Where does commission end and chargeable advice begin?

As an insurance intermediary, what is the line between the fee you can charge a client and the regulated remuneration for a regulated activity?

This question will be the focus of a discussion during a breakaway session at the upcoming Financial Planning Institute of Southern Africa’s Professionals Convention in November.

Billy Seyffert (pictured), the chief operating officer of Moonstone Compliance, says that, as the FSCA has discovered, there are no easy answers to this conundrum, which has plagued the insurance industry for almost two decades.

Seyffert will be one of the panellists speaking on the topic “People remuneration models” at the Professionals Convention on 14 November.

As Seyffert explains, the mandate of Moonstone Compliance – the largest independent provider of compliance and regulatory risk management services to financial services businesses in South Africa – is to protect FSPs by ensuring they follow the rules as set out in the financial services legislation.

Commission by any other name

Seyffert says what needs to be understood is that many people in the financial services industry talk of remuneration as commission, but it’s not.

“It’s actually a fee. It is an upfront advice fee. It’s an assets-under-management fee. It is a performance fee because it is a percentage of an amount invested. It is a percentage of a monthly contribution. So, yes, in that sense, it is a commission, but commission in itself is only defined in the Long-term Insurance Act (LTIA) and the Short-term Insurance Act (STIA). It doesn’t appear at all in the Collective Investment Schemes Control Act. It’s specifically in insurance.”

Seyffert says, at present, the commission regulations are very prescriptive: only regulated commission in monetary form may be charged or paid by or to an intermediary for performing “services as intermediary” and “rendering services as intermediary”.

As to what exactly these services entail, Seyffert says the current definitions in the LTIA and STIA regulations are problematic, “as they are very wide and include most activities performed by an intermediary when rendering a financial service to a client”.

“It is widely acknowledged that many intermediaries offer services which are additional and/or ancillary to these services, and they should be able to charge a professional fee for these services without falling foul of the commission regulations or section 3A of the General Code of Conduct.”

He says, she says

What further complicates the matter, Seyffert says, is that the current definitions of “services as intermediary” and “rendering services as intermediary” vary greatly.

“There’s a definition in FAIS Act, there’s a definition in the STIA, and there’s a definition in the LTIA – and they’re not the same,” he says.

In terms of the FAIS Act, “intermediary services” mean any act other than the furnishing of advice, performed by a person for or on behalf of a client or product supplier:

• the result of which is that a client may enter, offer to enter, or enters any transaction in respect of a financial product with a product supplier; or
• with a view to:
  1. buying, selling or otherwise dealing in (whether on a discretionary or non-discretionary basis), managing, administering, keeping in safe custody, maintaining or servicing a financial product purchased by a client from a product supplier or in which the client has invested;
  2. collecting or accounting for premiums or other moneys payable by the client to a product supplier in respect of a financial product; or
  3. receiving, submitting, or processing the claims of a client against a product supplier.

The STIA defines “intermediary services” as any act performed by a person:

• • • the result of which is that another person will or does or offers to enter, vary, or renew a policy; or
    • with a view to:
      1. maintaining, servicing, or otherwise dealing with;
      2. collecting or accounting for premium payable under; or
      3. receiving, submitting, or processing claims under.

  The LTIA describes the term as:

  the performance by a person other than a long-term insurer or a policyholder, on behalf of a long-term insurer or a policyholder, of any act directed towards entering into, maintaining or servicing a policy or collecting, accounting for or paying premiums or providing administrative services in relation to a policy, and includes the performance of such an act in relation to a fund, a member of a fund and the agreement between the member and the fund.

  Round and around we go

  The Supreme Court of Appeal decision in Maree v C Booysen t/a NVM Beleggings & Versekeringsadviseurs upsets the applecart even further.

  This decision implies that section 49 of the LTIA (and the Regulations) prohibits an independent intermediary from accepting any remuneration from the insured, insurer or any third party in relation to intermediary services rendered, otherwise than in the form of commission provided for in the Regulations.

  “This interpretation prohibits the payment of independent advice fees even where no commission is paid and runs counter to Directive 132.A.ii issued by the Registrar of Long-term Insurance on 30 January 2004,” the FPI stated in a “Call for Contributions: intermediary services and related remuneration in the insurance” document distributed in November 2011,

  This, Seyffert says, brings you back to the conflicting definitions of what constitute intermediary services.

  “The laws are clear. I can charge a fee for something if I haven’t received a commission already. In other words, I can’t be paid for the same thing twice, provided that it has been disclosed to the client, that he has agreed to it in writing, and that he can stop at any time (section 3A of the General Code of Conduct). But the question is, what is included in commission and what is not?”

  He says clarity is required as to which of these activities are included in the definitions and which are not as to allow for a clear fee-charging structure, where appropriate.

  Back at the ranch

  Concerns about the need to clarify the status in which an intermediary acts (in particular, the question of when an intermediary can be said to be providing independent advice) and the need to introduce a level playing field across different sectors in the structure of intermediary remuneration for investment products were raised back in 2006 when National Treasury published the Discussion Paper on Contractual Savings in the Life Insurance Industry.

  In 2019, the FSCA published a position paper setting out its proposals on the future regulatory framework for the collection of insurance premiums.

  In January 2021, the Authority published INS Notice 1 of 2021 in respect of regulations 5.1(1) and (2) of the regulations under the STIA and INS Notice 2 of 2021 in respect of regulations 3.2(1) and (2) of the regulations under the LTIA. These notices expired on 31 January 2022 and were followed by INS Notice 1 of 2022 and INS Notice 2 of 2022, which granted a further exemption, subject to the same conditions, until 31 January 2023.

  At the beginning of this year, the FSCA extended, until further notice, the exemption that allows independent intermediaries to receive compensation, over and above commission, for performing activities that support the direct collection of insurance premiums (as captured in INS Notice 1 of 2022 and INS Notice 2 of 2022).

  The future regulatory framework for the collection of insurance premiums, the Authority said, would be part of the new conduct regulatory framework under the Conduct of Financial Institutions (Cofi) Bill.

  Read: FSCA grants another extension for exemption on payment for collecting premiums

  The Bill is designed to replace the conduct provisions of most existing financial sector laws. The Authority is supporting National Treasury in developing this primary legislation.

  According to the FSCA’s updated three-year Regulation Plan (1 April 2023 to 31 March 2026) published in July, the work focused on transitioning the existing sectoral laws into Cofi (Phase 3) will continue throughout 2023 with the intention of having initial formal proposals ready in the first half of 2024.

  Read: When will Cofi be served?

  Seyffert explains that the complexity of the issue has been a significant factor contributing to the prolonged delay in the financial authorities addressing the matter.

  “If you reduce the use of commission, it becomes very politicised. If you do away with commission and make people pay for advice, in 20 years’ time we are going to have a massive mess in this country because people already don’t want to set aside money for insurance or to save for retirement. In those cases, it’s R300 or R400 a month. Which individual in this country is going to pay R5 000 or R6 000 for a financial planning exercise? It is not going to work.”

  Professionals Convention

  The 34th Professionals Convention will be held virtually and face-to-face at the Sandton Convention Centre on 14 and 15 November. A total of 27 local and international speakers and guests will share their experiences and insights.

  The hybrid nature of the convention will enable in-person and virtual attendees to earn a total of 12 CPD hours.

  Click here to download the full programme.

  The costs to attend are:

  Virtual (member): R3 000
  Virtual (non-member): R3 773
  Face-to-face (member): R5 850
  Face-to-face (non-member): R7 000

  To register, go to https://fpi.co.za/events/fpi-convention/

  For more information, email events@fpi.co.za or phone 011 470 6000.