Moonstone: Binder agreements and independent intermediaries
Although certain parts of the Insurance Laws Amendment Act No 27 of 2008 are already effective, there are a few sections that the legislator had deemed necessary to defer the operation of to a later date. One such section relates to the provisions dealing with binder agreements in terms of both the Long and Short Term Insurance Acts. The main reason for this is that appropriate subordinate legislation in the form of regulations has to be in place in order to ensure that there are clear practical rules that govern the application of the relevant provisions.
The FSB is involved in a process of work shopping, consulting and negotiating with industry stakeholders towards drafting and formulating a final set of regulations. Although FSPs who are currently contracted as binder holders with insurers will of course also be subject to the new regulations, one would expect a transitional period being allowed in such event to make it possible for the parties involved to align existing arrangements with the new regulations.
In terms of respectively sections 49A of the Long Term Insurance Act and 48A of the Short-term Insurance Act there are provisions which dictate certain requirements that will have to be adhered to in the case of binder agreements. These include that there must always be a written agreement between an insurer and a third party to allow such party to enter into, vary, renew, determine wording, policy values and premiums and settle claims on behalf of the insurer. Certain other minimum information will also have to be included in any binder agreement. Importantly also from the point of view of FSPs who are involved as binder holders will be the duty to disclose certain information relating to the insurer to every policyholder, keeping and maintaining proper books of account and records relating to policies administered in terms of a binder agreement, and making available when requested by an insurer, its auditor or actuary, any relevant information pertaining to policyholders.
It is expected, and required from a compliance perspective, that more clarity is provided on a number of aspects that give rise to questions and uncertainty regarding FSPs who are involved with binder agreements. For example, a person may be performing the agreed administration services as a binder holder for a specific insurer/s whilst the same individual or entity also has business interests in a sales or distribution channel. If that is the case, what are the limitations in regard to remuneration for the administration services that the FSP is rendering in its capacity as a binder holder? In the event of the termination of the binder agreement, should or will the type of agreement involved determine who will be the owner of the clients, the insurer or the broker? What is the full extent of disclosures required to policyholders that apply for persons who fulfill the dual role of binder holder and a financial services provider who market the same product? In this regard the current requirements pertaining to the issue of conflict of interest as contained in the General Code of Conduct already provide clear guidelines that will also be applicable to the situation with FSPs who are contracted as binder holders, but the detail of what needs to be disclosed, will be valuable.
What can be safely predicted is that all contracting parties involved in binder agreements will, once the new provisions come in force, be subject to much closer scrutiny by the regulator than is currently the case. Hopefully every party will also have more certainty about its role and responsibility and the practical implications thereof. It is very important from a risk management point of view.
