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FSB puts its foot down

01 February 2018 Jonathan Faurie

While the majority of the industry bemoans regulatory reform, many insurers, brokers and advisers within the industry understand why it needs to happen. There are just some practices that need to be rooted out completely. While the Financial Services Board (FSB) is happy with the fact that the majority of the industry is toeing the regulatory reform line, there is still work to be done.

Levelling the playing field

One of the concerns regarding regulatory reform, and in particular the Retail Distribution Review (RDR), is that it may possibly favour tied agents over independent advisers. 

The FSB has listened to this concern and has on a number of occasions tried to settle the growing discontent insisting that RDR hopes to level the playing field rather than favouring one party over another. 

However, it still seems as if tied agents are in the pound seats when it comes to certain insurers. In order to address this, the FSB released a Draft Determination on the Equivalence of Reward towards the end of 2017. 

The credit issue

According to the FSB, there are a few practices within the industry which favour advisers who are tied to an insurer. 

The first arrangement that the FSB labelled as uncompliant with the Long-Term Insurance Act was the provision of various forms of credit to tied advisers or access to this credit on terms that are more favourable than those available at an arm’s length. 

This is being outlawed in the hope that tied agents and independent advisers have access to the same terms when it comes to credit. 

Purchasing books problem

The second arrangement that the FSB labelled as uncompliant is a far more concerning one. 

According to the FSB, these arrangements see an insurer purchase a representative’s book of business when the representative’s intermediary agreement with the insurer comes to an end.  

According to the FSB, the policyholders making up such books are already clients of the insurer by virtue of its agency relationship with the representative. Therefore, the insurer is already obliged to ensure appropriate ongoing service to such policyholders regardless of whether the intermediary agreement with the representative remains in place. The FSB adds that the rationale for an insurer to remunerate a representative for, in effect, retaining access to its own customers is unclear. 

Equal pay

The third arrangement that the FSB wants to outlaw are remunerations arrangements where more than 15% of a representative’s overall remuneration comprises of benefits that are not generally provided to all of the insurers representatives or representatives of a particular type. According to the FSB, this does not comply with the principle of equivalence of reward. 

The FSB adds that this provision is intended to address other remuneration arrangements (over and above the those specifically mentioned in the above paragraph) through which insurers could provide benefits to selected representatives that it would not be permitted to offer to other independent advisers. 

Further, independent advisers may only be remunerated through commission in monetary form. A tied representative may be remunerated in cash or kind. 

A role for all to play

The FSB has been steadfast in its approach of engaging with the industry on certain issues before implementing law. For the most part, the FSB has got the practice of buying a book of business as an incentive to move from one insurer to another under control. Through hard work, it will achieve the same result with the strange practice of purchasing a book of business from an adviser that is leaving a company. 

However, it is important to note that there is many ways to skin a cat; and if every role player in the industry does not play their part in banishing these practices, there will be regulatory arbitrage. 

Editor’s Thoughts:
The industry needs to build trust with its clients, and the FSB cannot do this alone. Brokers, and advisers are more than capable of playing a supporting role. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts


Added by Brian, 01 Feb 2018
FSB requires intermediaries to have a succession plan. This means the book has to be transferred to a new intermediary and it is only fair that the exiting intermediary or his estate receive fair value for the book.
How then can book transfers be deemed to be a problem?
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Added by kenny, 01 Feb 2018
Surely the rationale is that the insurer is buying the book to stop the broker moving the book over to someone who he can be remunerated by (how will he / she earn if the book lies where he has no contract)? and the relationship is with the broker and client, not the insurer. Is this in essence saying that you may not sell a book of business to another broker/broker house?
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Added by Cynical Simon, 01 Feb 2018
Trying to really understand the issue is difficult since it appears that the term tied agent refers to more than one category of agent. I must admit that the issue is still murky.
Who exactly stand to benefit from the intended changes?
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Added by Magdalena de Lange, 01 Feb 2018
Morning I am glad that we (Independent) advisers at an Insurance Company get the chance to be heard but hope it would reach the FSB The thoughts will be send to jonathan

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