This week, I attended a National Treasury briefing to the financial services industry on legislation that will establish the proposed “twin peaks” regulation of the broader industry.
In terms of this legislation, the South African Reserve Bank will take over prudential regulation, which ensures that financial services companies don’t go bankrupt, and an expanded Financial Services Board (FSB) will be responsible for market conduct – in other words, ensuring that you are not ripped off.
A key part of ensuring proper market conduct is a new regulatory regime called Treating Customers Fairly (TCF). It is what is called principle-based regulation, in that certain behaviour is expected that will result in the best outcomes for consumers.
The problem is that there is little definition and it is subjective, rather than objective.
There was very brief (far too brief) discussion about TCF at the briefing session. Quite clearly, some of the representatives of financial services companies at the briefing see this type of regulation as an opportunity to continue to exploit consumers, rather than as an opportunity to treat you fairly, providing decent products that will enable you to retire financially secure.
Leanne Jackson, who is piloting the process at the FSB, has repeatedly made it clear that TCF’s success depends on a culture change in financial services companies, and this needs to come from the top – from executive level.
The problem is that we are seeing life companies going about their business in the same old way. And, in fairness, banks, which for the first time will also be made subject to the FSB and market conduct regulation, are probably even worse.
But what sums it up for me is the continued abuse of policyholders by the life assurance companies on what are called causal events. It is something I have gone on about ad nauseam.
It involves the application of the confiscatory penalties that life assurance companies apply when you can no longer afford to pay premiums, need cash, or want to transfer to a company providing a better, cheaper product.
It’s bad enough that these companies often continue to deduct the maximum penalty – and more if they can get away with it – when a causal event occurs, but what is horrendous is that they continue to sell these ghastly products seemingly without conscience.
There is no way any life company can claim to be meeting the admonition to treat you fairly if it continues to sell a product structured so that it always gets its profits and can pay perverse incentives to financial advisers to mis-sell you these products, when so much better is available.
In the accompanying graph, you can see that it is not only the actual confiscatory penalty that is costly; it is the ongoing compounding effect of that penalty.
As an example, I have taken a retirement annuity (RA) sold before 2005, assumed that the RA member has lost his job this month at the age of 35 and has been unable to maintain contributions, has made the RA paid-up, and has been hit with the maximum penalty of 30 percent (it would 40 percent on a life assurance endowment policy).
The bar chart shows what the outcome would have been if there had been no penalty and no further contributions (the green and the red together); and what the actual outcome will be (the green part of the bars).
I have assumed a conservative annual average real return (ignoring inflation) of three percent.
The bar chart shows what the situation will be at age 55 (when an RA can mature in terms of the Income Tax Act) and age 65 – the age most people should see as their earliest retirement date.
The R30 000 confiscation has become R72 818 at age 65. The damage caused by these penalties is unacceptable.
What is most worrying is that TCF is likely to be doomed to failure because major players in the financial services industry will not change their mind-set and continue to see consumers as patsies to be ripped off, be it in the life assurance industry, the retirement industry or the banking industry.
PENALTIES: GO ON THE OFFENSIVE
If you are an investor who is being slammed with a confiscatory penalty, fight it using every means. You may get lucky and have the penalty cancelled altogether.
Cape Town financial adviser Arthur Wienburg took on Momentum over confiscatory penalties it wanted to deduct from his clients – and he won, getting Momentum to back off in three cases.
You may not have a doughty Arthur Wienburg on your side, but, at the very least, you should complain to as many complaints resolution bodies as you can. Complain to the offices of:
* The Pension Funds Adjudicator, whose occupants of the post have led the fight against confiscatory penalties applied to retirement annuity policies;
* The Ombud for Financial Services Providers, which has also started to take up cudgels on behalf of investors; and
* The Ombudsman for Long-term Insurance, which over the years has gone from rubber stamping the ills of the industry to a body that has exerted its independence.
Life assurance companies cannot tell policyholders that they “may” have to pay a confiscatory penalty if they break contract conditions on an investment policy (a retirement annuity or an endowment policy). Policyholders must be told what the amounts will be and how they are calculated, says Wienburg, who has been in a months-long battle with life assurance company Momentum on the issue.
Wienburg has been trying to move three of his clients out of Momentum policies, mainly because of under-performance and high costs – but he is not prepared to give Momentum a blank cheque to set the amount of any consequent penalty.
Wienburg says: “Momentum asks clients to acknowledge that they are aware costs will be debited to them without disclosing these penalties, nor any calculation to enable a client to satisfy themselves that the costs are legitimate and acceptable.
