The FSB FAIS Conference earlier this month provided the latest thinking on a number of important aspects related to the short-term industry.
Binders and outsourcing
Leanne Jackson pointed out that a significant risk of conflict exists where a Registered Financial Adviser (RFA) also earns binder or outsourcing fees from suppliers whose products it recommends. For this reason, risk mitigation measures are being introduced through the insurance Policyholder Protection Rules and regulatory changes.
This function is currently regarded as part of “services as intermediary” and subject to current commission caps, with no separate remuneration payable for performing this function.
In the light of feedback received, the FSB is of the view that premium collection should be seen as an outsourced service on behalf of the insurer for which a fee can be charged. The intention is to implement this, but only once qualifying operational criteria for premium collection are set. A cap on fees will very likely apply, and the intention is to implement this in Phase 2 of RDR.
Stricter criteria for earning s.8(5) fees, including admin charges, are being introduced through Phase 1 STIA Regulation changes.
The next step will be to confirm new short-term commission caps and the setting of standards (not caps) for advice fees.
The Regulator is still considering whether separate caps should be set for remuneration for selling vs. remuneration for ongoing policy servicing, or whether both should be included in a combined cap. Whatever the decision, both will be payable as-and-when premiums are paid.
Any future commission caps and models will be informed by the technical activity segmentation work which is currently underway. The knock-on effect of other remuneration caps will be a key consideration.
The initial findings of activity segmentation include:
- Significant duplication and overlaps in activities for which intermediaries are remunerated
- Inconsistent interpretation of differences between “services as intermediary”, outsourced activities and binder activities
- The current remuneration levels for binders and outsourcing are largely based on prevailing market practice. There is little evidence of robust activity-based costing linked to actual cost of activities, as prescribed by the regulator.
Implementation of the above is scheduled for Phases 2 and 3 of the RDR process. Appropriate transitional and phasing-in measures will be aligned to the implementation of binder and outsourcing fee caps and enhanced conduct standards.