Fast little loans
“If any payments to financial service providers (FSPs) and any of their employees, including but not limited to representatives, or any associated company or structure apart from commissions are to be continued, please list the payments, their structure and why your company considers them to be acceptable.” This seems to be a fairly straightforward question. It was one of a number of questions that Personal Finance put to the major life assurance companies about additional payments to FSPs and their agents that are outside the regulated commissions.
Most of the companies seemed to be unable to provide a straightforward answer. Obfuscation is the polite way to describe most of the answers I received, particularly the one from Liberty Life (see “How three assurers replied”, below).
In fact, I am so puzzled by Liberty’s response that I am prepared to give away a used copy of Liberty’s most recent annual report so you can face the additional challenge of trying to establish how, on the back of such nonsense, Liberty managed to grow its business in the past financial year.
Personal Finance’s questions to the life companies arose after the Financial Services Board (FSB) sent an information letter to the short- and long-term insurance industries informing them (at least I think it did – the language is pure legalise) that they cannot set up structures, such as Netcos, into which payments over and above the regulated commissions can be made to FSPs for selling products.
Momentum’s reply stood out from the rest. Momentum said it has never used a Netco structure to pay additional amounts to FSPs, and that last year it discontinued the practice of paying sign-up bonuses to new agents.
Momentum deserves a pat on the back for what it has done and for its frank response.
Next in line for being straightforward was Discovery Life, which started most of the nasty practices for ducking and diving the commission regulations.
Although Discovery Life has been stopped from using the Netco structure it invented, it is now going to try to sign up independent advisers as its own representatives, again using unacceptable financial lures outside of the commission structures.
It may be legal, but it is most definitely not acceptable. The simple reason is that advisers who are paid additional financial lures have a perverse and a fairly secret incentive to mis-sell the products of providers that pay them amounts over and above the regulated commissions.
You, the client, can expect, on the “bought” switch in allegiance, to be given 100 reasons why the original product provider is suddenly no good and why the new product provider is the best. And you can be sure that most of the reasons will be gobbledygook.
A switch is likely to involve you in extra costs, mainly because of the triple payment of commissions to your adviser. The first commission was paid with the sale of the original product, the second commission comes with the sign-up payment and the third commission comes when the products are switched.
So although Discovery Life’s reply (below) is quite frank, the company should still have to stand facing the corner and wear a conical hat stating “I still do not know how to behave”.
It is quite clear from the answers that most life companies simply do not see the difference between what is legal, what is ethical and what is in the best interests of consumers.
The problem with the FSB’s letter to the insurance industry is that it was just as ambiguous and complicated as the responses I received from the life assurance companies. This, in my view, allows the FSB’s letter to be interpreted in almost any way.
The letter should have said: “Listen industry. We know you are paying amounts, often substantial, in excess of regulated commissions. Stop it now or we will inflict a big fine, and we will withdraw your licence. These practices are unacceptable and not in the best interests of consumers.”
And then the FSB should show some backbone. It should go out there and conduct proper inspections. If a company is doing the wrong thing, it should be hauled before the FSB’s Enforcement Committee, the regulator’s administrative justice body, with the recommendation that a multi-million-rand fine is imposed and that the company’s licence is withdrawn or suspended. The fines of R100 000 that are handed down are not going to make a difference to companies with turnovers of billions of rands.
If the regulator expects the industry to be transparent, which includes using understandable language, then it should also use plain language. Gobbledygook allows investors to be ripped off.
What the regulated financial services industry all too often has in common with scam operators is absolutely unintelligible language designed, yes, to confuse you. The less you know about a product, the more likely you are to be misled about what the product offers and the less likely you are to complain if something goes wrong; and if you do complain, the easier it is for the product provider to claim that you were informed.
Taking refuge in opaqueness helps the malevolent to succeed in major scams, such as the R1.8-billion apparent Ponzi scheme called the Relative Value Arbitrage Fund (RVAF).
Just as the FSB must up its game in dealing with the excesses of the regulated financial ser-vices industry, so it has to improve its performance dramatically in clamping down on the cheats, such as Herman Pretorius, who controlled RVAF and, from what I have heard, used a silver tongue and much confusing language to bamboozle investors.
