To be or not to be? That is the independent question

If we look at the Oxford dictionary, the word independent means free from outside control, not subject to another’s authority. However, if we look at our insurance legislation, defining ‘independent’ becomes much more difficult. What does ‘independent’ actually mean when it comes to an intermediary?

Both the Long-Term and Short-Term Insurance Acts define ‘independent intermediary’ as a person, other than a representative, who renders services as an intermediary. But what, exactly, are ‘intermediary services’? Before we decide what makes an intermediary independent, we have to clarify his or her functions.

Using a wide brush

Yurika Pistorius from Compli-Serve SA says that existing definitions of intermediary services in our insurance acts are broad.

“They cover all services rendered by an intermediary during the life cycle of a policy. In addition, the wording differs. The Long-Term Act refers to rendering services as an intermediary while in the Short-Term Insurance Act we find the phrase of services as intermediary. Though similar, these two are not exactly the same.” says Pistorius.

The question then is: “What is an intermediary; and how do we distinguish between tied agents and independent intermediaries? Is the advice offered by a tied agent the same as the advice offered by an independent financial adviser?

To make matters worse, the new binder regulations have further confused the situation.
“In the regulations, a mandated intermediary is an independent intermediary who holds a written mandate from a current or potential policyholder authorising him or her to take certain actions without the prior approval of that policyholder,” continues Pistorius.

Learning from experiences

South Africa is in the process of going through some significant regulatory changes. This has been driven by the industry regulator’s need to ensure that South Africa’s regulation stays in line with global best practice.

Marc Lindley, Sales Manager at Investec Investment Management Services, points out that the UK regulator – the Financial Conduct Authority (FCA) – dictates that in order to be considered independent, an adviser should consider a broad range of products, provide unbiased and unrestricted advice based on a comprehensive and fair analysis of the relevant market, and inform their clients before they provide advice, that they provide independent advice.

“In our view, the best financial advisers are independent of any product provider and provide the ‘best advice’ based on an individual’s circumstances. On this basis, independent financial advisers have no actual or perceived conflict of interest. Not only do they have a fiduciary duty to put their client’s best interests first, but they also have the objectivity and experience to help investors make sense of the thousands of investment options available to them,” says Lindley.

Offering flexibility

In the new insurance environment, advisers should ideally offer a range of products to the public.

Ian Middleton, MD of Masthead, says “It is clear that one product solution is not enough. Advisers should have the flexibility and freedom to choose how wide the set of advice and services and products are that they wish to offer. My gut says three of four.”

Middleton believes that advisers should be compiling a panel of providers with whom they want to do business in each of the lines in which they operate (ie. long term, short term, investments and medical). As one offers more choice, the position of the adviser in the matrix graph, tends to the right, indicating more independent. The number does not have to be the same for each line of business. And how the choice is made is essentially one based on some set of criteria, some form of due diligence (which is a discussion for another article).

The debate around independent versus not independent still has a way to go. But whatever choice or combination of choices advisers offer, customers should know the true status of their adviser. They should be clearly informed as to the choice and variety their adviser can offer.