In a media release on 21 May 2013, the Financial Services Board (FSB) announced that it has initiated regulatory action against Old Mutual for transgressions of Directive 159.A.i which applies to both the Long and Short Term Acts. This Directive sets out specific requirements for insurers who outsource an aspect of their business.
According to the FSB media statement, the following alleged transgressions led to the regulatory action:
- Old Mutual’s remuneration practises in respect of its outsourcing of broker consultant services (its Servco model) was found not to be reasonable and commensurate with the actual functions or activities outsourced as required under the Directive; and
- Old Mutual’s business relationship/s appeared not to comply with the requirements of the Directive in respect of conflicts of interest, as the agreements entered into are silent on the avoidance or mitigation of conflicts of interest and no evidence as to how compliance with these requirements are achieved was made available to the Registrar.
According to an article in Die Burger, the structure which is under the spotlight was introduced a few years ago by a new entrant in the market. It was adopted by most of the other players, and has become the norm in the industry. In essence, broker services were outsourced to companies created for “Broker Consultants”. They, in turn, contracted with brokers who had previously dealt directly with the product provider. The article claims that this often led to these companies being paid twice for the same service.
Providers were initially given until 1 January this year to get their structures in order to comply with Directive 159.A.i. This deadline was then moved to the end of March.
It appears, from the media release that the following section of the Directive comes into play:
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6.3 |
An insurer must when outsourcing any function or activity avoid, and where this is not possible mitigate, any conflicts of interest between the insurance business of the insurer, the interests of policyholders or the business of the other person that performs the outsourcing. | |
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6.4 |
Remuneration paid in respect of outsourcing must — | |
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6.4.1 | be reasonable and commensurate with the actual function or activity outsourced; |
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6.4.2 | not result in any function or activity in respect of which commission or a binder fee is payable being remunerated again; |
In what appears to be a first step relating to the Treating Customers Fairly (TCF) drive being integrated into the practical application of legislation, the media release states:
Appropriate remuneration practises and the avoidance of conflicts of interest are two corner stones in achieving the fair treatment of existing and potential policyholders and ensuring adequate and appropriate consumer protection.
Ralph Mupita, Old Mutual Emerging Market CEO, commented in response to the FSB media release: “We are committed to the submission of our plan and reaching a positive solution. We look forward to the market practice concerned being clarified in a manner that is in the customer’s best interests.” The Life office also intimated that a response, drawn up together with the FSB, “…would be tabled in due course”.
The fact that regulatory action follows so soon after the deadline for implementation of the Directive, indicates that the FSB is serious about ensuring compliance with it.
This is confirmed by the instruction to Old Mutual to submit its plans to change current structures within weeks, rather than months.
One can also read into this that, by tackling the big providers, the Regulator wants to send out a clear message concerning its intent to apply the requirements of the Directive across the board.
It is now in the process of investigating other insurers to ensure that their structures and systems are compliant, and is considering referring Old Mutual’s alleged transgression to the Enforcement Committee.
