FSB and Old Mutual agree on revised model for outsourced broker consultant services

The Financial Services Board (“FSB”) and Old Mutual Life Assurance Company of South Africa (“Old Mutual”) have reached an agreement about prerequisites for Old Mutual’s outsourced broker consultant services (SERVCO model).

This follows a directive issued by the Registrar of Long-term Insurance (“Registrar”) to Old Mutual to correct a breach of the principles relating to conflicts of interest and remuneration contained in Directive 159.A.i (LT & ST), which sets out the requirements that insurers must comply with when outsourcing an aspect of their insurance business to another person (as reported in the FSB media statement dated 21 May 2013).

Old Mutual has engaged with the Registrar in a positive and constructive manner demonstrating its commitment to fair policyholder outcomes.

A remedial plan has been agreed to by the Registrar and Old Mutual which will result in the SERVCO agreements being amended to give effect to the principles contained in the Directive. Specifically:

• Ensuring that SERVCOs and brokerages (including their representatives, and related or inter-related parties) cannot directly or indirectly hold or obtain shares or any other financial interest in or from each other;

• Ensuring that SERVCOs do not employ or otherwise engage brokerages (including their representatives, and related or inter-related parties) for purposes of rendering the broker consultant services; and

• Restructuring SERVCO remuneration to meet the requirement that the fee basis is not just volume related, but also has a quality component, and is commensurate with the  functions or activities outsourced, as required under the Directive.

No enforcement action in the form of a financial penalty will be instituted against Old Mutual in light of the technical nature of the breach and the cooperative manner in which Old Mutual has undertaken to immediately correct its SERVCO model.

The Registrar is also engaging with other insurers that have similar structures and remuneration in place to ensure that the principles relating to conflicts of interest and remuneration as embedded in the Directive are implemented consistently across the insurance industry.