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Redefining the intermediary

22 November 2011 Gareth Stokes

Gareth Stokes, FAnews Online Editor

What is an intermediary? How do we distinguish between tied agents and independent brokers? Is the advice offered by a tied agent on par with that offered by an independent financial adviser? How should intermediaries be remunerated? These are just some of the questions industry stakeholders are forced to wrestle with as the financial services landscape evolves. And there are no simple answers! The Financial Planning Institute (FPI) Technical Alert, distributed 15 November 2011, restarts the debate around certain critical issues. Their Call for Contributions: Intermediary services and related remuneration in the insurance sector is a first step towards formulating a submission for the Financial Services Board (FSB) Discussion Document on these emotive topics.

The FSB’s twin objective is to refine the definition of intermediary services in the current insurance laws (both short and long-term) and to reform the related remuneration structures. “While recent reforms in the Financial Advisory and Intermediary Services (FAIS) regulatory space have clearly raised the standards of professionalism and the management of conflicts of interest in the intermediary sector, concerns about the potential for miss-selling and poor outcomes for consumers persist,” notes the FPI. Their Call for Contributions is an invitation to industry stakeholders to participate in the initiative and have a say in the structural changes the FSB will eventually implement to ensure a smooth and sustainable introduction of Treating Customers Fairly (TCF).

Reading between the lines

You should, by now, be aware of the six outcomes of TCF. These outcomes require that “products and services (including distribution models) are appropriate to the needs of the target market, advice is appropriate to client needs and products deliver as per customers’ reasonable expectations!” And the regulator believes that potential failings in this regard will have to be mitigated by way of additional regulation. It appears as if the long-awaited “official” debate on intermediary status and remuneration will take place under the consumer protection mantle.

The key objectives in this regard will be: The promotion of appropriate, affordable and fair advice and services to potential and existing policyholders and a sustainable business model for financial advice. It is the second requirement that rekindles the age-old commission versus fees debate. On the one hand we have the apparently neutral “fees” model, where the client remunerates the intermediary for services rendered. On the other we have commissions paid by the product provider, which could be seen to create a bias or conflict in the advice process. The bias escalates further when we throw in the tied versus independent intermediary angle… And the debate becomes more complex when different types of financial product are added to the mix.

The regulator’s opening hand

The FPI recently distributed correspondence based on insights from Jonathan Dixon (Deputy CEO: Insurance at the FSB) gathered at the FSB Insurance Regulatory Seminar. His first point was that the remuneration debate would take place on two fronts, namely investment and risk business. For investment business, the FPI observes: “The FSB is considering banning commission payments on investment business.” Independent advisers in the investment space will in all likelihood have to determine charges for their advice and services before disclosing such fees to their clients and reaching an upfront agreement on remuneration. Dixon added that clients should not pay upfront for ongoing services and that intermediaries would have to disclose whether they provided an independent advice service, restricted advice service, or both. The FPI feels the practical impact of such changes would be manageable, and we agree.

The argument around remuneration for risk business is more emotive. Once again, we quote from the FPI correspondence on this matter: “The FSB is concerned that upfront commission can lead to inappropriate advice.” Dixon pointed to the noticeable swing away from investment sales towards risk sales following the reduction of upfront commissions on investment business in 2009 as proof of this. He also observed that a fee-based approach to risk business remuneration was not intended, but that a shift towards as-and-when commission might be appropriate. In addition, ongoing remuneration for this category of business should only be permitted for rendering ongoing services and there should not be two sets of remuneration paid for the same service.

Carrying the discussion into 2012

There are many scenarios that will have to be thrashed out as the debate heats up. “A central principle that will inform any potential reforms is that changes should be implemented in a way that promotes a level playing field between similar types of activities (in particular comparable types of investment business),” noted the FPI. “These topics are likely to have implications for other sectors providing investment products, such as Collective Investment Schemes (CIS) and Linked Investment Service Providers (LISPs).”

The FSB has invited contributions from industry stakeholders by no later than Friday, 30 March 2012. In due course they will publish their position in a Discussion Paper to include feedback from the industry. Regulatory changes, if any, will follow after appropriate consultation and interaction with the industry.

