The ugly face of old generation savings product
Modern financial services legislation centres on the consumer. New laws such as the FAIS Act, National Credit Act and Consumer Protection Act are designed to protect Joe Average from often unscrupulous industry stakeholders. In the event legislation fails to protect their rights, consumers can turn to various industry Ombudsmen, or in the case of pension funds complaints, to the Pension Funds Adjudicator (PFA) for assistance. But the Ombudsmen and PFA are often bound by nonsensical practices from the dark ages of the life industry. One such case landed in my inbox recently as a “stand out” among a list of typical PFA determinations.
The case dealt with commissions automatically deducted on a so-called old style retirement annuity. S Van der Merwe (the complainant), was unhappy with the way commission was deducted from his South African Retirement Annuity Fund (first Respondent) by Old Mutual Live Assurance SA (second respondent). A closer look at the determination confirms unwillingness by the industry to tackle its shortcomings, and reluctance on the part of the PFA to overstep certain boundaries.
The facts were not in dispute
To get to grips with this case we have to wind the clocks back a number of years. On 1 November 1985 the complainant became a member of the SA Retirement Annuity Fund (SARAF) of which Old Mutual was the administrator and underwriting insurer. The complainant’s policy went in force with an initial monthly recurring contribution of R42.10, an amount that was increased on a number of subsequent occasions at the complainant’s request. Old Mutual provided a detailed history of the policy in their response to the PFA. Monthly contributions were increased to R145.00 on 8 July 1997. On 5 September 2001, the contributions were increased by an extra R100.00, and further instructions to increase the monthly contributions were made effective from 1 April 2004, 1 February 2005 and 1 July 2006. So far, so good!
The complainant discovered that commission was being deducted from the credit balance on this policy each time the premium was increased despite the fact these instructions were issued by the policyholder without any broker assistance. Van Der Merwe said that he was “dissatisfied with the fact that there was a broker commission fee still being deducted from his investment even though he was not receiving any advice from a broker. He also submitted that “he managed his investment directly with the second respondent and as such, no broker fee should be deducted from his investment!” We were surprised that a complaint of this nature reached the PFA in the first place… Surely Old Mutual could have adequately addressed the matter directly with the client?
A broker commission party (perhaps)
Why were additional broker commissions levied after each client instruction to increase his contribution? Old Mutual said the policy was issued under its Flexi Range of products, an older generation range of products. Old Mutual explains further: “These older generation products did not provide a prospect of variable commission, a concept introduced when the new generation products were developed. The nature and design of the older generation products did not make provision for the commission content to become a negotiable item. As the commission is an invariable feature of this product range, it is not possible to adjust or remove the commission payable, regardless of the circumstances. Therefore, although the complainant prefers not to involve the services of a broker, it does not necessarily imply that the commission will be waived, or that he would become entitled to the commission concerned.
“The ability to negotiate commission is a distinct feature of the newer generation products and the actuarial design thereof. In terms of the newer generation products, the benefit of commission that is not paid to an intermediary is credited for the direct benefit of a particular individual policyholder.” That sounds fair enough for the commission incurred at policy inception, but surely not for any commissions relating to premium increases?
We can see where this is going!
Would the PFA stand up to the insurer and strike this defence? Not likely! What followed were a few paragraphs of the PFA standing up for the insurer’s right to charge the commission regardless…. The PFA observes: “There are various costs which an insurer incurs in issuing and maintaining policies of insurance which are incurred at inception of the policy…” They went on to list marketing and distribution expenses, acquisition expenses, renewal expenses and commission… Fair enough – this is common knowledge in the industry. The PFA continues: “In order to render policies actuarially sound, it is necessary that insurers levy charges against the investments made by the policy holders in order to recover the expenses. Such charges are accordingly not deducted at the same frequency as the expenses were incurred.
“Policies generally provide for the deduction of specified charges over the full term of the policy on the assumption that it will endure to term. The deduction of commission is permissible in terms of Part 3 of the regulations of the Long-term Insurance Act No 52 of 1998. Upon inception of the complainant’s policy, the second respondent paid the broker fee upfront over a period of two years on behalf of the complainant. Thus, the second respondent has to recoup this cost from the complainant throughout the term of the policy as part of the monthly premium levy.” These comments don’t seem to address any additional commissions incurred when premiums were increased. Nor does the PFA determination take into account modern regulatory trends.
Following the letter of the law...
“For reasons submitted above, it therefore follows that the second respondent cannot cancel the broker fee that is currently being deducted on the complainant’s investment because in effect the complainant owes the second respondent,” concludes the PFA. “This tribunal takes note of the second respondent’s submission that the nature of the older generation policies, such as the complainant’s, does not make provision for the commission to be a negotiable item, making it impossible to adjust or remove the commission payable, regardless of the circumstances.”
How would, for example, the soon to be implemented Treating Customers Fairly legislation resolve this issue? We’ll have to wait and see… For the time being life insurers have Carte Blanche when it comes to old generation product. The best the PFA could do was to suggest that the complaint stop the increase on his Flexi product and take out a newer generation policy that allowed for commission scaling. The complaint – which was received in March 2008, was dismissed on 12 October 2011.
Editor’s thoughts: It seems the so-called old generation policies on the books of South Africa’s life insurers kick sand in the face of modern consumer protection legislation. While the complainant in this case rues having to pay commissions each time he increases his contribution, we couldn’t help but wonder whether the broker in question actually benefited from these unassisted policy changes. What are your opinions on the commission treatment of so-called old generation products? Please add your comment below, or send it to [email protected]
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