AMENDMENTS TO REGULATIONS MADE UNDER THE SHORT-TERM INSURANCE ACT AND THE LONG-TERM INSURANCE ACT

Transcription

1 AMENDMENTS TO REGULATIONS MADE UNDER THE SHORT-TERM INSURANCE ACT AND THE LONG-TERM INSURANCE ACT REQUEST FOR INPUT TO INFORM THE FINANCIAL SERVICES BOARD S 1. INTRODUCTION SUBMISSION TO THE NATIONAL TREASURY In December 2016, National Treasury (NT) with the support of the Financial Services Board (FSB) published for public comment the proposed amendments to the Regulations made under the Long-term Insurance Act, 1998 ( LTIA ) and the Short-term Insurance Act, 1998 ( STIA ) ( draft Regulations ) to give effect to a number of conduct of business reforms, including reforms to give effect to the Retail Distribution Review ( RDR ) (specifically the Status Update: RDR Phase 1 published on 10 November 2015) and the draft amendments to the Binder Regulations published on 11 July 2014 for public comment until 1 September 2014, the finalisation of which was deferred until the publication of the detailed RDR Phase 1 proposals. The due date for submission of comments was 22 February An extension was granted to a number of commentators up until mid-march A total of 40 commentators provided feedback on the draft Regulations through the formal consultation process. The NT in conjunction with the FSB undertook a comprehensive review of all comments received. A particular focus of the comments received was on the amendments relating to the introduction of binder fee caps for financial advisers. To help inform an alternative proposal, the FSB worked with the main commentators on this issue namely the South African Insurance Association (SAIA), the Association for Savings and Investment South Africa (ASISA), the Financial Intermediaries Association (FIA) and the South African Underwriting Managers Association (SAUMA) to provide further substantive insight into how activities are segmented and to make proposals on what would constitute reasonable and commensurate remuneration for the performance of such activities so as to mitigate any risk of the remuneration potentially resulting in conflicted advice. Based on the comments received and the further technical input from the main commentators, the FSB is in the process of formulating proposed revisions to the draft Regulations to be submitted to the NT for consideration. In this regard, the FSB would like to request commentators to provide inputs on the proposed revisions to the draft Regulations that will inform the FSB s submission to NT. Page 1 of 8

2 2. FORMAT OF PUBLICATION AND SUBMISSION The document reflecting the proposed revisions to the draft Regulations builds on the December 2016 version of the draft Regulations. 1 All proposed amendments to the existing Regulations contained in the December 2016 draft Regulations were accepted, and only the further proposed revisions are reflected in tracked changes. For details of the original draft amendments to the existing Regulations please refer to Annexure C circulated with this document. Commentators are requested to focus their further inputs on the proposed revisions to the draft Regulations that are reflected in the document, although all further inputs on the draft Regulations will be considered. The NT will publish a detailed comment matrix responding to all comments received on the draft Regulations when it publishes the final amendments to the Regulations. Written inputs on the revised draft Regulations should be sent to FSB.INSDraftRegsInput@FSB.co.za by 4 August COMMON THEMES Certain proposed amendments elicited a lot of comments and interest from stakeholders and several of the proposed revisions to the draft Regulations were informed by these comments. Common themes and the rationale for the proposed revisions are provided below. 3.1 THEME 1: REMUNERATION Binder fees The draft Regulations gave effect to Proposal ZZ of the RDR, which proposed binder fee caps for non-mandated intermediaries ( NMI ) authorised to render advice as defined in the Financial Advisory and Intermediary Services Act of 2002 ( FAIS Act ) ( NMI advisers ) or their associates. This elicited extensive stakeholder comments, particularly from players in the short-term insurance sector. Most comments argued against capping and raised concerns that a one size fits all cap is inflexible and would not cater for the wide variations in the actual costs of binder services in different cases. Concerns were also raised that the fee cap percentages proposed in the draft Regulations were not adequately motivated, with some stakeholders arguing that the proposed caps were unreasonably low. The FSB remains of the view that the current principle-based approach to setting binder fees has proven inadequate to address the significant conflicts of interest that arise when an NMI that provides advice also performs binder functions. Considerable evidence points to a wide range of interpretation of the current principles among insurers that has led to persistent conflicts of interest, resulting in business being placed by NMI advisers that also perform binder functions in a way that is influenced more by conflicted incentives than it is by the best interests of customers. 1 Explanations are provided in comment boxes for all proposed revisions to the draft Regulations. Page 2 of 8

