The National Treasury has finally put its cards on the table and stated its position on the reforms it would like to see in the life industry and, in the process, took the matter of agent commissions far further than any previous discussions with the industry.
The government will first undertake a full investigation into the insurance sector to assess the degree of competition. Currently, the industry is what the Treasury refers to as an oligopoly, with only five companies selling 93% of retirement annuities and controlling 75% of industry assets.
Although studies have not been done on the relative market share in similar developing economies, there is no doubt that further liberalisation needs to take place. The issue of independent trustees of retirement annuity funds also needs to be addressed, where life companies have taken a great deal of flak for selecting their own trustees, which questions the trustees’ ability to put the interests of the members ahead of those of the life company.
The paper also recommends that agents only receive a limited percentage of the commission up front. The paper argues that clients should be able to stop the ongoing fees if they feel that the service is not up to scratch, and a customer can also change brokers and redirect the commission received to a new broker who they believe will meet their needs.
On agent commission, the paper recommends that any agent who is paid commission by the life company will not be able to call themselves “advisers” or to provide advice. Only independent financial advisers who are paid fees by the client are able to claim to offer advice. This is quite a curve ball and will have serious implications for the insurance industry and current remuneration structures. It also goes against the work undertaken by brokers and companies around the Financial Adviser and Intermediary Services Act (FAIS), which sets out standards that advisers have to meet when providing advice, as well as requiring them to register with the Financial Service Board.
A fair amount of costs has gone to meeting FAIS requirements, which could be negated by this recommendation.
So far, the reaction from the life industry has been fairly positive, although they have until May 15 to submit their comments.
The fact that the Treasury has dealt with a wide range of issues gives them a better idea of where the government is headed and allows for a broad range of discussions to take place.
The issues of commissions is one area in which the life industry will have to act as a single entity, so that commission structures are standardised across the industry, and will be an important discussion point.
There may be some resistance to the changes to the definition of when brokers are able to provide advice, as it would require an overhaul of the entire industry fee structure.
The Life Underwriters’ Association of South Africa, which represents broker interests is very concerned about cutting up front commissions as they feel brokers incur a great deal of costs up front in providing qualified advice under the FAIS Act, which they would not be able to offset immediately.
They also raise the point that, according to the Rusconi report, agent fees only make up 35% of total costs yet a great deal of attention is given to this area, rather than the super profits made by life companies.