The fair treatment of clients by certain product providers was recently questioned by Bruce Cameron in an article on causal event charges.
A key part of ensuring proper market conduct is a new regulatory regime called Treating Customers Fairly (TCF). It is what is called principle-based regulation, in that certain behaviour is expected that will result in the best outcomes for consumers.
The problem is that there is little definition and it is subjective, rather than objective.
There was a very brief (far too brief) discussion about TCF at the briefing session. Quite clearly, some of the representatives of financial services companies at the briefing see this type of regulation as an opportunity to continue to exploit consumers, rather than as an opportunity to treat you fairly, providing decent products that will enable you to retire financially secure.
I was reminded of this last week when a reader sent me a copy of a document from a life office in response to a request to transfer the proceeds of his maturing retirement annuity to another life office.
The covering page starts of by warning the client about the possible negative impact of cessation penalties, and advises that, in most instances, it is more cost effective and less time consuming to make use of options available under the current scheme.
It then proceeds to point out six possible reasons why the client needs to reconsider transferring his funds – this after stating that the maturity value is not subject to any costs concerning market adjustments, cessation levies or outstanding amounts.
In each of the six instances the client has to sign to acknowledge that he understands the implications, should he decide to transfer the proceeds. The form does not take into account that there are no penalties involved, and continues to hammer away as if there is.
In my view, this is nothing short of intimidation, aimed at coercing the client, who is often ignorant of the real facts, to leave his funds with the current provider, who will continue to reap the benefits of having the funds under administration.
At best, it is just slackness to not develop an appropriate form for the circumstances.
In this particular instance, the sum involved was a rather trivial R100 000. If you consider the volumes of maturing RAs, then 1 000 similar cases would result in R100 million, a sum not to be snubbed at. If one considers that the average maturity value is possibly substantially higher, then these tactics make sense from a provider perspective, but is certainly not in the best interests of clients.
Perhaps the provider needs to differentiate between early retirements and maturing annuities. Whereas the warnings referred to above may apply to early retirements, it is certainly not required for the latter. It will certainly assist intermediaries in fulfilling their disclosure duties if actual costs are contained in the document where early retirement values and penalties are concerned.
All it does, in the case of maturities, is to add to the already substantial paper burden.
The reference to retaining of the funds with the current providers also deserves comment. We regularly hear from intermediaries about long delays in finalising section 14 transfers. Yes, there are legal obligations, but do these cases receive the same treatment as other administrative requests?
The FSB is busy implementing standardised disclosure documents for the industry. It should perhaps include a review of maturity documentation as well.
The problem with TCF, as pointed out by Mr Cameron, is that it is rather subjective.
The objective of TCF is the FAIR treatment of clients – nothing more, nothing less.
In the discussion document titled “Contractual Savings in the Life Assurance Industry” the Regulator noted:
As long as investors do not understand how the products offered to them work and cannot effectively compare them to other products in the market, information asymmetries will imply that product and service providers can remain profitable without having to be competitive.
It also commented on the unfair burden carried by investors (causal event charges) and intermediaries (commission claw backs) in terms of the risk and cost involved when causal events occur, compared to the safeguards afforded the life offices.
While TCF may be subjective, the introduction of the Twin Peaks model of regulation will introduce much stricter disclosure requirements to ensure that clients understand what they are doing.
The onus to supply this will be on product providers.