3 In order to give effect to the core principle that binder holders should not be remunerated differently by different insurers for performing similar activities, further engagement took place with the main industry commentators to explore a solution that would achieve a common understanding across role players on what would constitute a reasonable and commensurate fee for specific binder and binder-related activities and detailed criteria that may be considered by the FSB when determining whether remuneration meets these principles. Following further industry proposals, the FSB believes that the introduction of revised caps on binder fees will mitigate the inherent conflicts of interest for binder holders who are NMI advisers. A robust analysis of substantive inputs received from industry associations and the data received through Information Request 3 of 2016 were performed and, based on the outcome of such analysis, the FSB revised the proposal on binder caps for NMI advisers for both short-term and long-term policies as follows: BINDER FUNCTION Enter into, vary or renew a policy (section 48A/49A(1)(a)); Determine the wording of a policy (section 48A/49A(1)(b)); determine premiums under a policy (section 48A/49A(1)(c)); or determine the value of policy benefits under a policy (section 48A/49A(1)(d)); or any combination of the above MAXIMUM FEE PAYABLE 5% Settle claims under a policy (section 48A/49A(1)(e)) 4% TOTAL 9% This proposal is still subject to further technical work, specifically in as far as it relates to functions (a) (d). The draft Regulations proposed that the outsourcing of binder functions (b) (d) to NMI advisors or their associates be prohibited. Additional substantive inputs from industry associations highlighted that NMI advisers generally does not perform full-fledged underwriting functions (i.e. functions (b) (d)), but they do however perform limited underwriting functions- typically applying discretion pertaining to policy benefits, wording and premiums based on pre-set criteria determined by the insurer. To accommodate the limited underwriting functions typically performed by NMI advisers, the prohibition on NMI advisers performing functions (b) (d) has been removed and fee caps will be provided for NMI advisers performing these functions. The intention is therefore to propose a further split between the (a), and (b) (d) functions. It is at this stage unclear what exactly this split should be and inputs in this regard are requested from commentators. The current thinking is to propose one of the following three options: BINDER FUNCTION OPTION 1 MAXIMUM FEE PAYABLE OPTION 2 MAXIMUM FEE PAYABLE OPTION 3 MAXIMUM FEE PAYABLE Enter into, vary or renew a policy section 48A/49A(1)(a) 3% 3.5% 4% Page 3 of 8

4 Determine the wording of a policy (section 48A/49A(1)(b)); determine premiums under a policy (section 48A/49A (1)(c)); determine the value of policy benefits under a policy (section 48A/49A (1)(d)); or any combination of the above 2% 1.5% 1% TOTAL: 5% 5% 5% At this stage the binder fee caps proposed for long-term policies are the same as for shortterm policies. ASISA recommended a sliding scale approach to capping binder fees for longterm policies, but due to a lack of data and testing of the proposal, this proposed approach requires further interrogation. Further detail in this regard was requested from ASISA and the inputs to be received could potentially lead to a revised approach to the binder fee caps for long-term policies Fees for policy data administration services To ensure consistency, it was deemed prudent to align the definitions of services as intermediary across the LTIA and STIA Regulations through the draft Regulations. These proposed amendments elicited a number of comments, amongst other things that the draft STIA Regulations extended the definition of services as intermediary to include administrative services which, according to the commentators, did not previously fall within such definition. It was argued that administrative services are functions which are outsourced and are not intermediary services and therefore the proposed definition would considerably increase the functions which an intermediary is required to perform without any corresponding compensation for services rendered. Having considered all comments received and concerns raised, the FSB is proposing that the definition of services as intermediary under both the LTIA and STIA Regulations should not be aligned at this stage, pending further activity segmentation work to be done during later RDR phases to ensure that a holistic approach to remuneration is adopted. The existing definition of services as intermediary in both the STIA and LTIA is broad and includes both administrative type services and advice. Based on the existing definition of services as intermediary, policy data administration services ( PDAS ) have been explicitly included in the definition of services as intermediary as they cannot be treated as outsourcing as was initially proposed in the draft Regulations. For purposes of remuneration, PDAS will be carved out from the normal commission regulations and an additional fee may be paid for PDAS if the relevant operational requirements are met. Fees paid in respect of PDAS performed by NMI advisers may also create a conflict of interest and for this reason it was proposed that fees paid in respect of PDAS are also capped. The majority of commentators raised concerns with the fee cap proposed. They argued that the proposed 2% fee cap is too low, does not adhere to the principle of commensurate remuneration and was not informed by scientific evidence. Page 4 of 8

