Discovery Life and Regal Financial Services have been fined R2.5 million and R200 000 respectively by the Financial Services Board (FSB) for engaging in the banned practice of paying “sign-on bonuses” to financial advisers, according to a statement issued by the FSB this week.
Sign-on bonuses refer to the payments that financial services companies make to advisers to attract them to sell their products, but have resulted in the widespread mis-selling of policies. The payment of such fees was banned in late 2014.
The payments included “establishment and restraint fees” to cover the cost to the advisers of establishing themselves in a new business, and to tie the advisers to the company for a certain period.
An adviser who received a sign-on bonus was expected to bring a certain amount of new business to the company for a specified period. Typically, an adviser would do this by recommending that clients who had taken out policies with the company for which he or she previously worked switched to policies from the company paying him or her the sign-on bonus.
It was unlikely that an adviser would disclose to clients that he or she had been paid a sign-on bonus, and therefore it was unlikely that clients who trusted an adviser would question a recommendation to move business, or, in the case of new business, ask why one product was recommended over another.
There was a case of an adviser being paid a sign-on bonus of R1.7 million by Old Mutual in 2012. Old Mutual defended the fees as compensation for the adviser giving up his independent brokerage and the contracts he had with various financial services companies.
But the FSB was of the view that the payment of these fees was to the detriment of consumers, because they served as an incentive for financial advisers to “churn” policies – in other words, to induce their clients to replace their policies, effectively moving their business to the company offering the adviser the bonus.
In September 2014, Personal Finance reported that complaints about companies luring advisers with sign-on bonuses, and the consequent churning by advisers, had forced the FSB to “act immediately” to stop the payment of these incentives.
The FSB had noted an increase in the payment of sign-on bonuses in light of an imminent clampdown by the regulator through proposals known as the Retail Distribution Review (RDR). Although the proposals had yet to be published, they were expected to suggest an end to sign-on bonuses.
The ban on sign-on bonuses was therefore introduced in December 2014 in terms of changes to the code of conduct under the Financial Advisory and Intermediary Services (FAIS) Act, the primary legislation governing the rendering of financial advice.
The statement issued by the FSB this week says that Discovery Life paid R840 000 in bonuses to four advisers one day after the code was changed, and that Regal also paid a R100 000 bonus to one of the four, although it’s not clear when.
There may be good reasons for an adviser to suggest you switch a policy from one company to another.
In terms of the FAIS Act, when a policy is switched, you must be provided with:
• A comparative analysis of both products;
• Details of the remuneration the adviser will earn directly or indirectly from both the replacement product and the product that you terminate; and
• A record of advice that documents the implications of the switch and why the replacement product is better suited to your financial needs.