The cost of compliance: over-stretched

Over the past decade, South Africa’s short-term insurance brokerages have had to absorb huge increases in administrative and operational overheads as they meet the advice, record keeping and reporting requirements for financial advisory businesses.

Compliance with the Financial Advisory and Intermediary Services (FAIS) Act of 2002 and its accompanying codes of conduct requires that brokerages increase their staff compliment, outsource their compliance function, or both.

"You would think that brokerages that conducted their businesses by the book before the implementation of FAIS would be relatively unaffected,” says Arnold van der Linde, President of the Financial Intermediaries Association of Southern Africa (FIA). "Not true. This is because FAIS places a burden of proof on the adviser and Financial Service Provider (FSP) to record and control each administrative process within their business.”

Legislation also requires that short-term insurance brokerages be audited by a compliance officer and that the result of this audit be reported to the Financial Services Board (FSB) in a prescribed manner.

"The cost of compliance is highly underestimated by the legislators and other insurance industry stakeholders,” he says. "Compliance in itself is not costly – it is part of a good brokerage’s daily business. What hurts, is the recording, on-going reporting, control and audit requirements that continue in perpetuity.”

Through 2012, the financial advice fraternity incurred significant and on-going expenses in preparing for and writing regulatory examinations. Small brokerages had to factor in down-time as their staff prepared for the exams, the cost of training material, lectures and examination fees, to name a few.

Enforcement comes with a hefty price tag too. Not only do brokerages contribute to the FSB and FAIS Ombud scheme through their levies and annual licence fees, but as more and more consumers use the office of the FAIS Ombud as a last resort recovery mechanism for short-term insurance disputes, the premiums and terms of their Professional Indemnity (PI) covers go through the roof.

"Another concern is that compliance costs seem to be skewed against broker-assisted businesses due to certain legislative responsibilities not applying to the direct selling model,” says Van der Linde. "Direct players, for example, can get away with providing information only when writing new business which means that their clients are effectively self-advised.”

In contrast, an intermediary must advise the client, present different product options and highlight the possible pitfalls both at underwriting and claims stage.

Despite the mounting cost pressures, consumers still receive the best overall deal by buying their car and household insurance from a risk adviser. "Costs do not magically disappear just because the client opts out of the advice process,” says Van der Linde. "And it is inherently untrue that the ‘no advice’ route results in cheaper premiums.”

Cost comparisons suggest that premium is linked to risk factors rather than the distribution channel used. The ‘no advice’ route meanwhile proves costly at claims stage, where direct insurers pay only 52c in claims for every rand of premium collected versus 69c in the rand for intermediated players.

"Consumers can rest assured that South Africa’s short-term insurance brokers are among the best regulated anywhere in the world,” concludes Van der Linde. "The length to which they have gone to ensure compliance with pro-consumer regulation, regardless of cost, affirms how valuable the broker-assisted distribution model is.”

These benefits could be lost if smaller brokerages are forced out of the industry due to rising compliance costs. Ask yourself: what will the consequences be when there is no professional advice channel for the insurance consumer to turn to?