The FSB’s Information Letter 4 of 2014 discusses changes to the tax deductibility of income protection policies in view of changes announced in the Taxation Laws Amendment Act which became effective on 12 December 2013.
From 1 March 2015, premiums paid in respect of these policies will no longer be tax-deductible, but the proceeds will be tax-free. This is to bring these policies in line with other similar products.
Insurers are obliged to bring this to the attention of all policyholders before 1 March 2015. Very specific instructions are also given regarding future advertising to ensure clients understand the tax implications of income protection policies.
The information letter contains a very interesting view regarding claw-back commission:
In respect of long-term insurance, the Registrar has been informed that this amendment may result in some policyholders reducing the sum assured under their policies causing a reduction in premiums payable – which, in turn, may necessitate an adjustment and refund of commission already paid (claw back) in accordance with Regulations issued under the Long-term Insurance Act. A concern has been raised that this may result in intermediaries not providing appropriate advice, if the intermediary is influenced by the prospect of commission claw back. The flipside of this is whether it is appropriate for those intermediaries that do provide appropriate advice to have their commission clawed back.
The General Code of Conduct…requires financial services providers to at all times render financial services honestly, fairly, with due skill, care and diligence, and in the interests of clients and the integrity of the financial services industry. It is therefore assumed that intermediaries will act appropriately. The Registrar is not authorised to grant any exemptions from the Regulations issued under the Long-term Insurance Act. Further, the Registrar is of the view that an amendment to the Regulations is not justified.
Could this be a gentle hint from the Regulator to product providers to refrain from applying the claw-back provisions in this instance?
This is an excellent example of a situation where the advisor did absolutely nothing wrong in terms of advice or service, yet may be penalised as a result of a change in legislation.
Maybe the SABC licence slogan is appropriate here. Do not claw back commission – it’s the right thing to do.
Click here to download Information Letter 4 of 2014.