NEW FINANCIAL SERVICES LEGISLATION
AND ITS IMPACT ON THE SHORT TERM
INSURANCE INDUSTRY
Index
1
Background to this
presentation
2
A brief overview of TCF and
twin peaks
3
Legislative changes
(proposed & in place)
4
The RDR
5
Linking TCF
responsibilities with the
draft market conduct
policy framework paper
6
Anticipated affect on
insurer’s (and UMA’s)
relationship with brokers
Background to this presentation
The agreement in 2010 to follow
the UK’s “TCF and Twin Peaks”
model of Legislation;
The TCF Assessment;
The numerous papers issued by
National Treasury;
The warnings by the FSB of their
intention to undertake “robust and
intrusive” site visits and our
experience of this;
The many presentations given by the
FSB;
The FSLGAA;
The FSR Bill (2nd draft)
Treasury’s Market Conduct Policy
Framework Paper;
Typical fines and penalties
imposed by the UK authorities
since the introduction of their twin
peaks model in 2013;
Board Notice 158 of 2014
TCF and
Twin Peaks
TCF and Twin Peaks
TCF Implementation began late 2013 and every FSP is expected to have
systems and procedures already in place
• The FSB’s experience has shown that relying on FSPs to do the right thing is not on its
own sufficient to drive the behavioural and culture change required to deliver
consistently fair outcomes for policyholders. As a consequence they introduced the
concept of ‘Treating Customers Fairly’ (TCF).
• TCF is an outcomes based approach which ensures that the promises made by
practitioners are actually delivered, demonstrated by formalising procedures and
ensuring that the 6 TCF Outcomes are maintained throughout the policyholder’s
insurance purchase life cycle, from product design and promotion, through advice and
servicing, to complaints and claims handling
TCF and Twin Peaks
Legislation being implemented over a 3 year period 2013-2016
Prudential Authority within
the Reserve Bank
Responsible for the oversight of the safety and
financial soundness of financial institutions,
including banks, insurers and financial
conglomerates.
Financial Sector
Conduct Authority
To protect customers of financial services
firms, and to improve the way financial
service providers conduct their business.
Legislative changes
(proposed and in place)
Legislative changes (proposed and in place)
FSLGAA
• The Definitions of “intermediary”, “representative” and “services as
intermediary” have been deleted from the STIA;
• Section 8.5 of the STIA has been deleted (trigger date TBA);
• Section 48 of the STIA has been changed to prohibit any intermediary
from earning any remuneration from a policyholder, unless agreed in
the Regulations (trigger date TBA);
• Restrictions imposed regarding advertisements:
• Curtailment of JR activities (trigger date 30 June 2015);
• Incorporates into FAIS ACT a full and understandable definition of
‘CPD’;
• Removes requirement to consult with an ‘Advisory Committee’;
• Incorporates ‘Fit and Proper’ requirements’ in all insurance laws;
• Section 13 Certificates to be produced prior to rendering a financial
service;
Legislative changes (proposed and in place)
FSR Bill
•
•
•
•
•
•
•
•
•
•
•
Establishes the Prudential Authority (‘Twin Peaks’)
Establishes the Financial Sector Conduct Authority (Twin peaks);
Brings all financial institutions into the regulatory conduct net;
Introduction of overarching Ombud;
Additional conditions to ‘Outsourcing’
New definition of ‘financial products’(includes a credit agreement):
New definition of ‘financial service’ (includes services provided in
relation to credit agreements);
Introduction of a significant owner at 15% or more;
Introduction of FSP license renewals;
Passes interpretation of insurance laws to the FSCA;
New requirements regarding debarment.
Legislative changes (proposed and in place)
Typical fines imposed by the FCA immediately following the implementation of ‘Twin Peaks’
Name
Penalty
Rand Equiv
What they did
Stonebridge International
Insurance
£8,300,000
R149,000,000
Did not give clear information, while post-sale support
staff discouraged customers from cancelling policies.
Santander
£12,400,000
R223,000,000
Poor investment advice following mystery shopping by
the FCA.
Invesco Perpetual
£18,600,000
R339,000,000
Exposing investors to greater levels of risk than they
expected.
