The Financial Services Board (FSB) is taking action to prevent you from becoming a victim of incentive-driven churning of life and investment policies, asking life assurers to report the payment of so-called sign-on bonuses to financial advisers and investigating policy switches made through these advisers.
This follows the regulator’s ban on the payment of sign-on bonuses late last year. The FSB has continued to receive complaints about incentive-driven churning, and the reports it is asking for could result in fines for life assurers and the debarring of advisers, preventing them from continuing to practise.
The FSB is asking you to interrogate any recommendation from an adviser to switch a policy from one company to another, to ensure that the switch is in your interests. This includes asking the adviser if he or she received a sign-on bonus.
Life assurers have been paying sign-on bonuses – which can amount to millions of rands – to advisers to induce them to leave one company and join another. Assurers justify the payments by saying they are compensation for commission the adviser may lose, or to cover the cost of setting up a new business, but the bonuses are typically based on the adviser’s ability to bring business to the life company. This can incentivise advisers to switch their clients’ policies, without good reason, to the assurer that has signed them up, a practice known as incentive-driven churning.
In December 2014, the FSB amended the Code of Conduct under the Financial Advisory and Intermediary Services (FAIS) Act to prohibit life assurance companies from paying sign-on bonuses. The Code of Conduct’s definition of a sign-on bonus includes an amount paid directly or indirectly, or any form of loan, advance or credit facility linked to the performance of any activity or to meeting any target.
Earlier this month, the FSB issued a notice calling on life assurers to complete a compliance report stating whether they have, since September 2012, offered or paid sign-on bonuses to advisers who sell investment or risk policies.
Life assurers are expected to submit the compliance report by the end of next month. They have to provide information on sign-up bonuses paid in the run-up to the banning of these bonuses in December last year and in the period after the ban.
Product providers will have to provide details of all recipients of sign-on bonuses, including their names and identity numbers, the amounts paid and when they were paid. They also have to list the number of new policies written by the recipient of a sign-on bonus for the specified period, as well as the number of replacements, as a percentage of new business written, during the corresponding period.
Paul Kruger, the head of communication at Moonstone, which provides compliance services to financial advisers, says it is likely that the FSB will view in a serious light any increase in the payment of sign-on bonuses to advisers – with the exception of new entrants – between September and December 3 last year.
Kruger says product providers are also required to indicate whether sign-on bonuses paid to new advisers who have never worked in the industry were linked to performance criteria.
They are also required to disclose whether they have systems and procedures to monitor inappropriate replacement products, he says.
Caroline da Silva, the deputy executive for FAIS at the FSB, says the FSB will collate the information about advisers who received sign-on bonuses before and after the bonuses were banned. It will use the information to identify any policies that were replaced and determine whether the motivation for the replacement was a sign-on bonus.
Da Silva says the FSB, under the FAIS Act, may take action against both a financial services provider and an adviser where they do not act in your interests or with the integrity of the industry in mind. This action may include debarring a person from working in the financial services sector for a certain period of time.
Although some product providers have argued that their sign-on bonuses were not linked to advisers’ performance, the outcome of this practice in almost every case was that the adviser churned clients by convincing them that the new company’s policy or investment was a better option, Da Silva says.
Some financial advisers were paid sign-on bonuses upfront, with the risk that they would have to pay back the bonuses if they did not perform for up to three years after the bonus was paid, she says.
Although an adviser may recommend that you switch your policy because the replacement genuinely is a better option for you, knowing that the adviser has been paid a sign-on bonus may make it difficult for you to determine whether the adviser is really acting in your best interests and not in his or her financial interests, she says.
Accordingly, the FSB says that if you have been advised to move a policy to another assurer, you should ask if the adviser received a sign-on bonus from the new company.
“If the answer is yes, then it is critical to interrogate the replacement you are being offered and the implications of cancelling your existing product.
“The FSB takes incentive-driven churn very seriously and will act against those brokers and companies that give poor advice to customers based on their own pockets and not the customer's needs or interests,” Da Silva says.
Advisers who advise you to replace one policy with another are required, in terms of the FAIS Act’s Code of Conduct, to provide you with certain information about the switch to enable you to make an informed decision about whether the switch will be in your interests.
A life assurance company that accepts a policy that will replace an existing one is expected to ensure there is an advice record that complies with the Association for Savings & Investment SA’s code on replacement policies.
Despite all these measures, churning continues, and in proposals released last year in the draft Retail Distribution Review (RDR), the FSB recommended that advisers be banned from earning commission on replacement policies. If the proposal is implemented, advisers who want to be remunerated for determining whether you should switch a policy will have to charge you an advice fee instead.
The RDR, which reviews all the fees you pay for being sold financial products and being advised on them, also suggests that:
* Only 50 percent of the commission an adviser earns from selling life assurance policies against death, dread disease and disability be paid upfront. This measure could reduce incentives to churn.
* No commission may be paid on investment products; instead, advisers should be charge advice fees that can be deducted from the investment.
* Commissions must take premium escalations into account, within affordable limits to ensure they are affordable. This is to prevent assurers from creating “mini policies” for premium increases and paying new commissions on them.
* A limited list of additional services for which an adviser can be paid be drafted, to prevent life assurers from circumventing commission regulations by paying advisers for ad hoc services.
WHAT YOU SHOULD CHECK BEFORE YOU REPLACE A POLICY
If you are advised to replace one policy with another, make sure you compare:
* The fees and charges, including future escalations;
* Any special terms and conditions, exclusions of liability, waiting periods, loadings, penalties, excesses, or restrictions or circumstances in which benefits will not be provided;
* In the case of a life assurance product, how changes to your age or health will affect the premium;
* The tax implications;
* Material differences in the risks of any investments; and
* The extent to which you can access or realise the funds in an investment product.
The Code of Conduct under the Financial Advisory and Intermediary Services Act obliges your adviser and/or financial services company to provide you with this information when you replace one product with another.
In addition, the code says you must be told:
* Whether you will pay any penalties or have any unrecovered expenses deducted from the product you are terminating;
* Whether you will lose any vested rights, minimum guaranteed benefits or other guarantees or benefits as a result of the replacement; and
* Any incentive, remuneration, consideration, commission, fee or brokerages paid, directly or indirectly, by the product provider to the adviser or intermediary who assists you with the switch.
ADVISER WHO COST CLIENTS R100m: PROBE INTO OLD MUTUAL, SANLAM COMPLETED
The inspection of both Old Mutual and Sanlam in respect of their handling of a case involving an adviser who cost his clients more than R100 million has been completed, and the Financial Services Board (FSB) is busy with follow-up inquiries.
The FSB ordered the inspection of the two companies following a complaint from Port Elizabeth businessmen who paid millions of rands in penalties on policies in which they were advised to invest by a financial adviser who received a sign-on bonus to join Old Mutual.
The Charles Stretch Family Trust and James Pearce went to the High Court to recover their money after Old Mutual imposed R32 million in penalties on policies sold to them by 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 Stern provided 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 (read: sign-on bonuses) it paid him.
Old Mutual debarred Stern under the Financial Advisory and Intermediary Services Act, which means he cannot practise 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. Stern also sold Sanlam policies to Stretch and Pearce.
Caroline da Silva, the FSB’s deputy registrar of financial services providers, says the inspection report will not be released, but the FSB will inform the public of the action it takes, as well as its reasons for taking such action.