An important communication to FIA members re the FIA's responses to regulators
The FIA has made public comment on a number of RDR-related draft regulations in the past two weeks. Each comment was compiled based on inputs from our discipline-specific FIA executive committees; via work done by the FIA RDR Board Committee; and by way of inputs from individual members following our request.
Big impact regulation – FIA response to the proposed amendments to the insurance acts
Certain of the proposed amendments to the insurance acts could have a major impact on FIA member advisors and brokers. It is for this reason that the FIA, under the signature of our CEO, Lizelle van der Merwe, included a covering letter alongside our submission to National Treasury.
We reminded National Treasury of our previous correspondence dated 15 February 2016. In a letter titled ‘FIA RDR Phase 1 Cover Letter’ – and sent to the FSB as part of our detailed submission on the ‘Status Update: Retail Distribution Review Phase 1’ – we raised a number of issues of principle as well as concerns and questions that our members had regarding the unfolding regulatory process.
Our clear message to National Treasury was that “the concerns and questions in our previous correspondence remain largely unanswered; but are still relevant to our constituency – even more so with the publication of the proposed amendments to the insurance regulations”.
Concepts that the FIA supports
The FIA confirmed our commitment to engaging with the Financial Services Board (the future Market Conduct Authority) and National Treasury in the quest to provide a disciplined and sustainable intermediated financial services sector. We further reconfirmed our support of South Africa’s broad regulatory objectives, as follows:
- We support that market conduct / prudential abuses be addressed and enforced by the regulator under current legislation as well as (where possible) by the FIA in terms of its code of ethics;
- We support rational, reasonable and enforceable regulation that promotes the sustainability of business models providing beneficial advice, innovation and efficient outcomes for customers; and
- We support the broad principles set out by National Treasury as crucial for the formulation of the future regulatory and supervisory approach, including that regulation must be:Transparent;Comprehensive and consistent;Appropriate;Outcomes based;Risk-based and proportional;Pre-emptive;A credible deterrent to misconduct; andAligned with applicable international standards.
In our covering letter we expressed the FIA’s concerns with a number of issues arising from the proposed amendments to the insurance regulations to give effect to RDR Phase 1. In no particular order, we stated that:
- Some of the proposed amendments appear to depart from National Treasury’s abovementioned principles;
- There are amendments that are unnecessarily biased towards granular detail, invasiveness and prohibition and the proposed intrusiveness is out of place in an industry that is recognised globally for being progressive, robust and reliable;
- The extent of industry participation in crucial studies currently underway is inadequate (the FSB’s Intermediary Activity Analysis is a case in point);
- That existing regulations should be properly enforced and given enough time to do their work (for example, existing binder regulations were only introduced into the market some five years ago);
- It does not make sense to introduce law with the provision that businesses can apply for the relaxation of such law as this creates unnecessary uncertainty (the best outcome is that the proposed change be reconsidered, but if that cannot happen the FIA would have to support the inclusion of an application for the relaxation of said law);
- The draft amendments as currently written will have a significant impact on the sustainability of financial advice practices;
- The draft amendments appear to favour a few large insurers at the expense of smaller insurers, some of whom only operate by way of binder and outsource models whilst playing a meaningful role in the market; and
- The FIA cannot support proposed changes that are qualified with the phrase “ongoing work with outcomes to be decided” and we therefore question both the rationale and haste in enacting such changes at this time (for example, proposals relating to data timelines and ‘capped’ fees appear to be incomplete).
The FIA’s view on remuneration
Our comments highlighted that the primary concern among FIA members, regardless of size, is the direct impact of the proposed amendments on our revenues and costs. These are the building blocks on which we have built our businesses and any change in this ‘balance’ impacts the value of our businesses and our ability to deliver a FAIS- and TCF-compliant service and advice offering to clients. It also impacts our ability to attract new investment into the industry. So, for example, we do not support the capping of binder fees where intermediaries are offering a professional, value-adding administration service.
We told National Treasury that it does not make sense to address ‘remuneration’ in parts, with binder and outsource fees in RDR Phase 1 and commission in RDR Phase 2. We asked: “How will fair outcomes be achieved without full and proper consultation and access to the reasoning behind the eventual outcomes?” We said that remuneration needs to be looked at holistically in order to make informed decisions across the remuneration spectrum and create and enable business certainty.