State Street
£22,900,000
R238,000,000
Charging for changes to asset portfolios without
agreeing the charges with clients.
Home Serve
£137,610,000
R412,000,000
Misselling policies and not investigating complaints
Our experience of the
FSB’s current site visits
which demonstrate
“robust and intrusive”
• All documents provided to the FSB are being
scrutinised
• All Reps, Admin Staff, the FD, HR Department
etc. are requested to be available for interviews
• FSB checking compliance with FAIS and FICA
• Internal policies and procedures that are
implemented must be common knowledge to all
relevant staff members
The RDR
Sectors of the short term insurance industry
which face particular challenges in respect of the RDR
Transport
Call Centres
(particularly outsourced
contractors);
Administrators
(wholesale brokers);
Reinsurance brokers
The RDR
3 different forms of advice
Financial Planning
Financial planning involves advice on structuring and arranging a customer’s
financial resources to meet short and long term goals.
Up-front product advice
Up-front product advice involves the provision of a recommendation, guidance or
proposal to a client regarding the suitability of a product based on the identified
needs of the client. It also entails the selection of specific products and/or product
suppliers depending on the range of offerings to which the adviser has access.
Ongoing product advice
Ongoing product advice involves the provision of recommendations on changes
during the life of a product in response to changing customer needs and
circumstances.
The RDR
3 different types of agent/broker
Independent Financial Agent/Independent Insurance Broker
The agent will be required to meet two sets of independence criteria – one set of
criteria relating to the choice of product and product supplier, and a second set of
criteria relating to being free from product supplier influence.
Tied Agent
An agent is contracted to provide advice in relation to a single product supplier
only.
Multi-tied Agent
The agent is not a tied agent and also does not satisfy the criteria to be described
as an IFA.
The RDR
Standards to be set for “low/no advice” and “no servicing” models
Limit
Will be imposed on the types of products or product features that may be
distributed using non-advice sales execution or low advice models and will be
restricted to simple products that comply. Specific fit and proper standards will also
be set for representatives providing factual information in these models.
Measures to improve customer trust and improve customer outcomes will clarify
the circumstances in which ‘no-service’ or ‘low/no advice’ distribution models are
appropriate and the consumer protection measures required in such models.
The RDR
Premium collection prohibitions
Collection of insurance premiums will not be permitted to
be carried out by ordinary FSPs in respect of life and
personal lines short-term insurance business.
A transition period will be granted for FSPs to become
compliant with such standards or for insurers to either take
over this function themselves or outsource it to third parties
who are not intermediaries or associates of intermediaries.
The RDR
Standards to be set for aggregation and comparison services
This will include putting customers in a position to make
meaningful comparisons between products on a number of
criteria, not just price.
The RDR
Standards to be set for referrals and lead generation
1. Non FSP provides lead to an FSP who contacts the
client
2. Non FSP asks lead to contact another FSP
3. FSP collects partial information and passes it to another
FSP to contact the client
4. FSP collects full information and provides quotation and
asks another FSP to undertake secondary underwriting
The RDR
Additional disclosures to be made at Point Of Sale
1.
2.
3.
4.
Type of advisor – tied, multi-tied or IFA
Type of advice – full, product, on-going or limited
Key product information (TCF initiative)
New market standard disclosure standards to be
developed
The RDR
Juristic representatives
1. Not allowed to give advice in the juristic representative’s
name
2. Natural representative must be under the control of the
license holder
3. Natural representative must have a direct mandate from
the license holder
The RDR
Representatives to represent one FSP only
Advisers will not be permitted to act as representatives of
more than one juristic intermediary
The RDR
Insurer to be responsible for advice given by tied agents
1. The insurer will have to provide full product and sales
training to enable the tied agent to provide the client
with accurate information and advice on the products on
offer as the insurer will be held accountable.
The RDR
Insurer to be jointly responsible for advice given by multi-tied agents
1. Similar to the responsibilities in respect of tied agents,
the insurer will be held jointly accountable for the advice
and distribution provided by multi-tied agents.
2. It is possible that the training that will be provided by
suppliers will form the basis of CPD, with the 2nd level
RE examination removed from legislation.
