The go-ahead has been given for the lifting of limits on commissions paid to financial intermediaries who sell life assurance products. This comes despite strong opposition from the Consumer Institute and even the life assurance industry itself.
The move will place an onus on you, the consumer, to make sure that you are properly informed about how much you are paying in commissions to ensure you do not find, years later, that the performance of your investment has been seriously undermined. Even half a percentage point compounded over the long term can have a significant impact on your returns.
The government-appointed body which sets regulation policy, the Policy Board for Financial Services and Regulation - headed by the Deputy Governor of the Reserve Bank, Gill Marcus - has accepted the proposal by the Financial Services Board (FSB) to do away with the regulation of maximum insurance commission in the medium to long term.
The regulations were put in place almost 30 years ago to stop escalating commissions and other incentives being paid to intermediaries to the severe disadvantage of policyholders.
The FSB's head of registration and policy, Deon van Staden, says an assessment of financial system stability by the International Monetary Fund and the World Bank has "indicated that the continuing regulation of maximum commission is a weakness in the South African insurance industry and inconsistent with international best practice". Van Staden says the timing of the decapping depends upon a successful evaluation of the proposed life assurance policyholder protection rules and a consumer education programme.
Details of the timing and the nature of the products to be decapped have not been decided yet. During the interim period, where commission will be capped in an environment where commissions are disclosed, an assessment will be made of the products or kinds of policies to be decapped first.
"It is anticipated that commission will firstly be decapped on single-premium policies in the life industry, as well as commercial and corporate business in the short-term industry. Decapping on all other insurance products will follow thereafter," Van Staden says.
The life assurance policyholder rules, which among other things will require full disclosure of commissions, are currently awaiting approval from Finance Minister Trevor Manuel, while the FSB's education campaign is still in its early planning stages.
Until the regulation is lifted, Van Staden has warned life assurance companies and intermediaries that they must "continue to comply with the commission regulations, and the FSB will not hesitate to take rigorous action against anyone contravening the commission regulations".
Oppie Opperman, the head of market conduct at the FSB, says the board is already taking action against life assurance companies which evade the current regulations by paying extra commissions under the guise of calling them "fees" rather than "commissions".
Opperman says the legal advisers of some life assurance companies have been told that insurers should not act as debt collectors for intermediaries (by collecting fees on behalf of intermediaries from policyholders).
"It was pointed out to them that intermediaries should invoice the clients separately if the intermediary rendered services by agreement with the client. It was also pointed out that if an intermediary should charge a fee, the client should be informed up front."
He says the issue is "currently under discussion and certain actions by the FSB are being considered, including possible amendments to the Insurance Acts in order to clarify this vexed matter".
"The current situation of fees being provided for intermediaries on the application forms of certain insurers, is not considered to be in the interests of policyholders taking into consideration the negative option included in the forms."
Opperman says you should carefully read everything you sign. If you are of the opinion that fees may have been paid out without your agreement or knowledge, you should contact the FSB at (012) 428 8059 or fax (012) 347 8788.
Opperman says consideration is still being given to altering the manner in which life assurance commissions are paid, including the time of payment of commission, commission "claw back" requirements, wording of regulations and profit commission.
He says commissions will have to be disclosed in rand terms and not as mere percentages - as they are currently disclosed - to give you a better idea of what you are paying.
Opperman says other measures being taken to protect investors are at different stages of implementation. The legislation to regulate financial advisers and intermediaries for the first time is still awaiting Cabinet approval. A working committee has been appointed in the meantime to start with the drafting of regulations in terms of the legislation. The target date is January 2002 (at least for certain sections of the Bill).
Legislation to establish an ombudsman who will deal with complaints about advisers is being finalised for submission to the Department of Finance before the end of February.