Another option

The FPI says life insurance companies will have to shoulder some of the risk carried by intermediaries in the event commission structures are changed from “upfront” to “as-and-when”.

Peter Nieuwoudt, chairman of the personal financial planning industry sector group for the FPI, said that conceptually the FPI believes the LOA’s suggestion that an initial advice and compliance fee and thereafter an ongoing service fee should be paid is sound.

He said a move to as-and-when commissions would work well for those established intermediaries working the middle to upper levels of the market, but the FPI feels an immediate move to as-and-when commission payment may threaten the livelihoods of intermediaries servicing the lower income market, and will discourage new entrants.

“For this sector of the market we are proposing that life companies shoulder some of the risk with the intermediary,” Niewoudt said.

The FPI is proposing that life companies advance future service fee payments to intermediaries. The intermediary would then be expected to pay a nominal interest on that “loan” for the duration of the product’s term, and should the policy lapse the intermediary must pay back the outstanding amount of the loan that has not been allocated to accrued commission.

The initial advice and compliance fee would however be forfeited by the client and this should be made clear at the outset.

As it stands now there is a practice among some players in the industry to in effect levy the “capital and interest” cost of the upfront commission payment against the value of the policy and then to deduct the unrecouped balance from the consumer if the contract is terminated early

“This practice is no longer defensible. If the intermediary requires an upfront payment to get his or her cashflows into a positive position, and thus to fund their entry into the industry, then the cost and risk associated with this payment has to be for their account,” said Nieuwoudt.

In addition, the FPI said the LOA’s proposal focuses only on the impact of upfront commissions on early termination values, while overlooking the similar impact of front-end loading life office costs.

“A major issue for the regulator to consider is whether the established practice of life insurers accounting for notional future profits in advance and then safeguarding these with high and generally undisclosed termination charges is ethically defensible,” Nieuwoudt said. A key proposal by the FPI is therefore the full disclosure or at least the limitation of such charges.