INTERMEDIARY SERVICES AND RELATED REMUNERATION

Transcription

1 INTERMEDIARY SERVICES AND RELATED REMUNERATION JONATHAN DIXON DEPUTY EXECUTIVE OFFICER: INSURANCE Insurance Regulatory Seminar 22 November 2012

2 Agenda 1. Summary of call for contributions 2. Summary of comments and initial feedback: General comments Definition of intermediary services Remuneration: Investment business Remuneration: Long-term insurance risk business Remuneration: Short-term insurance business 3. Way forward 4. Additional thoughts from industry panel 5. Questions

3 Summary of call for contributions Issued 11 Nov 2011 for input by 30 March 2012 Objectives: Promote appropriate, affordable and fair advice and services Support a sustainable business model for financial advice Informed by international developments in the UK and Australia (and now other countries, e.g. India) Focuses on insurance sector, but made point that any future recommendations on remuneration of investment business should apply across sectors Initial thoughts, not recommendations 3

4 Summary of call for contributions (continued) Definition of intermediary services: Should LTI & STI Act definition be aligned with FAIS? Separation into component parts? Remuneration for investment business: Move to fee basis Intermediaries must disclose whether they provide independent advice or restricted advice Possible different approach for low-income sector Periodic renewal of intermediary ongoing services Remuneration model for LISPs needs review 4

5 Summary of call for contributions (continued) Remuneration for life risk business: Shift towards an as-and-when basis for commission Ongoing commission may only be paid if ongoing advice and services are rendered Strengthening of equivalence of reward provisions Review of remuneration for replacement policies Remuneration for short-term insurance: As-and-when commission to continue Policyholder fees must be explicitly agreed to by client Policyholder fees must be reasonable and commensurate with actual services rendered No duplicate remuneration for providing specific service 5

6 Summary of comments and initial feedback 6

7 General comments Differing views no clear consensus on many of the issues General comments received include: Review of remuneration models should be seen as only part of a solution to fair outcomes Need to recognise SA circumstances in applying international developments Need to avoid any unintended consequences of reducing number of advisers or changing mix between independent and tied distribution 7

8 General comments (feedback) FSB initial views: Agree that reviewing remuneration models is only part of the solution: Project to be broadened into a full cross-sector Retail Distribution Review (RDR) Distribution issues need to be reviewed as part of the broader TCF framework May have implications for FAIS: Review of respective roles and responsibilities of product providers and FSB w.r.t. oversight of intermediaries in light of TCF Possible further differentiation of licence regime for tied / multi-tied agents of product suppliers vs. IFA s / independent intermediaries 8

9 Definition of intermediary services Strong support for consistent sets of definitions in the regulatory framework, although different views on how to do this Separating out components was supported different approaches to the issue: Per stages in the process financial planning vs. product advice vs. intermediary / admin services Per timelines initial services vs. ongoing services Per relationship services for customer vs. services for supplier With different combinations of fees, commission or both proposed for each approach 9

10 Definition of intermediary services (continued) Financial planning: Argument made that this can be provided by both independent advisors and by representatives Product advice: Differentiation between independent advisors and representatives? Lead generation / referrals should be excluded from definition 10

11 Definition of intermediary services (feedback) FSB initial views: Agree that consistent definitions should be developed Term intermediary services not always appropriate Will consider proposal to have separate components: Possible differentiation between financial / risk planning vs. product advice (with definitions) For product advice, possible differentiation based on range of products advised on Appropriate remuneration for different components and/or different types of advice and other services Referrals: may need to distinguish between different lead / referral payers and payees 11

12 Remuneration: Investment business Mixed views on whether commission undermines independence of product advice However, more support for level playing field Some support for shift to fee basis Others argue against an all or nothing approach Independence of product advice: advisor must be able to look at product suitability across a range of providers But whole of universe not possible Proposal that if don t meet criteria, then must disclose that offering restricted product advice 12

13 Remuneration: Investment business (continued) Different approach for low income sector? Different schools of thought 1. No need for distinction between advice and intermediary services keep commission 2. Also separate advice (for a fee) from intermediary services (for commission) Doubts whether a fee model is sustainable in this market 13

14 Remuneration: Investment business (continued) Fees: Basis should be flexible Fees should not distinguish between product types Fees should be regulated/capped Differing views on whether provider should be required to provide facility for deducting fee instalments Periodic renewal of on-going service: Supported, but not on an opt-in basis 14

15 Remuneration: Investment business (feedback) FSB initial views: Still in favour of fee basis for investment business: Not convinced by some arguments put forward for commission basis Only solution that appears to meet level playing field criteria across sectors Independence of advice: Agree whole of universe not appropriate will have to develop criteria Fee basis: Details to be worked out Further consideration of basis for low-income sector Need appropriate definition / criteria for low income 15

16 Remuneration: Long-term insurance risk business Evidence that up-front commission drives misselling and churn is challenged Argument made that majority of advice and intermediary services occurs up-front Annuity income from as-and-when commission can create capital value, but may also create barrier to entry Shift to as-and-when cannot happen overnight; would have to be phased-in 16

17 Remuneration: Long-term insurance risk business (continued) Replacement policies need to distinguish between good and bad replacement (and difficulty in doing so) highlighted More emphasis should be placed on the replacement process and enforcement thereof Split views on whether to ban commission on replacements or to only pay as-and-when Minority view that normal commission should be paid Equivalence of reward Stark differences on need to strengthen provisions 17

18 Remuneration: Long-term insurance risk business (feedback) FSB initial views: Accept argument against full as-and-when commission Recognise much work done up-front Further work needed on: Balance of remuneration between up-front and ongoing Basis of remuneration for product advice Possible differentiation for low-income sector Equivalence of reward to be reviewed; will be informed by other decisions 18

19 Remuneration: Long-term insurance risk business (feedback) FSB initial views: Replacement policies: While evidence of churn was challenged, this is difficult to reconcile this with the general view that some level of intervention regarding replacements is warranted Replacement process / practices need additional scrutiny Agree that some form of remuneration differentiation may be necessary for replacement policies, depending on overall decisions on remuneration model as well as trigger for replacement e.g. possible differentiation between entitlement to repeat up-front commission by same vs. different intermediary on effectively the same premiums Further work needed on determining link between policy churn and adviser churn competition for distribution arguably driving churn (exacerbated by recruitment 19 incentives / production targets)

20 Remuneration: Short-term insurance Similar comments raised regarding separation of components financial planning / risk planning; product advice; intermediary services Nature of intermediary services seen as on-going hence support continued as-and-when commission Should a separate fee be negotiated with client for risk planning? product advice? A separation of advice will need an adjustment to commission rates, otherwise paying the same for less 20

21 Remuneration: Short-term insurance (feedback) FSB initial views: General agreement with comments received Will review components of advice and intermediary services, as well as which should be remunerated by means of commission and which paid by means of policyholder fee Definitions will also be informed by binder regulations and outsourcing directive 21

22 Way Forward Discussion Paper to be drafted in Q Regulatory recommendations to be aligned with broader TCF regulatory framework proposals especially in relation to TCF Outcome 4 (suitable advice) Discussion Paper be published for comment May require legislative / regulatory amendments Transition periods will be provided for to allow time for implementation 22

23 Panel comments & Questions 23