“In two cases I have dealt with where the client was moving to another product provider there were, in fact, no penalties due, but the client was told that there could be costs. Clearly this threat of a penalty being deducted from a client’s savings is used to discourage investors from moving to better product providers.”
Wienburg says Momentum also uses various bureaucratic tactics to delay moves by clients to new product providers.
He says that the penalty limits set by regulators are also being abused. The limits are a maximum of 30 percent on a retirement annuity (RA) and 40 percent on an endowment policy taken out before January 2009; and a maximum of 15 percent on an RA and 20 percent on an endowment policy, on a reducing scale, from January 2009.
Wienburg says that the penalties levied on policies taken out before 2009 are often not based on actual unrecouped costs of a life company – but are far higher. He says unrecouped costs should be accurately calculated, and there should be no penalty where there are no unrecouped costs.
In one case, Momentum reduced an investor’s savings by R11 517 (11.52 percent) from R99 947, saying: “Unfortunately we cannot provide you with a breakdown of this cost that will be deducted. Please be advised that it is in line with legislation according to the Association of Savings & Investment SA (Asisa) ruling. These contracts cost (sic) is group-based and not individual-based. It is also spread over the full term of the contract.”
Asisa has denied it has anything to do with how the penalties are calculated.
The other problem was that Momentum had already penalised the investor many years earlier when he had made his RA paid-up (stopped making further contributions).
Momentum initially argued that it was entitled to “double dip” (applying penalties more than once to a policy), despite directives from the Financial Services Board that double-dipping is not permitted where it results in regulated limits being exceeded.
After persistent challenges from Wienburg demanding the calculations, Momentum backed off and cancelled the penalty.
Momentum, with a number of other life companies, continues to sell products with penalties that are applied if premiums/ contributions are reduced for whatever reason, including being unable to afford the premiums because of the loss of a job.
Asked to explain why it continues to sell such products in view of the new Treating Customers Fairly regulatory regime, Momentum says: “We have always believed in the fair treatment of our clients and will continue to update our processes and products to comply with the principles of the treating your customer fairly policy (sic).”
I wait with great cynicism for Momentum, the company that made a R800 000 mistake in one lot of penalties last year, to announce that it will no longer be selling these unacceptable products.
When there are more Wienburgs and policyholders putting up lengthy fights that cost the companies money, they may, however, start thinking again.
LIBERTY SHOULD KNOW ABOUT LIFE’S PITFALLS
Liberty Life seems to have little idea of the reality of life. It seems to think that everyone is educated, starts earning a living, buys a home with a white picket fence, has darling, perfect and healthy little children, has a blissful retirement based on a retirement annuity (RA) bought from Liberty and then dies quietly while asleep.
Why do I say so? Well it is based on a reply received from the strangely titled Lynette Sasto, Liberty’s “head of values initiatives”, to a complaint Personal Finance received about a confiscatory penalty Liberty imposed on one of its policyholders, Mr R (nothing like beating up your own customers!)
She had this lovely little paragraph:
“As with most of these products in the industry, the retirement annuity is structured so as to recover most of the expenses incurred in the issue and maintenance of the policy via charges levied over the life of the contract. This structure enables a higher amount to be invested upfront and provides better value to clients who keep their policies for the full period intended.”
Well Lynette, you obviously have a cosy, well-protected job.
Life is not like that. Most clients do not choose not to save for retirement. The misfortunes of life befall ordinary people all the time. They fall ill, their children fall ill, they lose jobs, they have accidents and they lose the ability to maintain payments to life assurance savings products – both RAs and endowment policies.
They often have to choose between paying RA contributions and feeding their families or paying for medical bills not covered by expensive medical scheme membership.
The question has to be, why do life companies like Liberty stick to sprouting this type of nonsense when they know very well, as life assurance companies, that the chances are significant that people will not be able to maintain payments, particularly when there is a long-term contract, as was the case with this complaint?
What made this complaint worse was that, at the beginning, the policy had a built-in premium escalation of 15 percent a year. Left in place that would, at the end of the 30-year contract period, probably have resulted in most of Mr R’s income going towards paying the contributions.
As it was, they socked him with a penalty of 19 percent (R68 753) of his accumulated savings.
But the head of Liberty’s value initiatives argues that it had been generous to Mr R because it had not confiscated any of his savings 13 years ago when he reduced his contributions. The result was that even with the penalty he is better off than he would have been had Liberty not been so kind to him then.
Well, Lynette, have you worked out that he would probably have been better off if he had not touched a Liberty product at all and simply put his money in a unit trust fund, which does not have penalties?
I sometimes wonder if the life industry has fallen through a rabbit hole and is having a glorious mad hatter’s tea party!