Clarifying binder regulations

The regulator needs to be commended for its efforts to ensure industry participation in resolving what appears to be a complicated issue. Much of the confusion stemmed from a wide variety of interpretations. This has now been clarified in Information Letter 3, in which the regulator published its interpretation, which should act as the blueprint for the industry to adhere to.

 

Although information letters such as these do not constitute legislation, the FSB makes it very clear that this letter forms the basis of how it will interpret the regulations. Any binder holder would therefore be well advised to ensure that its binder agreements and remuneration models are aligned to the principles discussed in this letter.

Perhaps the most important aspect of this information letter is that it now clearly defines what the FSB considers to be a binder function in that it explains and elaborates, in more detail, each of the five binder functions which a binder holder may perform on behalf of an insurer.

These activities are then defined in annexures to the information letter.

Of equal importance is that the FSB has provided a list of activities which the FSB considers to be incidental to the rendering of the binder function. The functions listed are not exhaustive, and insurers and binder holders are expected to apply their minds in line with this information letter.

The defining of the incidental activities will have major practical implications for binder holders, specifically in the area of remuneration for the performance of these activities.

The following are some highlights:

• Where a binder holder is performing these incidental activities on behalf of an insurer, the binder holder may not be paid for these activities outside of the binder agreement. This does not mean that the binder holder may not be paid for these activities, but should be paid for these activities as part of the binder fee. Accordingly, binder agreements will have to be scrutinised in order to ensure that the binder fee payable covers not only the binder function, but also these incidental activities.

• Where a binder holder is performing binder functions on behalf of an insurer, the insurer cannot outsource the incidental activities to another party. However, the binder agreement may provide for the binder holder outsourcing the performance of these incidental activities to another person. It is important to remember that such other person has to be remunerated by the binder holder from the binder fee received from the insurer.

• Only where no binder function is performed by a binder holder, may the insurer outsource the performance of the incidental activities to another person. Such activities and outsourcing must then be performed in accordance with the outsourcing directive known as Directive 159.

The ultimate test of whether a binder function is actually being performed, will be the determination of whether the discretion to perform the function resides with the insurer, or the binder holder.

The FSB just published a similar discussion document to investigate appropriate regulation in the funeral business space, where funeral parlours offer funeral policies underwritten by insurers to policy holders without the prior acceptance by the insurer of the insured risk and thereby effectively binding the insurer.

 

The letter also refers to the implementation of a standard activity based fee model, as well as the reporting of fees paid to binder holders by insurers. The golden rule remains that fees must be reasonably commensurate with the actual cost of the activity performed, together with the allowance for a reasonable right of return.

 

The need for clarity is well served in this instance, and it is now up to the industry to conform to clear requirements.