The FSB recently distributed a document entitled “Call for contributions: intermediary services and related remuneration in the insurance sector”. Moonstone’s request for permission to provide input was granted, and we aim to provide the regulator with a broader perspective than what is implied in the title and scope of the document.
The purpose of this letter is to solicit contributions from industry associations on possible refinements to the definition of intermediary services in the current insurance laws and reforms to related remuneration structures.
While some readers may very well echo the Bard’s question in the title above, it is actually quite important that the industry reaches clarity on this matter.
We agree with the view that there should be a standard definition of “advice” and “intermediary services”. Currently, there are conflicting definitions in the various insurance and FAIS Acts, which makes both compliance and regulation difficult.
- In terms of the FAIS Act, advice is defined separately from other intermediary services;
- In terms of the insurance laws, advice is not separately mentioned, but can be seen as forming part and parcel of “any act directed towards entering into” a policy (in the case of upfront advice) or “maintaining or servicing” a policy (in the case of ongoing advice), both of which are key elements of the definition of services as an intermediary;
- In terms of the insurance laws, the definition of services as an intermediary covers not only the initial act directed at entering into a policy, but also covers subsequent maintenance and servicing activities in relation to a policy; and
- In terms of the Long-term Insurance Act, the definition of services as intermediary also extends to “providing administrative services in relation to a policy”; in terms of the Short-term Insurance Act, the definition of services as intermediary extends in a similar way to “receiving, submitting or processing claims under a short-term policy”.
The definitions of services as intermediary in the insurance laws are broad and encompass all services rendered by an intermediary during the life cycle of a policy (advice, intermediation and administration). The remuneration payable in respect of these services is limited to regulated commission. There is no distinction between the remuneration payable
when advice is provided or not (although the FAIS Act contains certain requirements with respect to advice). There is also no separation between the remuneration payable for the initial sale versus payment for ongoing service; as a result, in a completely up-front commission environment there is a reduced incentive for the intermediary to provide such ongoing service.
The relationship between advice and intermediary services is therefore quite critical.
In our opinion, there is another very important reason why there should be a distinction between these two kinds of services to clients.
The introduction of regulation in October 2004 had the implicit purpose of converting the industry from a sales driven focus to an advice giving one. This failed to materialise, essentially because little or nothing was done to reward correct behaviour. On the contrary; remuneration on long-term savings were reduced substantially, contributing directly to a sharp decline in the country’s national household savings rate. This currently stands at -0.1%, which means that we spend more than we earn.
Our view, expressed in 2006, when these issues were first discussed, remains the same: there should be a clear distinction between advice and service, and fair remuneration for both.
Advice, which leads to the purchase of a product, should be rewarded in terms of an agreed method without any penalty if, for some reason beyond the actual advice process, the contract is terminated. By way of example: six months after a client makes an investment, there is a slump in the economy, and he cancels the investment. Not because the advice was wrong, but because of the economy. Why should the advisor have his “advice fee” clawed back? The only “penalty” should be no further service fee, as the contract is no longer valid.
Why should the advice for short-term insurance and healthcare products be treated differently? Yes, there is a much stronger service component in these products, but if you have to provide your time and expertise to assist the client to make an informed decision, then you should be rewarded for that separately, and upfront, followed by a service retainer paid for the duration of the contract.
If the regulator wants to make all cats grey, then they cannot allow a situation where ad hoc decisions, like those made in terms of healthcare advisors a few years ago, decimated the number of advisors, to the detriment of consumers.
The conflicting definitions in the various laws are indicative of the number of authorities who feel empowered to wield the whip in the industry. It is time to heed the words of Shakespeare.
“What’s in a name? That which we call a rose/By any other name would smell as sweet.”