The RDR
FSPs to charge clients for advice services
1. Current commission payment practices to be
discontinued.
2. FSP to charge the client for providing professional
advice.
3. Commission to be paid by insurer for business
acquisition only.
The RDR
Charging for advice
$
1. Must obtain explicit customer consent.
2. Must disclose the fee calculation basis, the manner of
payment and the type of advice to which the fee relates.
3. Advisers will be obliged to advise the insurer as to how the
fees are calculated.
4. The insurer to collect the fee on behalf of the adviser.
5. The insurer is obliged to monitor advice fees charged by
multi-tied advisers and IFA’s, where the product supplier
facilitates the fee collection.
6. There will be limitations on the extent to which advice fees
charged may vary between product types.
The RDR
Regulated commissions to be reviewed
1. All remuneration to be reasonable and commensurate with
the actual services rendered.
2. Remuneration structures to strike a balance between
supporting ongoing service and adequately compensating
intermediaries for up-front advice and intermediary services.
3. Ongoing fees and/or commission will only be paid if ongoing
advice and services are rendered.
4. The different types of services and fees to be easily
comparable by customers; and
5. Remuneration structures will promote a level playing field
between different types of intermediaries providing similar
services.
The RDR
“Equivalence of reward” structures to be reviewed
1. The principle of equivalence must apply for each individual
tied agent.
2. The nature of remuneration and benefits to be taken into
account in assessing equivalence.
3. The principle of equivalence to apply at appropriate time
periods or across appropriate tranches of business.
The RDR
Binder fees to be capped for NMIs
Proposed maximum fee structure:
Enter into, vary or renew:
Determine the policy wording
Determine the premiums under a policy
Determine the value of policy benefits
Settle claims
2%
2%
1% - 3%
The RDR
Outsourcing fees (Dir159) to be capped
1. No proposals as to the extent of capping has yet been
published;
2. Services to be included in ‘intermediary services to clients’
will be identified and removed from outsourced agreements;
3. Policy issuing will not be allowed as an outsourced
agreement where the intermediary has a binder; and
4. Where no binder exists, a set fee of R100 has been
proposed for the issue of policies.
RDR Time frames
Phase 1 changes is anticipated as being the 2nd half of 2015 and will include
•
•
•
•
•
•
Advisers acting for more than one intermediary
Restricted outsourcing to advisers
Commission regulation changes
Equivalence of reward review
Binder fee payment changes
Outsourcing fee payment changes
Treasury’s market
conduct policy
framework paper
This document proposes a
comprehensive framework
explaining how the market conduct
regulator will operate in order to
ensure that financial institutions
treat their customers fairly.
It ‘links’ to the responsibilities of
every FSP as comprehensively
detailed in the TCF assessment
that all FSPs must by now have
completed and entrenched in their
businesses
Linking TCF
responsibilities
with draft market
conduct policy
framework paper
Linking TCF responsibilities with draft market conduct
policy framework paper
Management Commitment
1.
2.
3.
4.
5.
Senior management discussions relating to TCF must be formalised
and documented;
Mission statement or corporate strategy must reflect commitment to
TCF;
Appropriate management information must be actively used;
KPIs must be introduced to assess TCF effectiveness and progress;
Management information must be
• sufficient to assess TCF effectiveness and performance;
• shared across the business;
• available to key audiences (e.g. Board, Senior Exec);
• reviewed to assess effectiveness of TCF strategy and used to guide
decisions.
Linking TCF responsibilities with draft market conduct
policy framework paper
Sales
1. There must be a clear definition of your target market;
2. Actual sales volumes must match predicted sales volumes;
3. There should be a low proportion of sales to customers outside target
market;
4. There is a low volume of complaints (measured against market
competitors);
5. A low proportion of claims are turned down or reduced;
6. There are very few technical queries from representatives; and
7. Lessons from complaints are fed back into product design.
Linking TCF responsibilities with draft market conduct
policy framework paper
Aftersales Service
1. There is a low volume of rejected or reduced claims;
2. There is regular and ongoing communication with customers;
3. There are clearly defined service standards and appropriate monitoring
of achievement of those service standards; and
4. Claims expectations are clearly outlined in the policy literature sent to
clients (not just claims conditions and requirements).