One thing that is clear is that until both the industry and the FSB raise their game, you must treat everyone and anyone with suspicion. You cannot even accept that the FSB’s licensing of FSPs is a safeguard, because too many abuses are taking place. The abuses include:
* People who cannot obtain licences are fronted by those who have been licensed. The people with the licences are normally family members, but the selling is done by those who would not pass the fit and proper tests required in terms of the code of conduct of the Financial Advisory and Intermediary Services (FAIS) Act.
* FSPs who cannot obtain registration in their own names to sell certain products are registered by product providers as their representatives. This happened on a wide scale with property syndication companies, which registered advisers to sell shares and debentures.
* The placing of an FSP licence number on a product to mislead you into believing that the product has been endorsed by the FSB, even where the product, such as a property syndication, is not regulated by the FSB.
No financial product, not even one that is regulated in terms of the FAIS Act, is endorsed by the FSB. Although a regulated pro-duct provides you with a lot more safeguards than an unregulated product, regulation is not a guarantee that your money is secure.
HOW THREE ASSURERS REPLIED
Arthur Marsden, Liberty’s divisional director: sales and distribution: “Liberty has minimal exposure to what appear to be described by the industry as Netco arrangements with distributors. In any event, Liberty believes that all of its arrangements with distributors comply with all applicable regulations. In the unlikely event that the FSB deems any of Liberty’s business practices to be in contravention of any regulations, those practices will be revised as appropriate.”
Lisette Lombard, Old Mutual’s senior media consultant: “We would like to point out that, in addition to commission payable for rendering services as an intermediary, a long-term insurer may legitimately remunerate third parties for ‘binder services’ and other services which may be outsourced by an insurer. We do not make any payments to FSPs and their employees, including but not limited to representatives or any associated company or structure in contravention of the regulations, or the provisions dealing with ‘binder activities’ … We have also gone through a rigorous process to ensure that our business practices conform to the Financial Advisory and Intermediary Services Act conflict-of-interest provisions.”
Esann der Kock, Sanlam’s senior communications manager: The term ‘Netco agreement’ generally refers to an arrangement Discovery introduced many years ago. Sanlam does not have a similar arrangement, nor any other sign-on incentive arrangements in place. Sanlam may, from time to time, outsource certain distribution services to third parties, as allowed by legislation. We regularly subject these arrangements to scrutiny, and will do so again following the recent FSB information letter.”
WHAT DISCOVERY LIFE SAID
Hylton Kallner, chief marketing officer of Discovery: “Further to the questions you sent through, we know that you have always been highly critical of the ‘Netco’ structures, but I feel that it is important that you know that Discovery has always engaged with the Financial Services Board (FSB) in an open, transparent and responsive manner on all issues, including our distribution structures. We would never engage in any practice which the regulator disapproves of, which approach frames our response on this particular issue.
“As you are aware, the recent FSB information letter makes reference to a wide range of structures. The area relevant to Discovery Life is the guidance provided by the FSB around intermediary services and outsourced arrangements, which include ‘Netco’ and other service contracts. We believe these companies provide important and valuable services, especially the recruitment and development of new advisers to the industry. Based on the guidance provided in the letter, Discovery has taken the decision to discontinue its ‘Netco’ contracts. We have informed the FSB of our position.
“We will offer advisers who have been serviced by ‘Netcos’ the option to either continue with their Discovery contract as independent financial advisers without the services they would have received from the ‘Netco’, or join Discovery as tied agents if they meet our employment criteria.
“While potentially far-reaching for the broader industry, the letter from the FSB has no implications for any of our other distribution structures and we are not engaged in any of the contracts, structures or practices referred to.
“Regarding upfront payments to tied agents, Discovery’s philosophy has been to never pay agents ‘sign-on bonuses’ or large lump sums that would place them in an advantaged position when joining Discovery. Our preference is that an adviser should join Discovery based on long-term prospects.
“Where an adviser foregoes commission already earned but still to be received in the next 12 months, we will partially compensate him or her for the loss of this future guaranteed income. It is important to note that this payment:
* Does not place agents in a financially better position than they would have been in had they not joined Discovery; [and]
* Is not contingent on production targets which would otherwise create a conflict of interest or potentially negatively impact the quality of client advice.”