Contractual savings in the life insurance industry.
National Treasury paper puts its case on the table in terms of the intermediary relationships, in terms of contractual savings in the life insurance industry.
The discussion paper released by National Treasury and the FSB task team yesterday had this to say about intermediary relationships see page 27:
National Treasury recommendations
10.4. The National Treasury team recommends that:
10.4.1. every intermediary be required to declare themselves to a prospective policyholder as either (a) a sales agent of a product or service provider, i.e. an insurer agent, or (b) an independent financial advisor;
10.4.2. insurer agents be remunerated by the insurer only;
10.4.3. independent financial advisors be remunerated by the customer only, by direct payment or authorised deduction from the policy;
10.4.4. insurer agents may be linked to one provider only, referred to here as tied agents, or have relationships with a number of providers, known as independent brokers, in which case they should be able to demonstrate to their clients sufficient knowledge of the products of all these providers to warrant describing themselves as independent;40
10.4.5. only independent financial advisors be allowed to describe themselves as advisors or providing advice because only these intermediaries are free of product or provider bias and may not receive compensation in any form from providers;
10.4.6. the declaration of capacity (hence source of remuneration) cover all clients, meaning that an intermediary may not service some clients in the capacity of an insurer agent and others in the capacity of an independent financial advisor; and
10.4.7. the declaration of capacity apply not only to an individual but to the organisation that they represent, removing the potential for conflict of interest from firms as well as individuals.
10.5. This recommendation is not about separating the sales process from the advice process, it is about addressing the principal-agent conflict. It forces the intermediary to declare in advance the capacity in which he or she operates and if that is one of acting as an agent of the client, this must be backed up by a refusal to accept any remuneration from any other party.
10.6. Though many tied agents and independent brokers undertake a financial needs analysis as part of the sales process, this cannot be regarded as independent advice in the true sense of the word, in that this service is paid for by the product provider in the form of commission.
10.7. Given the increasing financial risks borne by the investor in a changing savings environment, as highlighted in Section 2, the quality of the investment advice provided is of crucial importance. FAIS has already contributed to improvements in this area. 41 It has always been the widely communicated intention to improve the qualification standards under FAIS over the course of time.
The National Treasury recommends that:
10.7.1. consideration be given to the establishment of higher standards of intermediary education through inter alia a separate privately managed accreditation system established by intermediary bodies in co-operation with the FSB and FAIS Ombud to set standards that appropriately recognise the expertise required for different product areas; and
10.7.2. accreditation by independent financial advisors under such a qualification system be mandatory.
10.8. This document focuses on insurer-provided contractual savings products, but the principles of a clear definition of the capacity in which an intermediary acts in providing advice or product sales and improved intermediary education, cut across all areas of the financial services industry. The intention is that the same model used to address the principal-agent issue in the long-term insurance sector be applied across the financial services industry.
