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Update on Sign-on Bonuses

The swift reaction by the FSB to finalise this matter needs to be commended, particularly if one takes into account that the process, which was announced on 1 September, included consultation with the industry.

Board Notice 146 of 2014, which announces amendments to the General Code of Conduct, contains a number of changes to the original discussion document, including:

  1. The exclusion of new entrants to the industry from the prohibition of sign-on bonuses
  2. Applying the prohibition to only category I FSPs instead of across the whole spectrum and
  3. Removing the insertion of the definition of “outsourced” and the proposed amendment to the definition of “third party”.

The need for swift action is contained in the response by the Registrar to industry input:

“…sign-on bonuses exacerbate the risk of inappropriate bias toward tied distribution models, as well as the risk of incentive driven “churn” of financial products that may not be in customers’ interests. This conflict of interest is exacerbated by sign-on bonuses, where intermediaries are explicitly or implicitly incentivised to meet the production expectations of their new financial services provider (FSP). Recommending product replacements to the new FSP‟s product range is typically the most common way of meeting such expectations. In the long-term insurance sector in particular, this is further exacerbated by the opportunity to earn new up front commission on policy replacements.”

The Registrar points out that this practice has been a concern for a number of years. Various interventions to address the issue proved unsuccessful, hence the need to ban sign-on bonuses.

A glance at the summary of responses received confirms that a number of ingenious schemes were devised over the years to bypass the spirit of the regulations. The Regulator reacted to this as follows:

“A number of the comments received focussed on specific aspects of remuneration models and queried whether these would, or were intended to, fall within the scope of the prohibition on sign-on bonuses Although general responses to some of these scenarios are provided below, the Registrar urges providers who are in any doubt as to whether any specific practice may fall foul of the prohibition, to consult with the Registrar for guidance as to whether such practice constitutes a sign-on bonus or other breach of the General Code relating to conflicts of interest, before making or accepting any such offer.”

One of the issues raised by commentators concerns the acquisition of books of business from existing providers. The Regulator expressed the following view on this:

“The prohibition (on sign-on bonuses) does not restrict providers from selling or buying a business or a book of business provided fair value was paid or offered for it. However, an offer to a person to become a provider that is connected directly or indirectly to an offer to acquire a business or a book of business at price exceeding fair value is unacceptable and is regarded as a prohibited sign-on bonus.”

A general theme in the response to input from the industry concerns equal treatment of all intermediaries, as opposed to the current practice of providing special benefits to some only. The response to a question about whether an employee share-incentive scheme will be regarded as just another form of sign-on bonus elicited the following response:

“Sign-on bonuses must be distinguished from normal employee remuneration arrangements. A sign-on bonus is an incentive offered to induce a person to move to a new employer, which inducement is not consistent with the remuneration arrangements that apply equally to all other employees irrespective of those employees being providers or not.”

“In other words, the right to participate in a provider’s employee share incentive scheme will most likely not be regarded as a sign-on bonus if all the employees of that provider are entitled, on an equal level, to participate in the scheme. The Registrar has however become aware of recent recruitment offers in the market where share incentives appear to be specifically designed to achieve the same result as a more explicit form of sign-on bonus, and intends to scrutinise such models carefully. Providers are also reminded of the existing provisions in paragraph 3A(1)(b) of the General Code, which prohibits a provider from offering financial.”

If you have any doubts about existing or new remuneration models, it would be wise to make use of the invitation issued above to consult with the Registrar “…before making or accepting any such offer.”

Please click on the links below to download the relevant documents:

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