5 The initial 2% fee cap for PDAS aligned to the binder fee cap for performing function (a). PDAS is in many ways similar to function (a) the only difference being that PDAS are services directed towards entering into a policy whilst binder function (a) entails the actual entering into of the policy on behalf of the insurer and the operational requirements are very similar. Accordingly, the fee cap for PDAS will only apply to NMI advisers; and will largely align to the new proposed cap on binder fees for binder function (a) payable to NMI advisers. The only outstanding issue under consideration with regard to PDAS is whether or not the PDAS fee cap should be the same as or slightly lower than the fee cap applicable to function (a). This will depend on whether there are any services performed in respect of function (a) that falls outside of the services that are performed in respect of PDAS. Inputs from stakeholders are requested to indicate whether or not there is a material difference between services performed in respect of function (a) and PDAS which might justify a different fee General principles for determining remuneration The draft Regulations inserted a new Part setting out general principles that must be applied by an insurer when paying remuneration. The proposed principles were essentially the current remuneration principles contained in Directive 159.A.i (Outsourcing). As Directive 159.A.i will continue to exist, the general principles for determining remuneration contained in the draft Regulations have been amended to apply to any remuneration paid in accordance with the regulations, i.e. intermediary services (including PDAS) and binder functions. Directive 159.A.i will continue to govern remuneration paid for outsourcing other than binder functions. Concerns were raised that the principles are too vague and could lead to inconsistent application by industry role-players. To address these concerns and to ensure the consistent application of these principles, the FSB proposes to include detailed criteria that must be applied when applying the general remuneration principles. The Registrar would when assessing compliance with these principles, consider the extent to which an insurer could demonstrate that it has appropriately taken the criteria into account, including the robustness of any activity-based costing or any other assessments done by the insurer to ascertain the reasonableness of the remuneration being paid. To further mitigate the risk of insurers paying an independent intermediary or representative additional fees for a service, function or activity that ostensibly rather falls within the definition of services as intermediary or constitutes a binder function or incidental activity, a requirement has been inserted that an insurer must obtain approval from the Registrar before it pays an independent intermediary or a representative any fee for a service which in the opinion of the insurer does not constitute services as intermediary or binder functions. The Registrar will only approve the payment of such fee if the Registrar is satisfied that the service for which the fee is being paid does indeed not constitute services as intermediary or binder functions. 3.2 OPERATIONAL REQUIREMENTS The draft Regulations provided for operational requirements that apply in respect of both binder functions and PDAS. The operational requirements broadly entail the following: Page 5 of 8

6 3.2.1 Frequency of data exchange In terms of the draft Regulations binder holders and PDAS providers are required to provide the insurer at least every 24 hours with timely, comprehensive and reliable data to ensure that the insurer is able to comply with any regulatory data management requirements. There was a divergence of views with regard to the 24 hours data exchange requirement. Some commentators believed that it is too onerous while others were in support of the requirement. Those in support of the requirement argue that the requirement will ensure that insurers have reasonable access to policyholder information to assist them, in addition to meeting regulatory data management requirements, in assessing their risks under the policies. Some commentators also raised questions regarding the practicality of complying with this requirement for funeral and other assistance policies. The FSB acknowledges that it might not be practical to comply with the data exchange requirement for funeral and assistance business policies because of the lack of system sophistication in many of the distribution channels distributing these policies. For this reason it is proposed that the 24 hour requirement in respect of funeral and assistance policies be changed to a monthly data exchange requirement. It is, however, proposed that the 24 hours data exchange requirement for all other policies be retained as this is necessary to mitigate risks to both financial soundness and conduct of business. Some commentators raised concerns about industry s readiness to implement this requirement. It is argued that sufficient implementation period will be needed for insurers to achieve this. The FSB agrees that the industry needs time to be fully compliant with the requirement and has therefore proposed an extension to the effective date for this requirement (see theme 3 on transitional arrangements) Integration and access on demand requirement The draft Regulations also required binder holders and PDAS providers to ensure complete integration between the information technology system of the insurer and their system and to also ensure that the insurer has continuous access to accurate, up-to-date, complete and secure policy and policyholder data. This elicited a number of comments. The majority of commentators wanted clarity on what is meant by the terms complete integration and continuous access. The FSB acknowledges a need to provide clarity on these terms and as a result has proposed amendments that will more clearly express the intention of these requirements. The requirements have essentially been split in two: access on demand requirement - despite the 24 hour data exchange requirements, an insurer must at all times be able to access data held by a binder holder or PDAS provider when it so requests. A requirement has been inserted to give effect to this principle. integration requirement The proposed revisions to the draft Regulations include a definition for integration which attempts to clarify that the systems of the insurer and the binder holder/pdas provider must be able to talk to each other and exchange of information should not lead to a duplication in work (e.g. double capturing). This will entail that the format of data must be readily recognisable and capable of being Page 6 of 8

