FSCA warns of strong action against entities if Servcos contravene financial laws

The FSCA has warned that it intends to act “meaningfully” against entities in the insurance sector that use certain “distribution arrangements” in an attempt to get around the commission regulations.

The Authority has, for many years, repeatedly voiced its concerns about these arrangements, which may contravene the Long-term Insurance Act, the Short-term Insurance Act, the regulations published under these Acts, and the General Code of Conduct.

Essentially, the arrangements provide for intermediaries to be paid additional fees (referred to as “Netco” or “Servco” fees) for rendering distribution-related services or functions, whereas they are already being remunerated for performing these services or functions via commission, binder fees, or fees for outsourced services or functions.

In its inaugural Regulatory Actions Report for 2022/23, the FSCA said Servco arrangements are continuing across the insurance sector, even though it has consistently communicated its concerns about them to the industry.

The arrangements include the outsourcing of broker training, quotation, presentation support and other administration functions of insurers to third parties that are directly or indirectly affiliated with intermediaries acting on behalf of such insurers.

The FSCA said the concerning characteristics of these arrangements include the potential duplication and/or unreasonableness of the remuneration being paid for certain functions and activities, as well as the lack of transparency and the inadequate mitigation of potential conflicts of interest that could undermine the delivery of fair outcomes to policyholders.

The report said examples of such arrangements include:

• Arrangements that seem to be initiated by the intermediary who appears to be the actual recipient of the outsourced services in question, rather than the insurer in whose name the outsourced arrangement is concluded. In some cases, the insurer has very little input into, or oversight of, such agreements.
• Arrangements whereby the Servco fee or remuneration structure is directly linked to sales by intermediaries, resulting in an apparent duplication of payment for commission-related activities, thereby contravening the regulated commission limits. This includes increases in “service fees” when an intermediary exceeds certain sales thresholds.

The Authority said it is aware that insurers that do not have Servco-type arrangements are being approached by intermediaries to enter such arrangements as part of market movement negotiations.

Ongoing investigations

The FSCA said “several” investigations were looking into possible regulatory breaches by insurers, based on the information it has received about some Servco arrangements.

The risk of unfair outcomes for policyholders posed by the potential conflicts of interest “inherent in these types of complex structures” is not the Authority’s only concern. It said the arrangements also risk creating uneven playing fields between market participants and damaging the reputation of the insurance sector.

“For this reason, the FSCA intends taking serious and meaningful enforcement action against entities who are found to be engaging in these practices in contravention of financial sector laws,” the report said.

The Authority “strongly advised” insurers that have Servco arrangements in place, or that are contemplating entering such arrangements, to take steps to review and regularise these structures to ensure they do not contravene financial sector laws.

It said insurers that have been approached to enter Servco-type arrangements should contact their supervisory liaisons at the FSCA for guidance and clarity on meeting the Authority’s regulatory expectations.

The Authority said anyone who has information about Servco arrangements should contact its Enforcement Division. “All communications will be kept confidential, and if requested, the FSCA will treat such communications as protected disclosures.”