Moonstone: A service contract for self preservation
Such a contract should not be one-sided, like some contracts between product providers and FSPs are, but should be fair to both parties. There are also very specific reasons why we suggest that you have such an agreement drawn up by an industry expert, as shown by a recent determination by the Appeal Court.
An FSP sued a client for loss of commission when a policy was cancelled. This was provided for in a written agreement between the two parties. The Magistrates’ Court dismissed the broker’s claim with costs, on the basis that the written agreement on which the claim was based, contravened section 49 of the Long-term Insurance Act 52 of 1998 (the Act), read with the regulations promulgated thereunder.
The broker successfully appealed against this finding to the High Court, after which the client went to the Appeal Court which found in his favour.
The following wording from the agreement appears in the finding of the appeal court:
‘Ek begryp en aanvaar dat enige versekeringsbesigheid namens my, deur my tussenganger geplaas, voorsiening maak dat my tussenganger deur die betrokke versekeraar vergoed sal word volgens die aard van die produk deur my aanvaar, en soos op die kwotasie van die versekeraar/s aan my voorgelê, aangedui word. Ek en my tussenganger kom ooreen dat sodanige vergoeding deur ons beide aanvaar sal word as vergoeding vir die dienste aan my gelewer. Indien my tussenganger se vergoeding teruggevorder word deur die versekeraar as gevolg van my eie (die polishouer) se optrede tot nadeel van die tussenganger, aanvaar ek, die ondergetekende dat ek steeds verantwoordelik sal wees vir genoemde, ooreengekome vergoeding.’
The Appeal Court finding states that the broker had expended time and energy in procuring the policy and was now deprived of the commission he would otherwise have earned had the client not cancelled the policy.
“In considering the statutory provisions the Free State High Court held that there was no prohibition against an agreement between an intermediary and his client…in terms of which the latter was able to look to the former for compensation. It held that the Act did not deprive the intermediary of his right to recover commission that was his or her due.”
“The question before us is whether these conclusions were correct.”
Section 56 of the Long-Term Insurance Act provides that an agreement, in terms of which a person who has entered into a long-term policy waives a right to which he or she is by virtue of the Act entitled, is void.
“If such agreements were to be enforced it would have the effect of penalising a consumer financially for exercising the statutory right to cancel a policy within the ‘cooling-off’ period. The result of enforcing the agreement would be to hold a consumer liable for the loss of a commission that never accrued.”
An article in Personal Finance suggested that this determination by the Appeal Court may pave the way for many similar claims, as the finding only went against the broker on a technical point, namely that the policy was cancelled in the cooling-off period, and not against claiming against the client say three months down the line.
The Personal Finance article quotes Jonathan Dixon, the FSB’s deputy executive in charge of insurance as saying that they plan “…to review arrangements that result in policyholders having to repay commission claw-backs levied by life assurance companies.”
“The service provided to the client is remunerated by means of commission. The claw-back is there to ensure that the intermediary’s incentives are properly aligned with the policyholder so as to ensure appropriate selling. Any arrangement to have a policyholder refund a claw-back to an adviser undermines the intentions of regulation.”
Dixon says the challenge with the existing legislation is that it grants fairly wide discretion to what an intermediary may negotiate with you.
The FSB plans to clarify the interpretation of what constitutes an intermediary service for which commission is payable. The guiding principle should be that an intermediary should not be remunerated twice for providing the same service, Dixon says.
In other words, an intermediary cannot charge you a fee for something that falls within the definition of intermediary services for which a commission is already paid.
“Of course, the intermediary who forgoes commission may negotiate a fee with the client.”
Dixon says the commission is, at least in part, a means of compensating the intermediary for providing an ongoing service to a policyholder while the policy remains in existence.
At the risk of sounding like a stuck record I need to reiterate that there needs to be a clear distinction between remuneration for advice and that payable for intermediary services. If my doctor declares me fully fit and healthy, and I get hit by a truck a week later, can I then claim back my payment to him?
This debate is far from over. I hear that the whole issue of the status of an independent advisor is again under discussion. This proposal suggests that if you receive commission you may not call yourself independent; only if you are paid a fee directly by the client may you call yourself independent.
We are going to have to be a lot more proactive if we want to counter what is happening in terms of our livelihoods. The burning question is how?
Having a formal agreement drawn up may be the start of protecting ourselves, and also pave the way for negotiating fees in time.
