Clearing the smoke and mirrors

The local insurance industry finds itself in an increasingly regulated environment. In recent years the insurance giants, legislators and regulatory bodies have been carving out solutions and best practices to protect the consumer of insurance and retirement products.

This ongoing process has given rise to the perception that both long-term and short-term insurance companies are fighting the 'good fight' on behalf of the consumer. The result is that these companies have successfully landed the smaller players in the industry with the 'bad guy' image.

Yet, the reality is most savings being passed on to the consumer are coming from one place. The intermediary is expected to forego commissions and receive compensation on a fixed fees basis, while insurance company earnings from the product environment remain mostly untouched.

Financial intermediaries cowering in the crosshairs

A closer look at some of the settlements reached and laws passed in recent times reveal an alarming tendency. The persons bearing the financial and administrative burdens resulting from regulation are those at the coal face of the industry. Financial intermediaries and independent brokers are now responsible for consumer education, accurate selling, ensuring that the consumer understand the product and making good when advice, however well intentioned, causes financial harm.

Consider the recent Leaderguard scandal. Although there are many unresolved issues around how the company came to operate in South Africa, the only people nailed thus far are members of the broker community. These brokers have been ordered to repay monies to wronged clients. We are not suggesting the FAIS Ombud rulings are incorrect, because there is plenty of evidence of wrongdoing in each of these cases. What we are saying is gross oversights in the regulatory environment have simply been ignored or made to go away.

Of real concern is the shift of the entire burden of selling and servicing the financial industry products to the financial intermediary. Large insurance companies are largely absolved from any responsibility for the products they sell. If they present a flawed product to the market, it is the financial intermediaries' job to establish whether or not there is a problem with the product. And the intermediary bears the responsibility if he fails to spot the problem and sells a defective product.

Imagine if this situation prevailed in the motor industry. Here the salesman simply accepts an SABS approved product from the manufacturer and sells it to the consumer without having to worry about liability going forward. If the car is defective the owner simply hands it back to the salesman who gets a new one from the manufacturer. In the case of product defect, the vehicle owner sues the manufacturer and not the salesman.

Often unjustified media comment

This situation is exacerbated by the media, which is quick to latch on to any 'scandal' to cast the intermediary in a bad light. Journalists often go on a witch hunt to find single examples of bad financial advice, and whether appropriate or not paint the entire financial intermediary fold with the same brush.

A recent example of this relates to the miss-selling by an intermediary of a retirement annuity. The article alleges that an intermediary was selling longer-term RA's to boost commission earnings. A FAnews Online reader defends: "This [the allegation] is patently not true, and gives the impression to the uninformed public that intermediaries could sell an RA with a shorter term but don't so as to earn more commission. The truth of the matter is very different by law the earliest anyone can get a payout from an RA is 55 (excepting at death or disability). So a 30 year olds RA will have a minimum term of 25 years. An intermediary cannot change this."

Giant insurers have millions of rand to spend on brand awareness and image building. They have the clout to brush bad media aside the smaller industry players have no such ability.

More scrutiny required

Why is the press so slow in reporting big scandals occurring at the larger financial services providers? A reader recently shared the following practice with us:

"A short-term insurer (in an attempt to protect premiums) implemented a new method of dealing with unpaid premiums of clients who had encumbered vehicles financed by a certain finance company. Regardless of the introducing broker or agent, in the event that the premium is not met and the records stating that the insurer has an outstanding commitment with the bank, the insurer will notify the bank of the unmet net risk premium.

"The bank in return, to protect their asset will then add the insurance premium to the client's financing contract which will be financed by the client over the remaining term of the financial commitment. The premium will then be paid to the insurer. This practice will be repeated until the commitment to the bank is settled!"

Would a financial intermediary get away with similar conduct in the current environment? Why on earth should a large financial institution be able to?

The large life insurance companies recently committed to financially compensate retirement clients for poor industry practices. They also signed a Statement of Intent to ensure that the industry adopts fairer practices going forward.

We feel there are many practices which still require closer scrutiny. The once popular smoothed retirement funds and the much talked about lack of transparency in the underwritten retirement funds would probably be good places to start.

The financial intermediary has made mistakes in the past and is now carrying the cross for those mistakes. It is only fair that the regulators pay similar attention to the product providers going forward.

Editor's thoughts:
Despite continued regulatory pressures the blatant manipulation of consumer financial affairs to their ultimate detriment continues. Contrary to popular belief it is often not the financial intermediary or small independent broker causing the problem. It seems that the large institutions want to hold on to their slice of the pie at any cost. We would love to hear of any practices you have encountered which support this premise. Send your expos to gareth@fanews.co.za