The FSCA has issued a draft guidance notice aimed at clarifying when intermediaries can be remunerated after a pension interest has been transferred between retirement annuity (RA) funds.
The draft guidance notice has been published for public comment, and the deadline for submissions is 2 August.
To download the draft guidance notice and the comments template (Annexure B), go to www.fsca.co.za > Regulatory frameworks > Documents for consultation > Retirement fund.
Sub-section 14(7)(b) of the Pension Funds Act (PFA) imposes conditions relating to intermediaries’ remuneration when individual members or non-member spouses transfer interests between RA funds.
In a communication published on 5 July, the FSCA said it has received queries about the interpretation of sub-section 14(7)(b) when read with the commission limits in the regulations issued under the Long-term Insurance Act (LTIA).
It acknowledged there were inconsistencies between these two pieces of legislation.
Therefore, FSCA proposes to issue a guidance notice that will “alleviate uncertainty and ensure a more consistent application” of sub-section 14(7).
The Authority said it was expected that future regulatory reforms would resolve the current inconsistencies, and the proposed guidance notice would therefore be an interim measure.
The key take-aways from the draft guidance note include:
- After RA benefits have been transferred, fees for advisory or intermediary services that exceed the maximums in the LTIA Regulations are permitted as long as the fees are negotiated with, and agreed to in writing, by the transferring member or non-member spouse every year.
- These negotiated and agreed-to fees must be paid by the transferring member or non-member spouse personally, or the transferring member or non-member spouse must authorise the fund or administrator to pay them. If these requirements are met, there is no prescribed cap on the negotiated and agreed-to fees.
- The restrictions imposed by sub-section 14(7)(b)(ii) of the PFA are in respect of the transferred amount only. Fees or commissions for services rendered in relation to new ongoing or additional lump-sum contributions after the transfer, or in relation to any value attributable to investment growth after the transfer, are not subject to sub-section 14(7)(b).
- Sub-section 14(7)(b)(ii) does not apply to transfers from a non-underwritten fund to another non-underwritten fund, nor does it apply to transfers from a non-underwritten fund to an underwritten fund.
- The PFA prevails over the LTIA Regulations in respect of the inconsistency relating to the remuneration payable when interests are transferred from one underwritten RA fund to another.
- Sub-section 3A(1)(a)(iv) and sub-section 3A(1)(d) of the General Code of Conduct apply together with sub-section 14(7)(b)(ii) of the PFA.
Submissions on the draft guidance notice must emailed to FSCA.RFDStandards@fsca.co.za by 2 August.
For more information about the guidance notice, email Johann.Vanderlith@fsca.co.za
What follows is a summary of the seven-page draft guidance notice.
Guidance on applying sub-section 14(7)(b) of the PFA
Sub-section 14(7)(b)(i) of the PFA prohibits fees or commissions for the facilitation, intermediation or recommendation of the transfer of a member’s or a non-member spouse’s interest from one RA fund to another. This prohibition applies to underwritten RA funds and non-underwritten RA funds.
Sub-section 14(7)(b)(ii) deals with the payment of fees and commissions for financial services rendered by an FSP or representative after the transfer of interests.
The reference to “financial services rendered by a financial services provider” in sub-section 14(7)(b)(ii) is understood to refer to “advice” and/or “intermediary services” as contemplated in the FAIS Act, where these services are rendered after the transfer.
Sub-section 14(7)(b)(ii) prohibits the payment of fees or commissions that exceed the fees or maximum commission in terms of the LTIA or the LTIA Regulations if the transfer had not been done.
But sub-sections 14(7)(b)(ii)(aa) and (bb) contain exceptions to this prohibition.
Accordingly, no fees or commissions may be paid in excess of the maximum commission payable for furnishing advice and/or the rendering of intermediary services provided after the transfer, unless the fee is negotiated with, and agreed to in writing, by the transferring member or non-member spouse annually.
Any fees that are negotiated with, and agreed to in writing by, the transferring member or non-member spouse must be paid by the transferring member or non-member spouse personally (sub-section 14(7)(b)(ii)(bb)(A)), or the transferring member or non-member spouse must authorise the fund or administrator to pay such negotiated fee (sub-section 14(7)(b)(ii)(bb)(B)). If these requirements are met, there is no prescribed cap on the negotiated and agreed fees.
Accordingly, regardless of whether or not the maximum commission provided for in the LTIA Regulations had been paid before the transfer was effected, negotiated and agreed fees contemplated in sub-section 14(7)(b)(ii)(bb) are permitted, provided the requirements of that sub-section are met.
