This is an excerpt from the discussion paper released on 30 March 2006, concerning contractual savings in the life insurance industry.
All about commission levels, advice fees, and the thoughts of the National Treasury and the FSB task team.
National Treasury recommendations:
11.11. With regards to the possible deregulation of commission levels, the National
Treasury team recommends that:
11.11.1. Commission levels remain subject to regulated maxima, until there is evidence that other measures are effectively protecting policyholders, including:
11.11.1.1. a significantly improved system of disclosure;
11.11.1.2. appropriate consumer and intermediary education initiatives;
11.11.1.3. a tried and tested system of enforcement of provisions under FAIS; and
11.11.1.4. a sound financial safety net for policyholders, in the form of enhanced minimum early termination values.
11.12. With regards to the regulation of advisory fees, the National Treasury team recommends that:
11.12.1. The advice fee be a matter for discussion and agreement between the independent financial advisor (the advisor) and the customer.
11.12.2. The level and structure of the advice fee payable by the customer to the advisor remain unregulated, provided that:
11.12.2.1. a differentiation is made between initial advice and ongoing advice. The fee for ongoing advice should be spread in order to avoid losing the link between payment and advice; and
11.12.2.2. the customer retains the right, in all circumstances, to cancel the agreement with the advisor, either transferring the payment of the ongoing advice fee to another advisor, or stopping it altogether.
11.12.3. Concern is raised that advice fees expressed as a percentage of the assets under management are not necessarily in the best interests of the client, on the basis that they provide an incentive to the advisor to maximise the assets of the customer without proper regard to investment risk.
11.13. With regard to the level and structure of sales commission, the National Treasury team recommends that:
11.13.1. Notwithstanding the longer-term objectives set out in paragraph
11.11.1, the level and structure of the sales commission payable by the insurer to the tied agent or independent broker (the insurer agent) be determined by agreement between the insurer and the insurer agent 48,49 but subject to maxima, governed by the principles that:
11.13.1.1. the regulated maximum level of commission should reflect the fact that commission absorbs a higher proportion of fund value in the current low inflation, low return environment;
11.13.1.2. a limited proportion of the commission should be paid upfront, with the balance payable over the term of the policy, to provide an incentive to the sales agent to ensure that the policy is appropriate to the needs of the customer and to service the policyholder throughout the term of the policy;
11.13.1.3. the payment of ongoing commission should be conditional on the provision of ongoing support to the policyholder;
11.13.1.4. the policyholder should maintain the right to re-direct ongoing commission to an alternative agent or discontinue it completely;
11.13.1.5. commission on contractual contribution increases should be paid as and when the increases occur and are conditional on ongoing support to the policyholder; and
11.13.1.6. the structure and level of commission scales should be determined through further discussion with the objective of balancing the interests of all parties, bearing in mind that this
is essentially a matter between the insurer and its agent, and that the policyholder will be provided with a degree of protection through other measures, primarily minimum early termination values (as discussed in section 12).
11.13.2. The proportion of up-front commission should be specified as a maximum, below which an insurer and its intermediary agents can negotiate an appropriate up-front element that shares the risks of early termination and allows them to strike an appropriate balance
between:
11.13.2.1. on the one hand, being sufficiently attractive to intermediaries to entice new entrants into the industry, promote access to life assurance products and ensure a sustainable industry;
and
11.13.2.2. on the other hand, enabling the insurer to sustainably meet regulated minimum early termination values.
11.13.3. Claw back provisions through regulation need no longer apply, because policyholders will be protected by minimum early termination values, although it is recognised that insurers and agents may wish to include claw back provisions as part of the terms of their contractual
relationship.
11.13.4. Changes to the regime impacting on advice fees and sales commission should be applied in a consistent manner to risk products as well as to savings products, because:
11.13.4.1. the fundamental rationale for the change is to remove principal-agent conflicts this rationale applies equally to risk products and to savings products;
11.13.4.2. a single system for all insurer products is simpler to administer and regulate; and
11.13.4.3. establishing a different set of rules for savings and risk products may run the risk of regulatory arbitrage and distort the products offered to consumers.
11.13.5. A consistent approach should be determined for single premium products that avoids undue incentives for insurer agents or independent financial advisors to motivate the sale of one in preference to the other.
11.13.6. Consideration be given to ways in which access to savings products by low-income investors might be supported, for example, financing arrangement between the insurer and intermediary that do not put fund values at risk.
11.13.7. The LOA and its member firms should be encouraged to carry out independent research to test the appropriateness of product sales and the effectiveness of independent advice, making public the outcome of this research and recommended changes to best practice.