Awards dinner could suffer as conflict of interest concerns take hold

Gareth Stokes, FAnews Online Editor

Earlier this week I was chatting with one of my colleagues about the upcoming Financial Intermediaries Association (FIA) 2011 Industry Awards. The annual awards ceremony has grown in stature since its 1998 debut and is now recognized as one of the most glamorous events on the insurance industry’s calendar, attracting up to 1, 000 guests. The awards are one of the few opportunities for financial services intermediaries to offer a vote of thanks to the country’s leading product suppliers. And the FIA – with its 15, 000-strong member base – is perfectly positioned to ascertain which insurers offer the best overall service. “The awards are an important tool with which the intermediaries are able to both pay recognition to and honour those providers in the industry who provide excellent products and service to clients,” says Justus van Pletzen, COO of the FIA.

But the 2011 Awards could be a ‘shadow’ of previous events. Our ‘chat’ soon morphed into a heavy discussion as to whether or not the recently introduced Conflict of Interest (COI) legislation would impact on event attendance... How, we wondered, could financial services providers (or product providers for that matter) invite their top-performing intermediaries (tied or independent) to the event without it being viewed as an “immaterial financial interest”, thus creating – at least legally – some form of conflict? Here are some of our thoughts – we’ll get to the FIA view a bit later in the article…

Following the letter of the law

Conflict of Interest (COI) was the buzzword in the financial services industry through 2010. COI is a set of amendments and inclusions to the General Code of Conduct for Authorised Financial Services Providers and Representatives (the ‘Code’) introduced to prevent inducements (provided by product providers / received by intermediaries) to ‘influence’ financial advice. The amendments were outlined in Board Notice 58 of 2010 and became effective from 19 April last year, upon publication in the Government Gazette.

A great deal has been written about COI and its enforcement since then. For a quick refresher we provide three of the most important concepts from the legislation. These include the phrases “conflict of interest”, “financial interest” and “immaterial financial interest.” The following quoted directly from the Government Gazette:

“Conflict of interest” means any situation in which a provider or a representative has an actual or potential interest that may, in rendering financial services to a client, -

(a) influence the objective performance of his, her or its obligations to that client, or

(b) prevent a provider or representative from rendering an unbiased and fair financial service to that client, or from acting in the interests of that client;

including, but not limited to –

(i) a financial interest;

(ii) an ownership interest;

(iii) any relationship with a third party.

“Financial interest” means any cash, cash equivalent, voucher, gift, service, advantage, benefit, discount, domestic or foreign travel, hospitality, accommodation, sponsorship, other incentive or valuable consideration, other than –

(a) an ownership interest;

(b) training, that is not exclusively available to a selected group of provider or representatives, on –

(i) products and legal matters relating to those products;

(ii) general financial and industry information;

(iii) specialised technological systems of a third party necessary for the rendering of financial advice, but excluding travel and accommodation associated with training.

“Immaterial financial interest” means any financial interest with a determinable monetary value, the aggregate of which does not exceed R1, 000 in any calendar year from the same third party in that calendar year received by –

(a) a provider who is a sole proprietor; or

(b) a representative for that representative’s direct benefit;

(c) a provider, who for its benefit or that of some or all of its representatives, aggregates the immaterial financial interest paid to its representatives.

Wide open to abuse

The 2011 FIA Awards will be held on Thursday, 9 June at the Sandton Convention Centre, with awards issued in nine categories, including:

• Short-Term Insurer of the Year – Personal Lines
• Short-Term Insurer of the Year – Commercial Lines
• Short-Term Insurer of the Year – Corporate
• Long-Term Insurer of the Year – Risk Product
• Long-Term Insurer of the Year – Recurring Savings Products
• Investment Product Supplier of the Year – Retail Investments
• Health Care Product Supplier of the Year
• Employee Benefits Product supplier of the Year
• Underwriting Manager of the Year

But this time around industry stakeholders find themselves in a rather difficult position. They have to purchase seats (or tables) at around R450 per head should they wish to attend the dinner. If they then invite ‘representatives’ to enjoy the three course dinner, drinks and entertainment they quickly reach the R1, 000 immaterial financial interest just mentioned... Correct or not, the legislation is very clear that the ONLY remuneration representatives may receive are the commissions and fees sanctioned in the relevant Act (Short-term Insurance Act, Long-term Insurance Act, Medical Schemes Act) plus fees for rendering financial services (where no commission is paid or where specifically agreed with third parties).

What should financial services providers do? An insurer we spoke to said they would be downsizing their event attendance this year. Instead of inviting the usual mix of providers and intermediaries they would “play it safe” and just invite staff. Their five table reservation in 2010 has been cut to just one table this year!

The FIA interpretation of the legislation

But the FIA is more upbeat. Van Pletzen observes: “With or without COI we expect the number of attendees to remain the same – in fact we can only accommodate the max of almost a thousand delegates!”

“The FIA has met with the Financial Services Board (FSB) in an attempt to determine the possible impact of COI, and yes it was agreed that there were unintended consequences! Until the Act is changed there is not much that can be done about this. Insurers who book tables at a cost and invite intermediaries could, by the ‘spirit’ of section 1 (1) of the Code be subject to the R1, 000 immaterial interest clause. But Sect 3A (1)(b) is applicable if the insurer invites its own representatives. This should therefore be agreed to between the insurer and the intermediary and the ‘material value’ should then be determined and agreed.

“When the FIA invites guests there will be no financial interest and it will obviously not apply whether it includes intermediaries or not.”

Van Pletzen believes that industry and representative bodies such as ASISA, SAIA and the FIA should take the matter up with the FSB in order to address the grey areas in the Code, and perhaps to discuss the R1, 000 limit for immaterial interest. “As Wendy Hattingh from the FSB indicated at her recent road show, it is a living document and that implies that time and consultation will hopefully lead to a few changes,” he says.

Editor’s thoughts: The ink on the Conflict of Interest (COI) legislation is not yet dry and we’ve already heard rumours of companies trying to circumvent its provisions. We cannot see how an invite (all costs paid) to the FIA Awards dinner can be seen as an inducement to a financial services representative… But if we follow the strict letter of the law it must be! Do you think the cost of hosting a representative at an awards dinner forms part of the ‘immaterial financial interest’ mentioned in the COI? Please add your comment below, or send it to gareth@fanews.co.za