Linking TCF responsibilities with draft market conduct
policy framework paper
Complaints
1. Complaints management information must be consolidated and reported to
senior management and actively worked;
2. There should be few (if any) complaints referred to the Ombud (OSTI and
FAIS) that are upheld;
3. There is evidence of excellent and comprehensive complaints recordkeeping;
4. No person’s remuneration can be based on the volume of complaints
handled;
5. Full training and support must be given by insurers (and UMAs) to
intermediaries for handling complaints;
6. There must be a comprehensive process for root-cause analysis of
complaints; and
7. There should be a clear division of responsibility between those who may
have caused the complaint and those who investigate it.
Linking TCF responsibilities with draft market conduct
policy framework paper
Employment conditions
1. Strategies, budgets and remuneration of managers and staff should
reflect TCF principles;
2. Bonus and incentive schemes for senior executives and directors
should support TCF principles;
3. The FSPs employment conditions that influence behaviour must
support TCF principles (e.g. growth strategies, disciplinary
procedures);
4. TCF principles must be fully reflected in ongoing or induction
training; and
5. TCF principles must be developed in respect of each department or
staff role.
Anticipated affect on
insurer’s (and UMA’s)
relationship with
brokers
Anticipated affect on insurer’s (and UMA’s)
relationship with brokers
One of the intended effects of TCF is to rebalance responsibility
between product suppliers and financial advisers – delivering
TCF outcomes is a shared responsibility”
Product suppliers are expected to take greater responsibility for
outcomes arising from their chosen distribution model”
Anticipated affect on insurer’s (and UMA’s)
relationship with brokers
Outsourcing the distribution function does not entitle the supplier to
abdicate responsibility for customer outcomes. The principal remains
fully accountable over and above the distributor’s responsibilities”
Before and after contracting controls should be in place to
assess and monitor customer outcomes”
Anticipated affect on insurer’s (and UMA’s)
relationship with brokers
Controls to be implemented by insurers (and UMAs) in terms of B/N 158
An insurer must adopt, implement and document an effective
governance framework that provides for the prudent management
and oversight of its insurance business and adequately protects the
interests of its policyholders”.
Our views on the anticipated affect on insurer’s
(and UMA’s) relationship with brokers
Typical questions that the Insurer (and UMA) will have to ask its brokers
?
1.
2.
3.
4.
5.
Do you have a service level agreement with your client?
Do you understand the difference between your TCF responsibilities
and those of ours as insurer (or UMA)?
Do your clients know the difference between your TCF responsibilities
and ours?
How do you ensure that our disclosures are presented to your
clients?
Do you realise and accept that we must communicate with our
‘common’ clients?
Our views on the anticipated affect on insurer’s
(and UMA’s) relationship with brokers
Typical questions that the Insurer (and UMA) will have to ask its brokers (continued)
6.
?
7.
8.
9.
10.
How do you measure TCF delivery in respect of the products we
supply?
To what extent has your staff been trained in TCF – particularly
internal and administrative staff?
To what extent do you test the clarity and appropriateness of our
product material before offering it to clients?
How do you ensure that clients get post-sale information when they
need it?
What level of feedback will you provide to us as product suppliers
regarding our products?
Our views on the anticipated affect on insurer’s
(and UMA’s) relationship with brokers
Typical questions that the Insurer (and UMA) will have to ask its brokers (continued)
?
11.
12.
13.
What controls do you have in place to monitor the risk of poor advice by
your representatives when distributing our products?
Do you have controls in place to inform us immediately when you
receive a complaint which relates to one of our products?
What will you do if you discover a problem with the advice that your
company gave in respect of one of our products?
Anticipated affect on compliance officers?
“A riddle, wrapped in a
mystery inside an
enigma”
Winston Churchill referring to Russia 1st October 1939
Watch this space…………………………………
NEW FINANCIAL SERVICES LEGISLATION
AND ITS IMPACT ON THE SHORT TERM
INSURANCE INDUSTRY