FSB bans serious industry concern

One of the major problems in the industry is the financial luring of intermediaries, whereby insures offer intermediaries significant cash. This is the same issue that got James Stern in trouble at the beginning of the year.

The Financial Services Board (FSB) is on a mission to clean up the insurance industry. The imposition of the current legislation is a move by the regulator to be proactive as opposed to reactive. They want to catch the wrong doers in the industry before they cause too much damage.

The heart of the issue

When engaging with the FSB, Caroline da Silva, Deputy Executive Officer for Financial Advisory and Intermediary Service (FAIS) at the FSB, told FAnews that the issue of financial luring is a matter that has to be addressed urgently and will hopefully be resolved with the imposition of the Retail Distribution Review (RDR) regulation.

Da Silva says, “the regulator wants to take harsh actions against this practice and intends to amend the General Code of Conduct for insurers and representatives. The purpose of the amendment is to prohibit a financial services provider or representative from offering or receiving a sign on bonus.”

The FSB published a paper last week outlining it's desire to make this practice illegal. It is open for public discussion until to tomorrow.

Mafia style intimidation reported

The goal of the insurer is to entice top achieving intermediaries to their business. Insurers then lean pretty hard on these intermediaries to secure new business and the natural reaction of these intermediaries is to go back to existing clients and move the business.

FAnews received the following information from an intermediary who has been lured by an insurer in this way. The intermediary discussed will be referred to as Mr X.

The details of the brokerage will also remain unnamed as the current brokerage Mr X now works for has already undergone extensive audits. Mr X pointed out that the brokerage is passing the audits, but the audits have caused untold stress and has impacted on the income of the brokerage as time which should be spent with clients is now wasted on audits.

“Certain life insurers have been conducting illegal activities via distribution models which  have probably caused more harm than any intermediary has ever done, yet they are never investigated. They allegedly pay the FSB, and then they advertise in financial papers and magazines, so who is really going to question the ethics of the insurer?” said a disgruntled Mr X.

It is tough in the big league

Mr X is aware of this practice because he was one of the top achieves and was recruited by an insurer. He was paid upfront money, with a three year clawback, which was for lost renewals. Mr X pointed out that he was given no apparent targets.

“Things obviously did not go according to plan and I was clearly not writing enough business to warrant the upfront payment, even though I made the list of top ten financial advisers and was offered an overseas trip. After two years my contract was cancelled with a weeks’ notice. There was no reason given and I have emails from a representative of the insurer, who is their Regional Sales Manager for a specific area.  This email apparently states that the insurer did not have to give me a reason for the termination of the contract. After a week I had no job and no income and was being sued for the upfront money the insurer already paid me,” said Mr X.

Mr X pointed out that everyone in the industry knows that the upfront money paid to you is to bring your book across. That is why it is calculated on new business written from the previous two years. He is of the opinion that the regulator has completely ignored this issue up to now.

When FAnews spoke to the FSB in January, around the same time when the James Stern story broke, it was mentioned that they were aware of this problem and they were addressing the issue.

Trying to calm the waters

Mr X eventually got a position at a small brokerage. At some point he received a call from the same representative from the insurer he previously worked for requesting a meeting. The meeting took place and Mr X was told that he had not met the insurer’s internal targets of R200 000 of new business per month, which was, according to Mr X, never given to him. “The representative then went on to offer me a deal. The insurer would not sue me if I agreed to give them a certain amount of new business per month as an independent broker,” said Mr X. He further added that after some thought, and having been given the offer in writing, he declined.

“I declined because I was now an independent broker and had to put my client’s needs first. I could not sit in front of a client and sell the products from the specific insurer because I was scared if I did not, I would be sued. I therefore told the representative that I would not sign the agreement as it was illegal for me to do so. Having delivered the news to the insurer representative, he  flew off the handle and promised to bring down the full might of the insurer on me,” says Mr X.

He has kept this promise. Mr X adds that he is in constant litigation against the specific insurer.

Editor’s Thoughts:
The proposed amendment by the FSB supports the consistent delivery of fair outcomes to consumers, and ensures that advice is appropriate through explicitly addressing any potential conflicts of interest that may undermine a provider’s duty to act in the best interest of clients. Let us hope the FSB is tough in enforcing this amendment once it is implemented. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

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