7 meaningfully utilised immediately by the core insurance and reporting systems and applications of the insurer, including for specified regulatory purposes. 3.3 GOVERNANCE, OVERSIGHT AND REPORTING REQUIREMENTS The draft Regulations require an insurer to meet a range of governance, oversight and reporting obligations in relation to the binder holder and binder activities. It heightened the focus on the ability of binder holders to perform binder and binder related functions efficiently and effectively. The draft Regulations also focused on the insurer s ability to oversee the activities of the binder holder. The draft STIA Regulations also proposed that the outsourcing of binder functions in respect of commercial lines policies to NMI advisers be prohibited as the appropriateness of shortterm insurers entering into binder agreements with NMI advisers (as opposed to underwriting managers) for commercial lines business has been questioned in the past, specifically because outsourcing core underwriting and/or benefit design to a potentially conflicted financial adviser in respect of products that require specialist skills introduces unnecessary underwriting and reinsurance risk. A lot of comments were received on this prohibition and there is a strong view amongst the industry that NMI advisers should continue to bind insurers on commercial policies, provided they have the required technical expertise. Considering all comments received on the above themes, the FSB continues to propose that risks be mitigated through more robust governance and oversight requirements, including requirements that must be met before an insurer outsources binder functions. Amongst other things, it is proposed that when an insurer intends to enter into a binder agreement it must be satisfied that the outsourcing of the binder function will ensure the delivery of improved outcomes for customers, will not result in a duplication of administrative efforts or costs and will not impede the insurer s ability to manage its conduct of business risks. In addition, before and after entering into a binder agreement, an insurer will need to demonstrate that it has the ability and resources necessary to ensure effective oversight of the binder holder at all times and that it is satisfied with the binder holder s governance and internal control framework, fitness and propriety and technical and operational ability. An insurer will also be required to regularly review and act upon the information received from the binder holder to ensure delivery of fair outcomes to policyholders on an ongoing basis. Based on this approach, the FSB is also proposing that the outsourcing of binder functions in relation to commercial lines policies to NMI advisers be permitted, provided that the NMI meets the governance and operational requirements, including relevant technical expertise. In terms of reporting, it is proposed that insurers must notify the Registrar when entering into any new binder or PDAS agreements. 3.4 TRANSITIONAL ARRANGEMENT - BINDER FUNCTIONS To more appropriately accommodate some of the concerns that have been raised and to provide industry with an opportunity to transition into the new requirements, specific Page 7 of 8

8 transitional provisions are proposed in respect of the new requirements that apply to binder functions. The transitional provisions will apply to various requirements based on when the binder agreement was entered into: i. Agreements and/or policies entered into before 1 January 2017 The requirements on binder fee caps for NMI advisers in respect of binder agreements entered into before 1 January 2017 will become effective 12 months after the effective date (i.e. all binder agreements entered into in that period must be changed to align to the new requirements within 12 months after the Regulations become effective) All governance requirements will become effective immediately Operational requirements will become effective within 24 months after the effective date. This approach aligns with further work that is currently being performed by industry workstreams on data governance. ii. Agreements and/or policies entered into between 1 January 2017 and the effective date This time period has specifically been provided for to mitigate the risk of a substantial number of binder agreements being concluded between the publication of the draft Regulations and the finalisation of the final amendments to the Regulations, with the purpose of arbitraging the opportunity to enter into agreements at higher fees. The requirements on caps for binder fees on binder agreements entered into within this period will become effective 6 months after the effective date (i.e. all binder agreements entered into in that period must be changed to align to the new requirements within 6 months after the Regulations become effective) The governance requirements will become effective immediately Operational requirements will become effective within 24 months after the effective date. This approach aligns with further work that is currently being performed by industry workstreams on data governance. iii. Agreements and/or policies entered into on or after the effective date The requirements on fee caps and governance requirements will become effective on the effective date for all new agreements Operational requirements will become effective within 24 months after the effective date As PDAS is a new service identified in the Regulations for which additional remuneration can now be received, no transitional provisions will apply to requirements relating to PDAS and all requirements on caps, operational requirements and governance requirements will become effective on the effective date. Page 8 of 8