Monstone Monitor: Is proposed Commission Restructure Fair to All?

The draft proposals released for comment by National Treasury (Treasury) is in essence a big improvement on what was originally expected. Although the “…poor alignment of interests of policyholder, intermediary and product provider” is identified as the biggest bone of contention, the newly announced regulations appear to single out up-front commission as the prime focus in addressing the issue of poor early retirement values.

The perceived conflict of interest between up-front commission and client interests are identified as follows by Treasury:

• It may motivate an intermediary to replace an investment policy with another similar policy simply to obtain a new source of commission
• There is no financial incentive for the intermediary to provide ongoing service and advice to the client and
• Up-front commission raises the barriers to entry for potential new providers of contractual savings products in the life industry because it increases upfront capital costs.

While there is little we can do about the last, we are assumed to be guilty by default of the first two. One would have thought that introduction of regulatory legislation was meant to address this issue, but Treasury appears to think differently: “Legislation governing advice is in place in the form of the Financial Advisory and Intermediary Services (FAIS) Act, but needs time to take full effect.”

One could say the same about legislation aimed at curbing, for instance, corruption. The introduction of legislation does not deter wrongdoers overnight, no matter what it aims to regulate, so why should the financial services industry be treated differently?

The sweeping changes envisaged in the planned social security and retirement reform program will have a major impact on how clients make provision for retirement, and most will need advice from knowledgeable financial advisors. As no commission will be paid for replacements of existing contracts, why should the advisor assist the client to change plans agreed upon based on current legislation?

Yet they will. The ethical advisor does not sell policies; he provides his client with financial advice over the client’s lifetime, based on a relationship of trust. Therefore the first two motivations given above for changing the commission structure simply does not hold water, as it will merely lead to the majority being punished for the sins of the few.

And as far as the “…poor alignment of interests of policyholder, intermediary and product provider” is concerned, what about the other two parties?

If I decide to buy a house as investment on the advice of an estate agent, and for whatever reason find myself unable to continue payments after a year, that estate agent’s commission is not reversed. Why then, if I had done all that is legally required of me to provide my client with the information that was needed to make an informed investment decision, and he loses his job a year later, should my commission be clawed back?

Concerning the third party, the product provider, the argument appears to be that their contribution comes from improved early termination values, but how valid is this? While a minimum of seventy percent of premiums as a guarantee sounds good, looking at the actual figures makes quite startling reading; if the fund value is R1 million, that leaves R300 000 as potential losses that the client can suffer. Even reducing it to 15 percent still leaves a huge amount of leeway.

Two other cost aspects which Treasury may also want to look at concerns the distribution fee payable to a product house’s internal broker distribution channel which is debited to the client’s account as well as what happens to the commission payable to an intermediary who resigns.

We do not ask for special treatment, only that fairness be the guide in resolving an issue that is far more complex than it appears to be, and that those who make the ultimate decision do so realizing the full implications of their decisions on those whom the wish to protect.