Will the short-term industry be immune from major RDR change?

Suzette Olivier, General Manager Legal at the South African Insurance Association

There has been a mixed reaction to the Retail Distribution Review (RDR) White Paper which has been issued by the Financial Services Board (FSB) for public comment. The FSB has stated that the purpose of RDR is not to damage the industry, but to rather enhance its sustainability. A number of industry bodies have pointed out that the reaction to the paper has been positive.

The document is extensive and far reaching. Jonathan Dixon, Deputy Executive Officer of Insurance at the FSB, said that the RDR White Paper has been carefully designed after much consideration and consultation around protecting the customer and improving the sustainability of the industry.

However, have industry stakeholders had the time to sit down and carefully consider the proposals in their entirety? Suzette Olivier, General Manager Legal at the South African Insurance Association, said that it is important not to look at these proposals in isolation. Olivier said the proposals should be considered in line with the new outcomes-based approach to regulation of the FSB created on an activity, risk-based and proportionate model of regulation.

Services provided by intermediaries

One of the starting points of RDR is the definition of the types of advice and services offered to the public. Olivier pointed out that these proposals relate to the activities of intermediaries. One of the first changes is that the insurance premium collection will be limited to qualifying intermediaries.

“There will also be the introduction of three forms of advice; namely financial planning, up-front product advice and ongoing product advice. Standards for wholesale financial advice will also be developed. This advice will be provided to employer groups, retirement funds or medical schemes,” said Olivier.

Industry relationships to be reviewed

Olivier pointed out that these proposals relate to the capacity in which an intermediary acts. The major change RDR hopes to achieve is changing the current nature of the relationships that brokers have with their clients as well as product providers. The view that there will be a direct distribution channel and an intermediated distribution channel will not change.

With direct insurers, lead generation is a major part of their businesses and an important component for their businesses is aggregator websites. Olivier warned that this will come under intense scrutiny by the FSB. “One of the purposes of RDR is to ensure that product aggregation and comparison services and investment platforms provide unbiased objective support to financial decision making and transactions,” said Olivier.

She added that there will also be an assessment on the advice provided by brokers. “Referrals and lead generation where the referral occurs between brokers, product suppliers or between brokers and product suppliers will be treated as a form of financial intermediation subject to conduct standards such as disclosures and ensuring customer consent.”

How independent are you?

Another big change RDR hopes to bring about is the question over the independence of certain advisers. The term Independent Financial Adviser (IFA) has been used in the industry to define an adviser who is not a tied agent. However, this adviser still only offers multiple products from a range of insurers. One of the questions the FSB wants to get clarity on is the criteria to describe what they constitute as an IFA. This includes the number of product types and products suppliers in which the adviser is able to provide advice in order to be described as independent.

This will be done through the introduction of three types of advisers: independent, multi-tied and tied. Olivier pointed out that it is important to note the proposed guidelines governing the definition of these types.

•  IFAs will offer advice on multiple products and must demonstrate that they provide advice across an appropriate range of products and product suppliers. They also need to make product recommendations free of product supplier influence.
•  Multi-tied Financial Advisers will be required to be licenced in their own right to provide multi-tied advice, or as representatives of juristic entities holding authorisation as multi-tied advice firms.
•  A Tied Adviser will be an adviser where the contractual, ownership or other relationship with a product supplier restricts the adviser to providing advice on the products of that product supplier only. 

It’s all about the money

If we look at RDR from an industry perspective, the main purpose of RDR is to establish what constitutes financial advice, and to make sure that brokers are appropriately compensated for giving this advice. 

The major change will be in the long-term insurance industry, but that does not mean that the short-term industry is immune from change. 

“The as-and-when remuneration model for the short-term industry will be retained. The current provision allowing for additional fees over and above commission, the so-called “policy fee” will be replaced by an advice fee that must be explicitly agreed upon by the customer upfront. This fee and the premium should be two different premiums,” said Olivier. 

She added that remuneration for selling will now be in the form of commission subject to commission caps. The current commission caps will also be reviewed. The current maximum commission payable in the short-term insurance industry is 12.5% on motor products and 20% of premium for all other products within the industry. 

The cancellation of short-term insurance policies by a broker will now be subject to additional conduct standards to ensure that the customer has consented to a replacement policy prior to the cancellation becoming effective and that the replacement policy is in the best interest of the customer. 

What does this all mean?

The short answer to this question is that we do not know exactly what it means for the broker until RDR is fully implemented in 2016. Regular discussions with the FSB have shown that industry participants who are forward looking and are already adapting RDR principles to their businesses will be well positioned to create a sustainable business come 2016. 

However, there are a few valid questions that brokers are asking. There is an old proverb which says that if something is not broken, then there is no need to fix it. Besides the mining industry, one of the corner stones of the South African economy has always been the insurance industry. It has a rich tradition, and companies do not survive for long in the industry if they do not have the best interest of their customers at heart. If the industry has been thriving for such a long time, why change it? 

Another question is the possible confusion that the new class of broker will bring to the industry. Where does the line exist between being independent or multi-tied? And will these standards last or will the FSB have to continuously shift the goalposts? 

The third question is the separate instalment that needs to settle the broker’s commission. Let’s say for instance your policy instalment is R700 and the commission is R50, two payments go off. If a policyholder cancels the policy he will not be paying the R700, but if he does not cancel the commission instalment, the broker will be getting commission for a policy that does not exist.

Editor’s Thoughts:
While the changes to the short-term industry are not as significant as the long-term industry, there will be some major changes. The industry as a whole needs to engage with the FSB and make its voice known before the end of the RDR comment period in March 2015. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.