The long walk to commission clarity

"The FAIS promise was not kept and we now have the worst of all possible worlds in relation to the regulation of broker's commission," reads the opening line of a recent article from Patrick Bracher, Director at Deneys Reitz Inc.

He opines that instead of improving matters, the FAIS Act has created an untenable situation as far as broker commissions are concerns. "We are left with the rump of the Policyholder Protection Rules, elaborate provisions of the FAIS Act (and all the subordinate legislation it has generated including lengthy Codes of Conduct) and commission which is still regulated exactly as it was decades ago when the world of financial services providers was entirely different."

In other words despite the regulator's best intentions, the intermediary is faced with a greater workload to appease regulators while commission regulations remain unchanged. And neither disclosure nor transparency has been achieved with these items remaining entrenched as the holy grails of the financial services industry.

Promised deregulation and transparency never emerged

Bracher believes there are a number of areas that need urgent attention. The current insurance environment is littered with "regulations that are outdated, remuneration that does not compensate adequately for work done, regulators who only speak when spoken to, and elaborate schemes (legal and less legal) to enable the market to operate."

He speaks to a lack of unity and cohesiveness in the insurance industry as a whole. Bodies representing the short- and long-term insurance players seem to act independent of the regulatory bodies and are often make decisions that are at odds with the intermediaries and brokers who have to sell their members' products.

"Members of the South African Insurance Association and the Life Officers Association [still] indulge in practices that the Financial Services Board as regulator takes exception to when these matters are drawn to its attention," says Bracher.

The good old fee versus commission debate

Transparency and disclosure issues aside, the much debated commission versus fee remuneration matter still hangs over the insurance industry. It is a topic which is likely to be hotly discussed as the long-term industry looks for solutions to current commission practices.

And fees based advice is not necessarily the fix-all that industry players are hoping for. As far back as 2002, analysis conducted in the UK confirmed that consumers tend toward the 'cheaper' option or at the very least the option they perceive to be most affordable. When consumers are given the choice of an upfront commission or paying a fee, 85% to 90% prefer the commission option. We believe the results will be similar in South Africa. Of course there are many in favour of the fee based solution. One FAnews Online reader recently submitted that: "Although the independent adviser should fight the commission arrangement [as it currently stands] I would much rather get a small fee than a large commission.

"The chance that some tied agent will get to my client if I 'sell' him a commission based product, is very high, especially the way the LOA is going back to the tied agent model for its business.

"If the adviser charges the client a fee for implementation, then the adviser can't lose out. As an adviser, I won't have to keep worrying about whether my client is paying his life assurance premiums or not, and I can get on with other things, like focussing on clients' investment portfolios."

A possible answer

Our reader continues: "Saying 'no' to commissions is like saying 'no' to drugs. We know very well by now that commissions bite. I suppose it's understandable that tied agents will get whipped into a selling frenzy by their bosses, which will then lead to further discredit of the industry. As a professional, you don't want to get tarred with the same brush." But if brokers and intermediaries are unable to say "no" to commissions and opt for a fixed fee instead, what options remain to them?

Bracher proposes a unique alternative to regulated commissions. He proposes that commissions are deregulated and the client advised exactly what portion of his premium goes to commissions. This would allow the efficient market theory to determine price.

Consumers would be free to choose whichever product or service they preferred, fully informed of how the purchase price (or monthly premium) was allocated. "The suppliers will have a clear choice whether to compete with other suppliers who may be offering a better deal.  And the FSB will have an easier take to regulate in the interests of the public."

Editor's thoughts:
Prices in a free market are usually determined by supply and demand. Consumers are able to base their purchasing decisions on value and price. Problems emerge when competition is limited and products are of a complex nature. A consumer in the life insurance industry is hard pressed to compare quotes from different players for precisely these reasons. Assuming the industry achieves full disclosure and transparency where product structured and commission are concerned, will Bracher's proposal work? Send your comments to [email protected]