The evolution of financial services regulation
The financial services industry is constantly evolving. Product providers develop new and innovative product, financial intermediaries adapt their business practices to compensate for changes in commission structures and the regulators introduce new guidelines to ensure industry-wide compliance. This constant ebb and flow is what makes the financial services industry so compelling. And that’s why the requirement for continual professional development (by attending industry events for example) is so important.
One such industry event was this year’s Financial Planning Institute of Southern Africa’s Annual Convention. We attended the second day of the conference and particularly enjoyed the question and answer session with a panel of senior Financial Services Board (FSB) staff. Conference attendees were invited to submit questions to the master of ceremonies earlier in the day. He then had the tough task of whittling hundreds of requests to just a handful. In Monday’s FAnews Online newsletter we discussed FSB chief executive Dube Tshidi’s response to how the organisation deals with industry whistle-blowers. And today we’ll discuss the question put to Jonathan Dixon, deputy executive officer in charge of insurance. He was asked to provide an update on regulatory issues around commissions and binder agreements.
A layman’s guide to binder agreements
The FSB is currently working on terms for so-called binder agreements. According to Dixon “a binder agreement exists where an insurer allows a third party to enter into, vary or renew an insurance policy on their behalf.” In layman’s terms the situation arises when an insurance company lends their ‘pen’ to an intermediary. The concept was introduced by way of amendments to the insurance act in 2008 and the next step is for industry stakeholders to draft a set of regulations to outline ‘best practice’ for these provisions. Although the binder agreement legislation applies primarily to the short-term insurance industry and assistance businesses, Dixon notes it potentially affects some areas of the long-term insurance industry too.
The legislation is clear on a number of issues. “If a binder arrangement is entered into it must be in terms of a written agreement that clearly sets out the terms of that arrangement,” says Dixon. Accountability and responsibility for the insurance agreement vests with the insurer at all times. But industry stakeholders are still coming to terms with the requirement that the insurer must have access to all the information and data pertaining to the insurance agreement. “These are very simple principles,” says Dixon, adding that “applying them in practice is going to be a challenge…” There are simply too many outsourcing arrangement that have developed in the short-term industry over time.
A task team comprising the FSB, National Treasury, representatives from the short-term insurance industry (SAIA), the long-term insurance industry (ASISA) and various intermediary representative bodies (mainly the FIA) has already held a number of meetings. They are agreeing definitions and “compiling information on existing practices in the industry.” Dixon says that the draft regulations for binder agreements will hopefully be completed and issued to the stakeholders for comment by the third quarter of 2009.
More commission interventions on the cards
What else does the FSB have planned for 2009? Dixon says there’s a need to examine other common outsourcing practices. Administration is one instance mentioned. “There are currently cases where [administrators] are operating in [an unregulated] fashion, so we’re looking at clarifying conditions and issuing guidelines under which such outsourcing arrangements can continue,” says Dixon. Work in this area should commence later this year.
Commission will come under the microscope too. Dixon reminded the audience that the discussion paper on contractual savings described a phased reform. Thus far the first phase proposed in this paper has been tackled. The second phase will be to deal with the “thorny issue of intermediary relationships.” Industry wide agreement must be reached on the capacity in which intermediaries operate when providing services or solutions. Dixon says this discussion will probably commence late in 2009 or early next year. “One last thing to mention is the retirement reform process continues,” says Dixon.
The FSB will be looking at the individual retirement funding space with the aim to create an environment that facilitates the transferability of retirement annuities. Dixon says the existing termination penalties in the contractual savings space are untenable. Product providers take note! Of course intermediaries will have to do their part. Dixon’s parting shot was that the individual retirement industry would probably migrate to ‘as and when’ commission in the near future too.
Editor’s thoughts:
The only certainty in the financial services industry is change. While the regulators are hard at work creating frameworks for implementing and monitoring legislative requirements, government is hard at work on changes in the retirement and healthcare space. Will the new binder agreement regulations have an impact on your business? Add your comments below, or send them to gareth@fanews.co.za
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