Complaints about financial services companies luring advisers with “sign-on bonuses” and advisers switching policies to the company that incentivises them, to the detriment of consumers, have forced the Financial Services Board (FSB) to act immediately to stop the payment of these incentives.
“Sign-on bonuses” were expected to be addressed in the FSB’s much-expected review of the costs charged to distribute (sell) financial products – known as the retail distribution review (RDR).
However, an increase in this practice ahead of an expected regulatory clampdown has forced the FSB to take action earlier, Caroline da Silva, the deputy registrar of financial services providers, says.
The FSB was hoping to publish the RDR proposals earlier this year, but the regulator is still finalising the first draft.
Instead, earlier this month, the FSB published proposed amendments to the Code of Conduct under the Financial Advisory and Intermediary Services (FAIS) Act that will prohibit companies from offering “sign-on bonuses” and advisers from accepting them.
An adviser who accepts a “sign-on bonus” typically becomes an agent or representative of the financial services company offering the incentive and is expected to bring a certain level of new business to the company for a specified period, although this is not always explicitly stated in the contract. To attain these targets, advisers may switch their clients’ policies to those of the companies that signed them up.
Industry sources say that some advisers switch companies every few years in order to earn a “sign-on bonus” – and they switch their clients’ policies each time.
The financial incentive can lead an adviser to recommend that you switch a policy, without taking into account whether the switch is in your best interests or the penalties you may incur in doing so.
Da Silva says the FSB is considering the comments it received on the proposed changes to the FAIS Act’s Code of Conduct, and it expects to make the amendments or publish another draft of the amendments within weeks.
The draft amendments to the Code of Conduct define a “sign-on bonus” as amounts paid directly or indirectly, with or without conditions, as:
* An incentive to recruit, or become a representative of, a financial services provider; or
* Compensation for potential or actual loss of any benefit, including any form of income lost as a result of becoming a representative of a financial services provider; or
* The costs associated with the establishment of an adviser’s business or operations.
The definition includes any form of loan, advance or credit facility linked to the performance of any activity or meeting any target.
Da Silva says the amended code will ban the payment of any restraint-of-trade fees (which ensure that an agent will stay with a company for a certain period), establishment fees (which cover the costs of setting up business premises) or what are known as cash-neutralisation payments (compensation for any loss of income that results from becoming an agent).
She says the FSB cannot undo any existing “sign-on bonus” contracts, but it will review those that are the subject of complaints, to determine whether the payment of an incentive resulted in clients’ policies being churned (switched without good reason), and if they were, to what extent, whether the policyholders were properly advised about the replacement policy, and whether the switch was in the policyholders’ best interests. This review will be conducted in terms of the FAIS Act, which states that, when a policy is switched, you must be given:
* 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 needs.
The explanatory memorandum to the proposed amendment to the Code of Conduct says the payment of incentives may be reviewed once the reforms proposed in the RDR have been implemented.
Discovery Life is said to have initiated the practice of paying “sign-on bonuses”, which was copied by other life assurance companies.
Lee Nakan, the executive general manager at Old Mutual’s broker division, says although Old Mutual supports a ban on “sign-on bonuses” that lead or contribute to churning, it believes the proposed amendment of the Code of Conduct may have unintended consequences and be open to misinterpretation.
The current wording of the amendment seems to ban even incentives that do not result in churning, Nakan says.
Old Mutual has proposed to the FSB that the ban apply specifically to incentives that lead to churning, because this is the FSB’s stated intention in the explanatory memorandum, he says.
Old Mutual has also recommended that the FSB consider banning upfront commissions on all replacement financial products – that is, allowing only ongoing commissions or fees, agreed to by you, the policyholder, and that you can stop at any time, Nakan says.
Banning all “so-called sign-on bonuses” will result in a loss of “fair incentives” – such as legitimate retention structures or bonuses for new employees – that support professional development and career growth and “in no way” encourage product churning, he says.
The RDR proposals are expected to ban all commissions on investment products and only allow fees to which you consent to be deducted from your investment.
Jonathan Dixon, the FSB’s deputy executive for insurance, says the release of the RDR proposals has been delayed, because the review spans products across all sectors of the financial services industry.
The proposals should be released in the next few weeks, Dixon says.
FSB LOOKS INTO ‘SIGN-ON BONUS’ PAID TO OLD MUTUAL AGENT
The “sign-on bonus” paid to an Old Mutual agent whose bad advice is the subject of a multi-million-rand court case is one of a number of issues being considered in an ongoing Financial Services Board (FSB) inspection.
Caroline da Silva, the FSB’s deputy registrar of financial services providers, says the inspection should be completed shortly.
The inspection, under the Inspection of Financial Institutions Act, followed complaints to the FSB from Port Elizabeth businessmen who lost money on policies in which they were advised to invest.
The Charles Stretch Family Trust and James Pearce lodged a High Court case to recover their losses after Old Mutual imposed R32 million in penalties on policies sold to them by adviser James Stern. Their claim is against Stern and alternatively Old Mutual, which they allege has a duty to treat its customers fairly.
After it became aware of Stern’s bad advice, which was given before he became an Old Mutual agent, Old Mutual applied for Stern’s sequestration so it could reclaim the R1.7-million establishment and restraint-of-trade fees it paid him.
Old Mutual debarred Stern under the Financial Advisory and Intermediary Services Act, which means he cannot practice as an adviser, and he was therefore unable to fulfil his contract as an agent.
Stretch and Pearce believed they could make withdrawals from their investments whenever they needed to, but the policies had terms, which resulted in Old Mutual imposing the penalties of R32 million on eight contracts when the businessmen made withdrawals before the policies had matured.
The trust and Pearce allege that Stern falsified the policy application forms, using copies of their signatures on other documents.
The trust and Pearce want Old Mutual to reverse the penalties and return their investments, which are worth over R100 million.
In a second recent case in which Old Mutual sequestrated an agent, the company claimed the repayment of R1.6 million paid as a “sign-on bonus” to Alwyn Smit, of Bellville in the Western Cape.
Before he signed up as an Old Mutual adviser, Smit advised a pensioner to terminate three policies and take out a new policy with high annual increases that the client subsequently could not afford.
The pensioner complained to the Ombud for Financial Services Providers, Noluntu Bam, who ruled that Smit must pay back the R211 000 that the pensioner lost as a result of the advice.
In addition to the “sign-on bonus” paid to Stern, the FSB’s inspection will consider how both Old Mutual and Sanlam dealt with penalties imposed on the investments Stern sold to the Stretch trust and Pearce.