We reminded the regulator that fair remuneration (under the principle of “cost plus reasonable rate of return”) is of utmost importance to FIA members before stating, categorically, that the outcomes of the implementation of the restriction on remuneration as stated in the draft insurance regulations will cause hardship and loss of employment, particularly in the middle to lower earning brackets.
We warned that capping of incomes alongside the additional expenditure required to give effect to increasing regulation, being both operational (for example the restriction on remuneration and IT system changes) and governance and compliance (for example the now onerous Policyholder Protection Rules and FAIS Conduct of Business Reporting), could lead to the demise of many small to medium size intermediary practices.
We also warned that the uncertainty pertaining intermediary business models will have an adverse impact on new intermediaries entering into the market, inhibiting transformation in the sector.
What happens next?
What do we expect from National Treasury? What will we do if we are unhappy with their response? And what should FIA members do in the meantime?
The FIA believes that the FSB and / or National Treasury should conduct a comprehensive economic impact study to assess the up and down sides of proposed regulation to both the intermediary community and the greater insurance industry. We want the regulator to demonstrate that the intended benefit to the customer outweighs the costs of their regulatory interventions. If they cannot do so, backed by a comprehensve study, the question becomes: “What informs the decisions proposed in the various regulatory amendments?”
As an organisation we stand firmly behind the soundness, beneficial advice, innovation and value-add services currently offered by the members of the FIA to the South African insuring public. Our members’ capabilities have been facilitated in part through the use of binders (mandates) and outsourcing going as far back as the late-1980s (in SA) and for well over 100 years globally through models such as the Lloyds cover-holder delegated mandates. The value of these models is evidenced by the many millions of satisfied and well treated customers both large and small, across the world and in South Africa.
It is our contention (a matter frequently raised with both the FSB and National Treasury) that scant attention has been given to the actual economics of the broker distribution model. In real terms insurance is cheaper today per R1000 on cover than it was 20 years ago, while insurers’ costs per R1000 on cover have increased – the premium charged to consumer has reduced in real terms too. In the absence of any adjustments to commission caps this scenario has led to an effective decline in the commission paid to intermediaries.
We therefore believe that the FSB's Intermediary Activity Analysis should be pursued (in addition to a comprehensive economic impact study) in order to give a detailed assessment of all intermediary activities. Such an investigation is fundamental in support of the proposed changes and we have requested that the FIA participate in the IAA and that the outcomes from the IAA be made known prior to the introduction of the proposed amendments and further regulations.
At this early stage it is clear that the regulations as currently proposed will result in losses to binder income – at a future date yet to be determined – and that FIA members will have to begin thinking about their options / responses in this regard. This means each of our members will have to reflect on their business processes and structures in light of the current proposed regulations.
The process of engagement continues
We will continue to engage with the regulators on the various proposed changes to regulation, including Phase 2 and 3 of RDR, giving FIA member input whenever necessary. Because the proposed regulations have wide impact on all industry stakeholders we will also interact with insurers (large and small) and various industry associations including ASISA, FPi, IISA and SAIA to name a few.
We are holding a close watching brief to ensure that our concerns are adequately reflected in the eventual legislation. You can rest assured that the FIA has plans in place should changes be implemented without meaningful consultation, justification and rationale. We are consulting widely to ensure that we are both well informed of the options available to us and well prepared in the event the regulatory outcomes challenge our members’ sustainability. We will keep you informed though our structures as these consultations unfold and as specific action is decided on.
Thanks to our engaged members – and a call to action
We would like to take this opportunity to thank those members who have given of their time and resources to ensure that the FIA’s comments reflect the view of all its members. We again call on our members to submit any relevant input not addressed in this correspondence to the FIA – you may email Peter Atkinson () – so that we can incorporate this into our interactions and planning with the regulators as appropriate.
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Regards,
GarethStokes – Communications Manager.
Tel: 012 665 0085; Fax: 012 665 0534; Mobile: 073 373 3580
E-mail: ; Web:
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