Editor’s thoughts: Mention as-and-when commission and risk business in the same paragraph and you’re guaranteed a lively debate. It now looks increasingly likely that the intermediary remuneration model will be finalised to coincide with TCF. Do you agree that issues such as the role of tied versus intermediaries and remuneration in risk and investment business should be bedded down alongside TCF? Please add your comment below, or send it to gareth@fanews.co.za

Comments

Added by Hansie, 18 Jan 2012

I believe we all feel this way. Can we please find a credible representitive body that can and will defend our case!
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Added by yes, 17 Jan 2012

I fully agree with Sandile and Tim. It is simply not proffitable to be in this industry. I wrote a letter to Jonathan Dixon in 2008 regarding the implications of the new commission structures on investment recurring premium business - to no avail. Fact is that the insurance companies do not want us to be independant - they want us to work for them. I believe they are manupalating the FSB to make it impossible for us to exist. We burden the full cost of sales (including having to print our own application forms), administration of new and old business to earn a tippence! This overregulation and reduction in commissions will eventually destroy this industry. The broker is allways the problem and needs to be managed and regulated. How is it then that I have over 15000 satisfied clients. We are not all devious, uneducated, incompetent fools. Stop treating us as such.
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Added by Ronel, 23 Nov 2011

I agree with most of what is said above and add my voice to all of your voices. One thing though, what is the big issue about churning pure risk business anyway? If it is in the client's interest and the client is young and healthy, why should they be stuck in an outdated product? Who ever says anything about churning in the Short term Insurance space where clients run from one insurer to the other all the time, looking for better rates? Will I really be giving a client who qualifies for a new age type of product best advice if I tell him/her to stay in an outdated product just because I sold the original product to him/her years ago and earned commission on it back then? I don't think so, and the next broker will come along and sell the new age product to them anyway. Very few clients today are that loyal to brokers. We have an obligation to keep our clients abreast of the latest products and then leave it up to them to decide whether they would like to change or not.
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Added by Tim jones, 23 Nov 2011

Roneles argument is fine but the short term comm is as and when! I think that Sandile and Elna have described the situation perfectly and will the FSB please listen! The trend to selling life policies with upfront comm is one that is forced on most intermediaries so that they can survive. This is not only because of the cost of doing business and being compliant but also because of the increased time involved in being compliant! There should be a distinction between commission earned for selling a product and fees earned for servicing the product (I.e. Intermediary services as defined in FAIS). most intermediaries do know how to charge for what they do.
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Added by Nick, 22 Nov 2011

To demotivate churning - Why not start of with As-and-when ONLY on all replacement business?
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Added by TheFinancialCoach, 22 Nov 2011

Companies need to accept much more responsibility for all the churning. If they would update/upgrade their products to the latest benefits there would be less need and incentive to churn...it's not only the advisors. The model - which survives on new business - is fundamentally flawed.
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Added by The Court Jester, 22 Nov 2011

Why not ban all commission and fees and let it be a charity work :). Very easy for salaried Fat Cats at the FSB to come up with all of these ideas. Go do a simple calculation to try and see how much business a young new adviser will have to get to earn just a decent living. Maybe the FSB should consider banning all Financial Advice Services and let clients in need of financial products do it all them selves at self help kiosks at financial institutions - problem solved with those "irritatting advisers that have the audacity to earn an income!!!! I mean the customers do buy their own groceries without advice from Advisers!!!
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Added by John, 22 Nov 2011

Churning is not the issue, its TCF. I would not object to as and when commission on risk business if the commission percentages where the same as on short term insurance - on average 15%. I'm afraid the current 3.25% on life business is nowhere near enough for an as and when model.
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Added by Petro, 22 Nov 2011

