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Commission procurement clause just one piece of the transformation puzzle

29 September 2020 Gareth Stokes
Ronald King, Director and Chair of the Regulatory Committee at the FIA.

Ronald King, Director and Chair of the Regulatory Committee at the FIA.

Andrew Coutts, Head of Intermediated Business at Santam.

Andrew Coutts, Head of Intermediated Business at Santam.

The commission procurement rule introduced via clause 5.14 of the Amended Financial Services Sector Code (AFSSC) is the tip of the iceberg as far as insurance sector transformation is concerned. The clause, which is effective from December 2020, requires that insurers include the commissions they pay to an insurance broker or insurance intermediary when measuring their total procurement spend. It is important because commission makes up a significant slice of a non-life insurer’s total expenditure. And procurement makes up 25% of an insurer’s overall Broad-based Black Economic Empowerment (B-BBEE) scorecard.

“Broker commissions and panel-beating expenses make up a significant percentage of a non-life insurer’s total procurement expenditure, and they could see changes in their B-BBEE scorecards as a consequence,” said Ronald King, Director and Chair of the Regulatory Committee at the Financial Intermediaries Association of Southern Africa (FIA). He opined that an insurer that realises a large proportion of its commission-based business from non-compliant large brokers will have to choose between shifting the business to compliant brokers, challenging existing brokers to improve their scorecards, or compensating on their scorecard by spending in other areas. 

The ‘Rip Van Winkel’ clause

Clause 5.14, which was included in the regulation with the provisor that it would only be in force three years after implementation of the AFSSC, was brought to FAnews’ attention by a reader who felt that financial services providers (FSPs) were uninformed about the change and its potential impact. He wondered what consequences brokerages would face should they fail to fit into an insurer’s evolving procurement plan. We asked various insurers to share their insights on the matter, with special thanks to Santam for their reply. 

Andrew Coutts, Head of Intermediated Business at Santam said that the inclusion of gross commissions in an insurer’s total measured procurement spend “impacted the current preferential procurement contribution from non-intermediary suppliers, and thus the transformation component of a general insurer’s B-BBEE scorecard”. The clause’s implementation coincides with an increase in the minimum spend targets, which further complicates matters. Coutts was confident that the changing procurement targets were achievable due to the proportion of broker commissions currently paid by insurers to exempted micro enterprises (EMEs). 

Empowerment recognition levels

An EME, defined in the legislation as a brokerage that generates less than R10 million per annum in gross fees and commissions, can achieve level 4 B-BBEE recognition by completing an affidavit. This level is adequate for the insurer to attain full recognition for the portion of its commission procurement spend paid to that broker. A qualifying small enterprise (QSE) with turnover of between R10 million and R50 million can submit an affidavit, provided it is more than 51% Black Owned (per clause 5.4 of the FSSC). Clause 5.7 stipulates that all other QSEs that elect to be measured, will be required to obtain a verification certificate. Large intermediaries with more than R50 million in fees and commissions from all insurers will have to obtain a SANAS-approved certificate issued by an accredited verification agency. 

Many FSPs still view the AFSSC as a matter of choice and consequence rather than compliance; but their stance belies the longer term intention of the regulation. “The B-BBEE code is based on choice and consequence, however, in application, because of its ripple effect on all stakeholders affected in the procurement chain, it becomes compulsory,” said Coutts. Insurers will have to approach their intermediary partners for documentary proof of their B-BBEE level to enable them to make the necessary verification of their procurement spend for future reporting periods. 

Could we expect insurers to lean on brokers to compel them to do better in the transformation stakes? “We encourage all brokers to support and drive the transformation of their businesses, to improve their relevance in the market and to support our industry’s transformation objectives,” said Coutts. “Our dedicated broker development team has completed multiple roadshows and engagement sessions countrywide, increasing both our black broker count and our business from black brokers by more than 20% per year since 2018”. 

Radical and aggressive transformation

Tough new regulations have already superseded the AFSSC in the transformation stakes. “The Conduct of Financial Institutions (COFI) Bill is going to make black economic empowerment part of a broker’s licensing requirements and you will risk losing your license if you do not have a proper transformation plan in place,” said King. 

The Department of Employment and Labour has also upped the ante. The Employment Equity Amendment Bill, which was gazetted on 21 July 2020 and will be implemented as soon as it passes Parliament, will empower the Minister to determine sector-specific numerical targets for equitable representation across all occupational levels. Local human resources firm, LabourNet, describes the proposed bill as the most radical and aggressively transformative move by the Department to force employers to change their respective employment profiles. 

“Transformation represents a great opportunity for growth and penetration by brokers into markets currently dominated by direct insurers, banks and affinity markets and is strongly supported by the FIA and the large number of intermediaries we have already engaged with,” said Coutts. Santam has vested 160 black intermediaries into various broker practices since 2016, is currently engaging with more than 400 black brokers, and has exciting growth targets through to 2025. “We have a strong  level 1 B-BBEE accreditation and fully support the transformation of our intermediary base to support development initiatives in our country,” he said. 

Proactive positioning is business critical

“The regulatory focus on transformation will not come as news to FIA member brokers; we have communicated the need to be proactive in this regard for many years,” concluded King. “Brokers must ensure that their businesses are correctly positioned for the prevailing macro and socioeconomic conditions”. It will take time for changes in the measurement of procurement expenditure to filter through the market, and brokers are unlikely to find their commission business yanked away from them by insurers looking to influence procurement scorecards. 

Writer’s thoughts:
The Amended Financial Services Sector Code, Conduct of Financial Institutions Bill, and Employment Equity Amendment Bill highlight the need for insurance brokers to transform their businesses. How have you responded to the transformation challenge? Are you meeting it head on with a fully transformed business, or do you hope to ‘fly under the radar’ as an EME or QES? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

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Quick Polls

QUESTION

Is the commission procurement rule introduced via clause 5.14 of the Amended Financial Services Sector Code (AFSSC) an important piece of the transformation puzzle?

ANSWER

The clause’s implementation coincides with an increase in the minimum spend targets, which further complicates matters
Many FSPs still view the AFSSC as a matter of choice and consequence rather than compliance
Transformation represents a great opportunity for growth and penetration by brokers
Brokers are unlikely to find their commission business yanked away from them by insurers looking to influence procurement scorecards
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