A first step towards centralised financial services regulation

To gain a complete understanding of how the Bill impacts on relationships between insurers, intermediaries and customers it must be read in conjunction with the Binder Regulations and the Amendments to the Insurance Act.

According to the Financial Services Board (FSB) the new regulation will "ensure a sound and well regulated financial services industry and promote financial market stability by strengthening the financial sector regulatory framework and enhancing the supervisory powers of the regulators, as well as the powers of the Minister of Finance in dealing with potential risks to the financial system.”

The practical implications are somewhat wider, as the Bill covers amendments to 12 areas, ranging from the Pension Funds Act and the Co-operative Banks Act to the Short Term Insurance Act! This article focuses on the provisions relating to the payment of commission and fees to intermediaries in the short term insurance space.

The first proposals to directly impact on intermediaries are the deletion of the definition of ‘services as intermediary’, ‘representative’ and ‘independent intermediary’. Under the existing law an intermediary may only receive commission for services that satisfy this definition, regulated to a maximum of12.5% for motor business and 20% for non motor business.

When a broker offers a service that is interpreted as falling outside of the current definition, the insurer often pays additional fees to compensate. The Binder regulations and the Outsource directive under the Insurance Act defines where such fees are legitimate and attempts to introduce fee limits by stipulating that they be commensurate with the costs of performing the function.

Essentially these regulations gave some certainty as to what falls outside the definition of ‘services as intermediary’ for which remuneration other than commission could be paid. The Binder Regulations and the Amendments to the Insurance Act also introduced new definitions of independent intermediary by introducing the mandated or non-mandated concept.

The removal of these definitions from the Insurance Act is to allow the Registrar to act swiftly in addressing payments of various forms of remuneration to intermediaries, thereby addressing the discrepancies that arise out of different interpretations as to what constitutes intermediary services and what remuneration is payable in respect of such services.

It is now proposed that brokers may receive only commission from an insurer or policyholder – and that the "on top fee” charged by many brokers to clients in terms of Sec 8(5) of the Insurance Act be removed.

The Binder regulations state that a broker may not be compensated twice for any function performed. If a broker earns commissions and fees from an insurer then the argument goes: "What services are you rendering to your client not already covered under either binder fees, outsource fees or commission?”

The South African Insurance Association (SAIA) and the Financial Intermediaries Association (FIA) have been working on a submission to the Financial Service Board (FSB) to break down the functions currently performed by intermediaries.

Functions that should be compensated for include certain services rendered specifically for clients and charged for under Section 8(b). It is expected that the regulations under the Financial Services Law Amendment Bill will pull all of the existing remuneration arrangements together under one specific set of rules.

The Bill also includes an update of the FAIS Act to introduce "continuous professional development” and a new section on fit and proper requirements. These are two of many changes introduced by the Bill, each emphasising the need for active industry engagement on both the Bill and the Regulations that will eventually form part of it.

Until we know what the new regulations will contain it is very difficult to constructively comment on the deletion of definitions from the Insurance Act! Industry stakeholders will have to ensure that the Bill includes appropriate remuneration structures within a regulated commission environment.