Moonstone Monitor: Proposed healthcare commission changes

The proposals presented by the Council for Medical Schemes are really not well thought through, and lack meaningful motivation for implementation. With the abundance of information available on the two main thrusts contained in the document, one gets the impression that not enough time was spent on researching the issues thoroughly, resulting in a document that lacks convincing arguments for its proposals.

One of the reasons given for the need for change is the conflict of interest created by the payment of commission by medical schemes, and the use of unauthorised incentives in exchange for business. Attempting to address the issue by making changes to the intermediary’s remuneration appears to be a case of fixing the symptoms rather than addressing the cause. It is the medical scheme who makes the payment, not the broker. There are more than enough measures in place to regulate this and take appropriate steps against transgressors; the question is, does the regulator want to, seeing that the broker is a much softer target?

Brokers versus Scheme agents

"...the current regulatory framework for brokers in terms of the Medical Schemes Act fails to make a distinction between brokers who provide services as independent agents of members and brokers who provide services as agents of medical schemes. Under these circumstances, it is very difficult for consumers to know whether the advice being obtained is independent advice in their own interests, or marketing advice on behalf of particular medical schemes."

This is but one example of attempts to duplicate regulations that are already in place via other legislation. The FAIS Act very clearly stipulates what disclosure has to be made; all that this will do is add more paper work to the already cumbersome process.

"The proposed solution lies in making a clear distinction in the legislation between brokers who act as agents of the scheme and brokers who act as independent agents of consumers. For purposes of this document, we will refer to them as “marketing agents” and “independent advisors” respectively."

The document drawn up by the Joint Broker Forum provides conclusive proof that this is a totally impractical suggestion that will never work.

Fees versus Commissions

These independent advisors would therefore operate in terms of a contract negotiated with the consumer, based upon an agreed upon tariff.

In 2006, National Treasury also considered these two options (tied agents versus independent brokers and fees versus commission) as a remedy for the problems in the contractual savings industry. Since then, nothing more was heard of it. This is clear evidence that the market cannot yet accommodate it, so why flog a dead horse? Or as the master of the mixed metaphor, Dilbert, may have put it: why reinvent a dead horse?

Advice and Administration

In our previous article we suggested that the CMS use this opportunity to make a clear distinction between advice and service. As things currently stand, brokers only receive a monthly retainer which remunerates them for the advice that led to the sale of the product and their availability for service should the client require assistance or further advice.

Our perspective is that the medical scheme should pay a fixed, once-off amount to the broker for placing the business. This is not commission, but a cost incurred by the scheme in the acquisition of business. The broker is recompensed for his expertise in the same manner as a doctor or lawyer is paid for his.

A service fee/retainer is then payable for the duration of the contract.

The CMS's main concern with upfront commission is that it will lead to churning. Whilst this is a valid concern, the real solution does not lie in punishing the broker, but in the prevention of unjustified churning. We know that funds undergo major changes very regularly, and a broker who does not advise the client to change to a more beneficial fund transgresses the FAIS Act - another example of damned if you, and damned if you don't.

We support the Joint Broker Forum's stance that the current status quo, although not perfect, should be retained until such time as a workable solution has been found. This will require a lot more research by the Council for Medical Schemes than this effort. Hopefully with the new Minister of Health at the helm, it can happen.