Clarifying RDR in the short-term space

The insurance industry is eagerly awaiting the Retail Distribution Review (RDR) paper from the Financial Services Board (FSB) to understand precisely what the FSB’s approach is going to be regarding fees and commissions currently being earned by intermediaries both in the long-term and short-term space.

This paper will not only affect intermediaries retailing investment and long-term products, but will also have a significant impact on short-term brokers. For the purposes of this article I am only going to refer to the implications on the short-term side, but this should not detract from the significance of the RDR paper for the life and investment markets. It is important that a number of issues are clarified for the industry as soon as possible so that brokers can begin to prepare and budget appropriately for the future.

The issue of fees

The RDR paper will deal with the difficult issue of broker fees currently regulated in terms of Section 8 (5) of the Short-Term Insurance Act. This is the fee charged by the broker over and above the premium for services which are not defined as binder, insurance administrative or intermediary services.

This income is sorely needed by brokers and has been part of their income for some time, having taken on different guises in the past, such as debit order fees, administrative fees or service fees. With the advent of the binder regulations and Directive 159, it became clear that the only fee a broker may charge the client directly will be in terms of Section 8 (5). This fee, which would not constitute fees being paid from the premium, needs to be disclosed to the client and cannot constitute a duplication of costs for functions being remunerated from elsewhere.

This creates a difficult scenario as brokers continue to perform the same services and theoretically thus require the same income. Their ability to earn income directly from clients is restricted to the policy Section 8 (5) fee. Section 8 (5) currently provides little guidance as to the exact services that need to be performed in order to earn this fee, or at what level this fee should be set.

Defining advice

The RDR paper will overhaul Section 8 (5) and amend this fee to an advice fee. Advice will be removed from the definition of “intermediary services” and will hence no longer be covered by the payment of commission.

The idea that insurers pay a broker commission for advice given to a client has not really ever made sense from a legal perspective, as the service is performed for the benefit of the client alone and so the RDR proposal makes sense.

The RDR will hence allow a broker to charge fees for a tangible service as well as for the quality of the service. More educated clients who do not require extensive advice may opt for a lower fee whereas less knowledgeable clients would need to pay more. This creates an incentive for brokers to charge according to the quality of service provided as opposed to simply standardising their charges and is to be welcomed.