Nick's comment is really something the FSB must look into. We are professionals in the financial world ........right? Attorneys and accountants ask fees by the hour and no one ask them to pay back that fee when a case's not sorted in court or your tax return was'nt submitted in time. We are the only professionals that needs to pay our income back. And now they go so far to say we are not allowed to earn an income. As an independent adviser my hands is full with all the admin, my bank account is empty due to all the compulsory fees I need to pay and they have the audacity to say we earn to much. If I received R3000 commission on a risk product sold. And the term accepted by my client is 15 years. This means i will have to "advice" for the next 15 years on a payment of R16.67pm. And they call me a professional THATS OVER PAID. Come on!!!
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Added by Gino, 22 Nov 2011

To add on to The Court Jester's comments. Have a look on the FSB website under Publications, FSB Annual Reports, Annual Report 2011 on page 146 what the "salaried Fat Cats at the FSB" accually earned the past two financial years ending 31 March. Who's paying?
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Added by Elna Rudman, 22 Nov 2011

Nobody I know who is employed works for free, not at the FSB and not at the Insurance companies and certainly not in my office although I sometimes forfeit my salary to pay my personell especially those months when we have to pay fees that is not a regular expense! Estate Agents earns commission from their sales and this comes out of pocket from the Homeowner, this commission is sometimes negotiable as is commission on Investments which is fair. For the high risk Brokers have to take to give investment advice, making sure that they have excellent record keeping and give 1st class service, maybe it is time to calculate the expenses this involves, we pay a CO but they have no real responsibilities but to help us on our way to comply, we pay companies for programs to ensure proper record keeping, we pay the FSB, the Ombud, our Auditors and Bodies we belong to and PI Insurers and the list goes on, but we are expected to work for free and market the companies we are contracted to with very strict rules and regulations for FREE, We are paid at any given date of the month that suits the Companies we are contracted to and we seldon know what we shall be paid because of debits and credits reconciliated each month on our commision statements and yet we are expected to budget! I cannot find a way to understand the logic in all of this, in a small Brokerage like ours we shall have no choice but to abondon fee based products because there will be no recourse against clients who refuse to pay and no guarantee that they will pay the fees and one wanders if this will be in the interest of clients or Companies?! . By the way most of us in this Industry have been treating our customers fairly even before TCF!
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Added by Sandile, 22 Nov 2011

Thanks God that this issue has come to the fore. Granted, we are perhaps the most hated crop in the financial world and are blamed for all the ills. Ever since changed were brought into this industry 10 years ago, I have never seen as corresponding increase in advisory fee/commission which everyone says is high. We work very hard, sell products that everyone desires but doesnt want to buy and where they are bought and cancelled, the amount earned on it is clawed back as if its our fault that the client can no longer afford the premium. When this happens, no one comes to our rescue and we go home to meet our families with nothing in our pocket. This is one industry that looks down and serve to destroy, and has added almost 20% into the national unemploymen rate. There has been an ever increasing need for compliance to a host of regulations but such has not been accompanied by a corresponding increase in fees/commission. We are thought of as the last in the scheme of things and at worst as unscrupoulous agents preying on innocent and perfect clients such that when they cancel their policies we have to pay for them....and so get blamed for giving inapprorpiate advice. When we give good advice and the client makes a R500.00/month investment in an RA, the industry, FSB in particular reckons it would be fair for us to earn 3,25% of that monthly over five years, which is R16.50 per month. How many of these (R16.50) do you need to survive in the current economic environment. An independent sole trade like me is in a worst situation....I am liable for the monthly FSB levy, ongoing capacity development...which at present is FSP product focussed for each product I market and sell for the FSP, industry wide Regulatory Exams, voice logging equipment to record each call I make and receive from my client even if its my mum, record keeping for all the documentation I have dispersed to my clients. That's all over and above the normal business operational costs and your personal salary....the worst is yet to come with the tolls fees, the overzelous metro police selling traffic fines which are also payable on monthly basis, parking fees. client entertainment in restaurants, etc .... the list is endless. We are out there as orphans with no one to contend the weekly outburst of condemnation by Bruce Cameron as if all financial advisers offer bad advice and/or are being corrupt and pledge clients hard earned money down the drain. Can the industry stop and listen for a while, I suggest that the FSB and all other concerned industry stakeholders institution a study and observe the challenges that we face and come up with a workable solution to our plight failing which the industry will have to bear the consequences of an increase in unemployment and other social ills.
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