IBC submission to National Treasury on Commission

According to Justus van Pletzen, CEO of the Insurance Brokers Council, Scrapping up-front commission will put many brokers out of business. It is critical to maintain the livelihood of our constituency through job creation in the small and medium enterpri

The Insurance Brokers Council (IBC) made a submission this month to the National Treasury on the issue of commission and the role played by brokers in cultivating effective financial planning.

Drawing on the recent actuarial study commissioned by LUASA, the IBC highlighted the extensive costs paid by intermediaries. The recent pressure of compliance with government standards has further increased the up-front costs of brokers by 30%.

The IBC made several proposals to highlight problem areas in the current legislation, as well as recommendations on how to achieve a win/win scenario, for all parties, including consumers.

The IBC also raised concerns about capped commissions as contrary to a free and fair economy. Capping removes the latitude for negotiating more competitive pricing for consumers and remuneration for intermediaries. It also has a direct bearing on the intermediaries rights to negotiate with insurers, given the diverse socio-economic realities of their clients.

A formal proposal was made to for the deregulation of capping so that negotiations can take place with various stakeholders. It was stated that upfront commission should be paid to a broker when a product is sold.

In the Financial Advisory and Intermediary Services Act, the definition of financial services refers to the furnishing of advice; or the furnishing of advice and the rendering of an intermediary service; or the rendering of an intermediary service.

The IBC submission raised ambiguities about the term advice in the current legislation. It is not clear whether advice refers to pre-sale or after sale information. On the conclusion of a sale, a contract is entered into between the client and the insurer, typically facilitated by the broker. It is the opinion of the IBC that as insurance companies are the main contractors, compliance in the form of ongoing advice should remain the liability of the insurer. Thus, payment must be made if the insurer requests the assistance of the broker to provide this service.

The FAIS stipulation on the requirement for the intermediary to provide ongoing advice and service in terms of the General Code of Conduct suggests that it is important to clarify the relationship between insurer and broker.

SUMMARY OF THE IBCS PROPOSALS

• Deregulation of capping of commission
• Legislative provisions must clearly delineate between commissions paid for pre-sale and clarify the configuration of advice to be provided post-sale. It is proposed that commission be classified as sales commission payable on the completion of a sale.
• The interpretation of ongoing advice should be clearly outlined.
• Given the fact that contracts are entered into between client and insurer, it should be further clarified that the provision of ongoing advice is the responsibility of the insurer who should bear the cost related to the provision of this service.
• The specification of this advice as per the legislative provision must form the basis for the contractual negotiation between the insurer and the intermediary required to provide this service. Compliance in this regard must remain the responsibility of the insurer.

The IBC has begun the process of dialogue with the National Treasury on the issues raised and will continue to contribute to the debate towards advocating the rights of the broker to make an honest living.