Add spice to the fees and commission equation

Both the common law and the FAIS Act demand that brokers act in the client’s best interest by giving fit and proper advice. The broker is also required to represent the client honestly and competently in dealings between client and insurer.

It was accepted practice that brokers would obtain general broker appointments from their clients at which stage their mandate included moving the client’s policies from one insurer to the next, or purchasing additional products, with the clients’ informed consent.

In return for placing business with the insurer the broker received a commission, paid from the gross written premium. Payments were made in terms of an agreement concluded between broker and insurer which, among other things, allowed the broker to sell the insurer’s policy.

These agreements morphed into agency relationships between broker and insurer, allowing brokers to perform administration functions and collect premiums on behalf of the insurer. Brokers charged administration fees and kept the interest earned on premiums (while the money remained in their accounts) for these services.

Brokers could also charge the client a Section 8 broker fee as compensation (paid for and agreed by the client) for performing functions exclusively for the client and not covered by intermediary services or binder functions. The complicated "double agency” situation is plain for all to see. Brokers were getting paid for administrative functions including paying valid claims or rating risk on behalf of the insurer!

The Binder Regulations gazetted on 1 January 2012 attempt to deal with the agency problem by stating that where the broker performs a binder function for the insurer (such as settling claims, rating premium, deciding policy wordings, entering into policies or deciding on policy benefits) must do so as non-mandated intermediaries.

Such brokers will no longer be acting as the client’s agent and any action they take "on behalf of the client” will have to be signed off by the client. The broker still retains all the FAIS obligations such as giving the correct advice, best quotes and dealing with claims on behalf of the client. In other words the broker will be the insurer’s agent going forward – still earn a commission for placing business – and receive a binder fee for doing the binder functions.

To ensure that broker advice is not compromised, the broker may not earn a profit share from the scheme that is placed with the insurer, but only fees commensurate with the functions being performed.

The collection of premiums and the fees and costs charged have not been dealt with comprehensively by the new legislation, because these functions are still defined as an intermediary service.

The Binder Regulations hold that fees paid to the broker are commensurate with the work they are doing. It is no longer acceptable to lump a "debit order fee” with the Section 8 fee because they do not qualify in terms of the definitions. The broker, if acting as a binder holder, may only receive extra remuneration for regulated commission and the Section 8 broker fees mentioned earlier.

The issue around debit order functions and remuneration will be dealt with by the Financial Services Board (FSB) shortly, as they are currently waiting for industry comment on their recently published intermediary role and remuneration paper.

The broker’s legal position is still fraught with doubt with respect to agencies. Brokers who have no binder functions from insurers – and who take decisions on behalf of clients as mandated intermediaries – still receive commissions and may still be involved in the collection of premium on behalf of insurers and non mandated intermediaries are still forced by law to act in the best interests of the client in their dealings with the insurer.

But all brokers remain subject to their schemes being cancelled and rates being increased if their loss ratios weaken… The conflict is still very difficult to deal with completely.