INTERMEDIARY SERVICES AND RELATED REMUNERATION

Transcription

1 INTERMEDIARY SERVICES AND RELATED REMUNERATION Jonathan Dixon Deputy Executive Officer: Insurance Insurance Regulatory Seminar 19 October 2011 & 11 November 2011

2 Outline Objectives Background International Developments Definition of Intermediary Remuneration: Investment Products Remuneration: Risk Products Page 2 Next steps

3 Objectives Objectives of the review are to ensure that the definition of intermediary services and related remuneration structures in the insurance sector promote appropriate, affordable and fair advice and services to potential and existing policyholders; and support a sustainable business model for financial advice. Page 3

4 Background Long history of debate National Treasury Discussion Paper on Contractual Savings in the Life Insurance Industry, 2006; Intermediary status and remuneration of risk products described as Work Stream 2 issues; International developments UK Retail Distribution Review (RDR) and Australia; FAIS has strengthened conflict of interest provisions and is raising levels of professionalism and knowledge, but structural issues remain. Page 4

5 International Developments UK RDR Adviser fee model for investment products by end-2012; Can only describe as independent advice if undertake a comprehensive and fair analysis of the relevant market otherwise referred to as restricted advice ; Advice fee basis not prescribed product provider can faciltate payment in instalments; Applies to both IFAs and in-house agents; On-going charges linked to on-going service; Page 5 Sales through platforms (LISPs) must be consistent with these principles.

6 International Developments Australia Ban on commissions and any form of volume based payment for investment products from July 2012; Introduction of an adviser charging regime retail clients must agree to the fees and to renew (by opting in) to an adviser s continued services every two years; Advice fee basis not prescribed product providers can facilitate payments in instalments. Page 6

7 Definition of intermediary services SERVICES TO INSURER SERVICES TO POLICYHOLDER OUTSOURCED SERVICES BINDER SERVICES INTERMEDIARY SERVICES SERVICES TO POLICYHOLDER [not covered by binder fee or commission] [covered by binder fee] [covered by commission] [not covered by commission] Page 7

8 Definition of intermediary services Definition of services as intermediary in the insurance laws is broad covers all services rendered by an intermediary during the life cycle of a policy (advice, intermediation and administration) Differences between LTI, STI and FAIS definitions; No distinction between the remuneration payable when advice is provided or not; No distinction between the remuneration payable for the initial sale versus payment for on-going service; STI Act can charge policyholder fee, but not clear in return for what services. Page 8

9 Remuneration: Investment products Despite recent enhancements to FAIS Consumers may not be aware of or understand the advice service they are being offered specifically whether the advice is truly independent in the sense of relating to a wider range of products; Consumers may not pay adequate attention to how much they are being charged for advice and other intermediary services given the built-in nature of commission charges, and may find it difficult to compare costs across offerings; and Adviser recommendations may be influenced by the incentives paid by different product providers particularly given the unlevel playing field that applies across sectors. Page 9

10 Remuneration: Investment products FSB is considering introduction of a fee basis for investment product intermediary services Fee agreed to by client, corresponding ban on commission; Applies to all types of intermediaries, including in-house sales force; Ongoing fee for ongoing service; Product providers can facilitate ongoing fee deduction; To apply equally across sectors (CIS, LISPs); Independent advice to be defined in SA context; Page 10 Consideration of how to support advice to low-income sector.

11 Remuneration: Risk products FSB does not propose introducing a fee-based approach for risk business. However, following concerns remain Long-term insurance Up-front commission has contributed to high churn; Some direct costs to policyholders of miss-selling; Substantial indirect cost to policyholders due to lower persistency; Up-front commission does not incentivise ongoing service; Up-front commission model may distort intermediary advice and product sales; and Page 11 Equivalence of reward provisions inconsistently interpreted.

12 Remuneration: Risk products Short-term insurance On-going as-and-when commission incentivises retention and reduces the costs of switching between product providers; Industry practice is to charge policyholders a fee over and above commission, but not clear what services this is in return for over and above services as intermediary; No requirement that the policyholder explicitly agrees to the fee, nor clarity on the policyholder s right to cancel the payment of the fee if no adequate service is being rendered; and No consistency between the STI Act and LTI Act re. charging of a policyholder fee. Page 12

13 Remuneration: Risk products FSB supports a shift towards an as-and-when basis for commission payments for life insurance risk products; and the introduction of revised rules that clarify the basis on which remuneration may be received for the provision of various types of services. Page 13

14 Remuneration: Risk products Review to be informed by following principles Commission structures should strike a balance between supporting on-going service and adequately compensating intermediaries for up-front advice and intermediary services; Remuneration structures should promote a level playing field between independent intermediaries and in-house agents; An intermediary may not be remunerated for the same or a similar service twice; All policyholder fees must be motivated, disclosed and explicitly agreed to by the client; All remuneration must be reasonable and commensurate with the actual services rendered; and Page 14 Ongoing fees and commission may only be paid if ongoing advice and services are indeed rendered.

15 Next steps Request for contributions / inputs through industry associations; Will assist the FSB in formulating a comprehensive discussion document which can form the basis for extensive public consultation. Page 15