Life cover probe looms

Last week's newsletter focussed on the commission practices employed by Regent Life in selling credit life assurance policies through a network of approximately 400 motor dealers. The assertion was that Regent Life, an Imperial Holdings subsidiary, regularly flouted the law on maximum commissions for the sale of such products.

Regent Life maintains that these practices were halted in October 2005, almost two years ago. But as with the retirement industry which came under fire for its handling of retirement fund terminations and early surrenders, the fact that a transgression occurs in the past does not absolve a company or individual from responsibility. A legal transgression of this nature cannot simply be swept under the carpet and business resume as normal.

The start of another lengthy investigation

In response to these and other allegations, the Life Offices' Association (LOA) appointed Peet Nienaber to head up an inquiry into practices in the credit life insurance sector of the industry. Nienaber is a past Ombudsman for long-term insurance and a former Judge of the Supreme Court of Appeal.

At the very least it appears the credit life assurance industry will come under fine scrutiny in coming months. The LOA inquiry enjoys the support of the South African Short-term Insurance Association (SAIA) and will run concurrently with a Financial Services Board (FSB) investigation into regulatory compliance.

Since some of these allegations involve undeclared salary benefits, National Treasury is expected to keep a close eye on proceedings too.

Gray areas condoned by the FSB

One of the problems with capping incentive payments and commissions is the number of gray areas and loopholes which are currently being exploited. Unlawful practices are simply disguised or modified until company management are happy that they 'fit' the regulatory environment enough to avoid censure. And, failing action by the regulator, these practices soon become entrenched as common practice in the industry.

A prime example of this thinking is the provision of services to companies or individuals who sell policies for a particular insurance company. These practices have been questioned, but never investigated or sanctioned. The point being this: What is the difference between paying a sales agent an incentive in the form of a Woolworth sales voucher, compared to supplying a company with compliance services which would ordinarily have cost a few thousand rand?

The question the industry should be asking is how these practices will be stopped once and for all. Can the industry really afford to engage in damaging investigations every two years, and then pay the millions in compensation which inevitably follow. One of our FAnews Online readers provides a short answer: "This type of practice will not stop until someone very high up goes to jail." It is a tough call, but something we tend to agree with. The truth is one cannot 'S-Reference' a company in the same way as a broker is 'S-Referenced'. The economic impact would be impossible to manage.

Are regulators barking up the right tree?

As we mentioned in our last newsletter on the topic, commissions and incentives have been used for years to grow market share and attract the best sales people to the insurance industry. Insurance product providers have to answer to their shareholders, so they will always come under pressure to increase their sales and market share. And this means they have to find ways to offer better commissions and incentives than their competitors.

Various reforms embarked on in the last five or so years focus on commission as one of the main drivers of fees in the industry. But commission practices are certainly not the only areas that regulators should be focussing on. Some of the selling techniques used to sell credit life assurance products are far more serious than the commission transgressions talked about today. Credit life assurance is an expensive product with or without commission and the manner in which it is sold often means the client is unaware that he has purchased the insurance.

The last word on the subject is that insurance product providers have a responsibility to the intermediaries and brokers further down the sales line. By offering additional incentives or commissions they blur the line of fair and impartial advice. As another reader comments: "As independent financial advisers we are supposed to act in the best interest of the client, not the product provider. Any thing else is a breach of trust and good faith. Products should be sold on merit not incentives and this is what most product providers fear the most."

Editor's thoughts:
The LOA has set up a broad-based inquiry into practices in the Credit Life Assurance industry. It will be very interesting to view the findings of this commission. Do you think the LOA commission will recommend action against the product suppliers (LOA members) or will we simply see an additional raft of legislation aimed at the financial intermediary? Send your comments to gareth@fanews.co.za