-term insurance industries informing them (at least I think it did – the language is pure legalise) that they cannot set up structures, such as Netcos, into which payments over and above the regulated commissions can be made to FSPs for selling products.”
The Personal Finance article focuses chiefly on the practice of paying an independent advisor an inordinate amount of money to switch his allegiance to a specific product house. What makes matters worse is that, very often, most of this business was already placed with that particular product provider.
Even worse are instances where this switch also involves “converting” existing clients to the new religion which involves a whole new set of commissions. I like to call this “institutionalised churning”.
Relative newcomers to the scene used this practice to get a foothold in the market, with no apparent action being taken against them. Mr. Cameron’s article Gobbledygook makes it easier to pick your pocket put it very bluntly:
The letter (to the industry) should have said: “Listen industry. We know you are paying amounts, often substantial, in excess of regulated commissions. Stop it now or we will inflict a big fine, and we will withdraw your licence. These practices are unacceptable and not in the best interests of consumers.”
And then the FSB should show some backbone. It should go out there and conduct proper inspections. If a company is doing the wrong thing, it should be hauled before the FSB’s Enforcement Committee, the regulator’s administrative justice body, with the recommendation that a multi-million-rand fine is imposed and that the company’s licence is withdrawn or suspended. The fines of R100 000 that are handed down are not going to make a difference to companies with turnovers of billions of rands.
If the regulator expects the industry to be transparent, which includes using understandable language, then it should also use plain language. Gobbledygook allows investors to be ripped off.
While I wait for the applause to die down, let me rattle the cage of some readers too. If you are charging extra fees, it has to comply with specific guidelines to be legal.
We recently conveyed these rules to our compliance clients for consideration, and suggest that you request expert opinion, if you charge such fees.
There is a blurring of the lines between fees charged for “services as an intermediary”, and those which you are already being paid commission for. The warning from the FSB also raises concerns about practices where an FSP is being remunerated for the same activity or service more than once.
My own example mentioned above, is a good example of this. Is there a justification for the charging of this fee, or is it “something we have been doing for years”? This does not make it legal, does it?
While the amount involved in my case may not be huge, multiply this with say 300 clients, and you will see that it adds up to a substantial amount, year after year.
Or, like someone once said:
Mens kan nie net ‘n bietjie swanger wees nie.