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FSB directive clarifies industry position on causal event charges

12 November 2013 Jonathan Faurie
Jonathan Faurie, FAnews Journalist

Jonathan Faurie, FAnews Journalist

In an effort to improve the number of South Africans who can retire comfortably, with a large enough savings net, Government has aggressively been embarking on a retirement reform programme which will have a significant impact on the retirement industry.

One of the biggest changes will be implemented by the Financial Services Board (FSB) who has clarified its position on the maximum charges a client can expect from financial service providers when it comes to causal events.

Industry Context

At the beginning of the year, Government noticed that one of the characteristics of the South African retirement industry is the fact that it is common for investors to move their investments from one company to another as it seeks to find the saving vehicle which will benefit them the most come retirement. This is known as a causal event.

Product providers are taking advantage of this and are imposing charges on each and every causal event; which they are perfectly entitled to do as it is permitted by the Long Term Insurance Act of 1998 (the Act).

This is contrary to what government hopes to achieve by implementing its retirement reform programme, which it is currently in the procgress. Noticing that this is the case, the FSB issued a directive towards the end of October which would reflect the manner in which the registrar will apply parts 5A and 5B of the regulations made under section 72 of the Act.

Societal impact

While it is true that product providers may implement causal event charges, the Act does provide guidelines which highlight both a minimum as well as a maximum charge. It is then up to the product provider to price its charge within this range.

The FSB points out that most product providers unfortunately opt to implement the highest possible charge for each transaction. By publishing this directive, the FSB hopes to change the mind set of product providers who are quick to implement these charges. The regulator points out that not only do these charges go against Government's objective of increasing the number of people who can retire comfortably, but they also may infringe the principles set out by the Treating Customers Fairly regulation, which will officially be imposed on 1 January 2014.

Policyholders stand to lose up to 40%, 35%, 30% or 15% of their expected policy values if the highest possible charge per transaction is applied. This practice has brought the industry into disrepute and unsustainable from a policyholder point of view. Policyholders, which are close to retirement age, will not be able to recover these types of losses.

The FSB objectives

Parts 5A and 5B of the regulations made under section 72 of the Act state that: The Minister may make regulations not inconsistent with this Act— (a) prescribing all matters which are required or permitted by this Act to be prescribed by regulation; (b) limiting the amount which and the extent to which a long-term insurer may invest in particular kinds and categories of assets, prescribing the basis on which the limit shall be determined and defining the kinds or categories of assets to which the limit applies.

To give effect to the purpose of part 5 of the Act, insurers must adhere to a number of principles pointed out by the directive.

The FSB also acknowledges that there are different ways in which the insurer may apply these principles. It must, however, apply the same method of calculation to all policies of the same type.

It points out that although maximum charges do exist, insurers are not obligated to enforce them. In fact, according to the FSB directive, insurers must, where their actuarial basis provides for a charge percentage that is less than the maximum prescribed charges in the regulations, apply the lesser percentage in calculating causal event charges and in determining their cumulative effect.

Impact on the industry

The directive points out that, for every policy that has not come to an end subsequent to the happening of a causal event, the insurer must adjust the investment value of the policy in accordance with the principles pointed out in the directive. It adds that when a policy has matured, and a complaint regarding the investment value as at the maturity date of the policy is received either from the policyholder or a financial services provider of the policyholder, reciprocity must occur. It is then up to the pension funds adjudicator, the FAIS Ombud and other relevant authorities to determine the amount which would have been payable if the investment value had been determined in accordance with guidelines pointed out in the directive, and pay the shortfall.

This basically means that if there is any discrepancy over the fact that a consumer was unfairly treated by a financial services provider with regards to causal event charges, the financial services provider may be compelled to reimburse the member the full amount that it charged the member when it took advantage of the gap caused under previous directives.

Norton Rose Fulbright Director, Michelle David, points out that this directive will benefit the industry as it now clearly clarifies the parameters for charges for companies. "The FSB issued this directive because the law was previously open to interpretation and sometimes to the disadvantage of the member. It was causing an untenable situation as many of the causal events cannot be avoided. And when a person cannot have an opportunity to recover the savings which they have lost, it goes against the objectives of Government's retirement reform,” says David.

Companies will now need to calculate their charges according to minimal levels and then go back to rectify all of the historical charges they imposed.

"The length of time a company needs to go back has not been established as the FSB did not provide guidance on this issue in its directive. However, it is possible that it only expects companies to go back to 2005 when the statement of intent regarding this issue was signed between the Minister of Finance and the long-term insurance industry,” says David. If one thinks back to the number of maximum charges that could have been implemented in the past, companies could face a massive bill.

Editor's Thoughts:
Because this is a directive, the FSB is forcing companies to comply and supply a certain measure of reciprocity for a situation which they ultimately took advantage of. However, the directive shouldn't be seen as a way to punish companies, it also forces them to implement proper control systems which will enable them to make accurate calculations in the future. This can only benefit the industry. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

Comments

Added by HJ, 13 Nov 2013
I agree with Jo's comment and I commend the government's initiative in this regard.

However, I would really like to pose the following simple question:

If government is hell bent on ensuring that everything possible is done to ensure that people can retire (without the government's grant/pension), why don't the government do something truly helpful and...
1. Scrap all taxing of the lump sums from pension funds & RA's.
Currently it is as follows:
Taxable Lump Sum & Rate of Tax
A: Not exceeding R 315 000 0%
B: R 315 001 – R 630 000 18% of taxable lump sum above R 315 000
C: R 630 001 – R 945 000 R 56 700 + 27% of taxable lump sum above R 630 000
D: R 945 001 and above R 141 750 + 36% of taxable lump sum above R 945 000
This would certainly demonstrate the government's commitment to the people of South Africa and their own retirement reform program. (The old saying "Can't sell it until you've bought it" is applicable.) Furthermore, it is a much simpler process to implement with fewer role-players affected.

2. Scratch income tax on people above the age of 75.

I don't have the stats on what income SARS / the government are getting from this demographic in proportion to their total tax revenue, but the point that I am making is that in South Africa today the following can be applied to a lot of government's actions:
They dish out law's and regulations that are not always in line with making our economy sustainable in the Africa and broader global context. They are implementing (read imposing or even steamroller) these laws and regulations on other role players in every sector of the economy, while more effect with less effort could be achieved if they called themselves to account and truly served the nation and all it's people with valour.

I know its a mouthful, but it is a simple concept at it's core.

Lead by example.
Report Abuse
Added by Jo, 13 Nov 2013
Pleased to read that the broker is not being blamed for the industries predatory behaviour, which would be the norm.

In fact the retirement and life assurance industry has always exploited the clients and then when the fiasco was exposed, they simply blamed the brokers.

But regulate as much as they wish, government is doing nothing to ensure that retirees have enough to retire on and won't be dependant on the state.

This affects the very few who already have some means.


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