Patrick Bracher
The Financial Services Board has been admirably busy protecting the consumer. Recent regulations regarding disclosure and remuneration of intermediaries, the way insurers do business through intermediaries and the protection of policyholders from unexpected cancellation of their insurance cover coupled with a Treating Customers Fairly discussion paper will go a long way towards consumer protection. Like all regulators however they have to be sure that they do not make the bathwater too hot for the baby.
By the end of April 2011, insurance laws and practices have to be brought in line with the wide-ranging consumer protection provisions that are found in the Consumer Protection Act. There is therefore a lot of work to be done. But insurance has to be sold by people who are incentivised to sell it. The most financially successful brokers are usually the best of the breed. The recently published draft regulations on binder agreements are a good example of how to go about it. They are generally clear and understated and recognise the way people have been doing insurance business and intermediary business for generations. The role of brokers acting for policyholders and insurers, and the role of underwriting managers and administrators are all acknowledged in concise and workable regulations. Insurers are able to pay binder holders a reasonable fee with a reasonable rate of return and can share profits with expert underwriting managers. Control (and especially rejection) of claims is the preserve of the insurer and its representatives and the registrars of long-term and short-term insurance control the way in which relationships between insurers and intermediaries are terminated so that policyholders are not prejudiced. The performance of brokers, underwriting managers and administrators are likely to be improved by the approach adopted.
Unfortunately the same cannot be said for the recent amendments to the code of conduct under the FAIS Act regarding incentives and disclosure. The regulations are overbroad, over-intrusive and sometimes beyond understanding. Subordinate legislation affecting people’s livelihoods should be clear, rational and not go beyond the scope of the legislation under which it is published. The latest code amendments try to control the activities of insurers and their brokers (as well as other financial product suppliers and their intermediaries) in ways that are irrational and contrary to the interests of the industry. If there is one thing that a regulator should do it is to encourage intermediaries to be properly educated regarding the policies they sell. When insurers provide training, the new code amendment expects intermediaries to pay to get there, to pay to stay there and to pay to eat there. Whilst seminars at highly exotic venues that are intended to incentivise rather than teach may well create unacceptable conflicts of interest, the code now seeks to interfere with ordinary ways of doing business. The financial services industry will, if you take the regulations seriously, be the only industry where principals will be discouraged from getting to know their agents over a good dinner or in pleasant surroundings. An industry that is built on relationships in the public interest, will be made sterile. The full disclosure requirements and the necessity for intermediaries to sell appropriate products to their clients have always been enough. It is a mistake to try to punish normal business behaviour because of an inability to police abnormal behaviour. Is it a vain hope to expect the FSB to withdraw these overbroad regulations and publish something which works for everyone? The baby is getting cleaner all the time and, properly watched, will stay clean. Scrubbing him till he bleeds will not encourage him to get back in the bath.
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