Broker commission - worst of all possible worlds

Because the FAIS promise was not kept, we now have the worst of all possible worlds in relation to the regulation of broker's commission.

When the Policyholder Protection Rules were originally proposed as a forerunner to the FAIS Act the promise was that ultimately the market would operate, full disclosure would fill the gap of commission regulation and broker commissions would be deregulated.

What we are left with is the rump of the Policyholder Protection Rules, elaborate provisions of the FAIS Act (and all the subordinate legislation it has generated including lengthy Codes of Conduct) and commission which is still regulated exactly as it was decades ago when the world of financial services providers was entirely different.

When I started doing insurance law, the insurance market effectively consisted of a number of large companies who did everything through expert employees.  They sold and produced the policies, collected the premiums, serviced the needs of clients and dealt with the claims from start to finish.  Brokers were essentially remunerated for bringing in the business and got no share of the action nor any profits made out of managing a good portfolio of business.

Nowadays there are dozens of insurance companies.  Many of them are small companies that do not want to spend resources on performing services that can be better performed by intermediaries.  Policies are developed, sold, endorsed and maintained by brokers who know their market.  Portfolios are managed for efficient results.  Premium collection has been outsourced.  Claims are handled by intermediaries or claims administrators.  All this however still bears the shackles of commission regulation.  Intermediaries are performing valuable services for the financial services market and are seeking ways to be properly remunerated for what they do.  Members of the South African Insurance Association and the Life Officers Association indulge in practices that the Financial Services Board as regulator takes exception to when these matters are drawn to its attention. 

Various practices, some more acceptable than others, that supplement broker remuneration have been going on for decades and have kept the insurance market operating.  It all goes on unregulated till some whistleblower or competent investigative journalist or consumer body criticises the industry and its practices publicly.  Only then is anything done about it. 

What we have therefore is regulations that are outdated, remuneration that does not compensate adequately for work done, regulators who only speak when spoken to, and elaborate schemes (legal and less legal) to enable the market to operate.

If commission were deregulated but close attention were paid to the requirement to reveal any conflicts of interest between the broker and the client (because of the extra work done and money earned by the broker) and if there were full disclosure as to exactly how much of the premium is being applied to feed various hungry mouths, the consumer could seek their own best deal and the market could operate efficiently as it is intended to.  In the first place the consumer would have a clear choice as to whether to go to one supplier of products or services or another.  The suppliers will have a clear choice whether to compete with other suppliers who may be offering a better deal.  And, finally and especially, the FSB will have an easier take to regulate in the interests of the public.

PATRICK BRACHER, DIRECTOR, DENEYS REITZ INC.