The restrictions and requirements imposed by sub-section 14(7)(b)(ii) are in respect of the transferred amount only. Fees or commissions for services rendered in relation to new ongoing or additional lump-sum contributions after the transfer, or in relation to any value attributable to investment growth after the transfer, are not subject to sub-section 14(7)(b). However, this guidance should be considered with the applicable provisions in the General Code of Conduct (see below).
Transfers from underwritten RA funds
Section 14(7)(b)(ii) does not distinguish between an underwritten fund and a non-underwritten fund. The distinction is drawn from the PFA read with the LTIA Regulations, in that the limitation on commission in the LTIA Regulations would apply to fees and commissions related to an underwritten fund, whereas the limitations on commission would not apply where the transferor is a non-underwritten fund.
Accordingly, the restrictions and requirements of sub-section 14(7)(b)(ii) apply to transfers from an underwritten fund to another underwritten fund and to transfers from an underwritten fund to a non-underwritten fund.
Sub-section 14(7)(b)(ii) does not apply to transfers from a non-underwritten fund to another non-underwritten fund, nor to transfers from a non-underwritten fund to an underwritten fund.
Fees must be agreed to annually
Where a member or a non-member spouse authorises the payment of on-going fees by the fund or administrator as contemplated in sub-section 14(7)(b)(ii)(bb)(B), the FSP or its representative cannot rely on such authorisation indefinitely until the member or non-member spouse informs the fund or administrator otherwise.
Sub-section 14(7)(b)(ii)(bb) is clear that any such fees must be negotiated and agreed to in writing annually by the transferring member or non-member spouse. It therefore follows that any authorisation by the transferring member or non-member spouse for the fees to be paid by the fund or administrator must also be confirmed annually.
Guidance on applying the LTIA Regulations
Parts 3A and 3B of the LTIA Regulations regulate commissions for intermediary services rendered in respect of long-term insurance policies issued to underwritten RA funds. These policies are referred to as “fund member policies” in the LTIA Regulations.
The practical overall effect of the relevant provisions in Part 3A and Part 3B, read in isolation, is that:
- Any remuneration payable for rendering intermediary services, including any fees agreed to by the customer (such as those contemplated in sub-section14(7)(b)(ii)(bb) of the PFA), would be subject to the commission caps and other limitations of the LTIA Regulations if the transferee fund is an underwritten RA fund; and
- No remuneration is payable for rendering intermediary services in relation to a fund member policy that is transferred from one RA fund to another. Therefore, the fees contemplated in sub-section 14(7)(b)(ii)(bb) of the PFA would not be permissible where the transferee fund is an underwritten RA fund.
However, sub-section 14(7)(b)(ii) of the PFA effectively allows for the negotiation of a fee between the FSP and the transferring member or non-member spouse annually, above and beyond the permissible commission allowed for in the LTIA Regulations. Therefore, the provisions summarised above are inconsistent with the provisions of sub-section 14(7)(b)(ii) of the PFA insofar as they relate to transfers from one underwritten RA fund to another.
Note that sub-section 14(7) is primary legislation, whereas the LTIA Regulations are subordinate/delegated legislation. It is trite in the law of interpretation that subordinate legislation must be consistent with primary law; where a conflict exists, the primary law must succeed. Sub-section 14(7) must therefore prevail, because this primary legislation is “superior” to subordinate/delegated legislation.
Guidance on applying the General Code of Conduct
Section 14(7)(b) of the PFA should be read together with the General Code of Conduct.
In particular, the following provisions of the General Code should be borne in mind when applying section 14(7)(b)(ii) of the PFA:
- Sub-section 3A(1)(a)(iv), which states that an FSP or its representatives may only receive fees or commissions that are not set by regulation if:
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- The amount, frequency, payment method and the recipient of those fees, and the details of the services that will be provided in exchange for the fees are specifically agreed to by a client in writing; and
- The client can stop those fees.
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- Sub-section 3A(1)(d), which states that an FSP or its representatives may only receive or offer remuneration if:
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- It is reasonably commensurate with the service being rendered, taking into account the nature of the service and the resources, skills and competencies reasonably required to perform it;
- The FSP or representative is not remunerated more than once for performing a similar service;
- Any actual or potential conflicts between the interests of clients and the interests of the person being remunerated are effectively mitigated; and
- Remuneration does not impede the delivery of fair outcomes to clients.
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