Contractual Savings in the Life Insurance Industry - Discussion paper
SAFSIA wishes to compliment National Treasury on the comprehensive research that was conducted regarding the issues surrounding contractual savings in South Africa. Too often the debate was restricted to issues of cost and commission, which tended to result in emotive discussion without addressing the bigger picture. SAFSIA therefore welcomes the fact that the discussion paper now covers broader territory.
SAFSIA is pleased to note that much of the discussion paper is consistent with the views presented to National Treasury in the joint submissions by SAFSIA, the FPI and the BBF and in subsequent discussions between the parties.
Having considered the contents of the discussion document SAFSIA has some initial comments to make. The issues raised will be fleshed out in more detail and SAFSIA will be making a detailed submission to National Treasury prior to the cut off date of 15 May.
General comments
The discussion paper touches on a wide array of issues and suggests regulation in a number of areas. SAFSIA is concerned that the regulation of too many aspects of contractual savings in the life insurance industry may not necessarily be to the benefit of the consumer. It may in fact rather benefit financial product suppliers, by increasing opportunities for regulatory arbitrage. SAFSIA believes that the contents of the discussion paper should be separated into four or five different initiatives and that the initial focus should be on creating a regulatory regime that will deal with standards relating to minimum termination values.
Specific areas of comment
Intermediary Relationships
The discussion paper introduces a new basis of classifying intermediaries in which the criterion to determine the intermediarys status is the nature of income received (commission or fee income, respectively) with the implication that the earning of commission taints the intermediarys objectivity. In SAFSIAs view, the correct test is the objectivity of advice and the process followed and not the basis of remuneration.
This proposal is inconsistent with the FAIS Act, which requires the intermediary to fully disclose the quantum of its income, details of provider contracts and the extent to which tied relationships may exist. FAIS was finalised after protracted debate amongst all role players and has general acceptance.
This proposal will necessitate the re-drafting of FAIS legislation. It will also result in further arbitrage in the form of informal ties between agent and advisor groupings, which will necessitate extremely complex drafting and policing regimes. Even so, wee are not convinced that there would be any benefit to the consumer.
Commission and remuneration recommendations
SAFSIAs understanding is that the envisaged minimum termination values will create a market mechanism in which the product supplier and intermediary will share the available margin. SAFSIAs view is that the current caps should be retained until the situation normalises itself, whereafter they should immediately be removed. Commission regulation would create more profits for the product providers at the intermediarys expense without a commensurate benefit for the consumer.
Risk Business
The inclusion of risk business in a revised commission structure has not been part of previous discussions and, in our opinion, is unnecessary. SAFSIA believes that the market mechanisms will ensure value for money to the consumer and the current market trend in favour of reduced premiums would gather momentum. This class of business is already an early beneficiary of the FAIS disclosure requirements.
Competition in this industry
The life insurance industry already suffers from a lack of competition and SAFSIA believes that the depth and complexity of statutory and other regulation contributes to further inhibiting competition in the sector, which is not to the advantage of consumers.
Product Design
The discussion paper comments on product design which we feel is unnecessary as existing legislation is entirely sufficient to deal with issues of product design.
It is clear that this is a discussion paper only and that it deals with principles and high level proposals. SAFSIA looks forward to engaging in further discussions and debate with National Treasury in order to ensure that a new regulatory environment allows for the proper alignment of the interests of consumers, intermediaries and product providers.
