News Article : On the table
|Category:|| Advisers & Brokers : Commission & Fees|
|Posted:||05 Sep 2005|
The industry finally agrees to review practice
The Life Offices’ Association (LOA) has tabled a discussion document outlining proposals to reform the current regulations regarding upfront commissions on long-term assurance policies, including endowments and retirement annuities.
At the same time it has highlighted an LOA code, the Code on Policy Quotations (CPQ), which came into effect on 1st July 2005. This code compels life assurers to declare the impact of their charges on investment performance allowing consumers to make more meaningful comparisons between different company policy quotations.
Executive director of the LOA, Gerhard Joubert, says the industry had been looking at the issue of costs and commissions since mid-2004. The CPQ was approved in November last year and had in fact begun being adopted by some members as early as February 2005. The commission discussion document tabled June represents the next step in the industry’s ongoing effort to address issues of concern to consumers.
The document has been handed to National Treasury, the Financial Services Board as well as intermediary associations. It seeks to address the impact of upfront costs and commissions on the early termination values of assurance products.
Mr Joubert says the industry is proposing a “simple, robust and transparent” approach.
The overriding aim is to ensure all parties are satisfied; that consumers are getting a fair deal while, at the same time, the eventual reforms to be agreed by the industry will be sustainable. Whatever the outcome it will change the face of the life assurance industry dramatically.
The essence of the LOA proposals is that the current regulated upfront commission system will fall away, to be replaced by an ongoing commission structure. This will consist of two elements:
• A sales commission (proposed at a maximum 3% of each premium) paid to the intermediary who sold the product;
• A service commission (proposed at a maximum 3% of each premium) paid to the intermediary who is currently servicing the client in relation to the product.
Clients would be free to negotiate all commissions. They would also be able to shift the service commissions to another adviser where, for example, there was dissatisfaction with the existing broker.
Companies may choose to advance the sales commission component every five years. In the first five-year period the applicable commission will be earned pro-rata over the first 24 months and guaranteed to the intermediary thereafter. After the initial five-year period, any commission advanced would not be guaranteed and would be proportionately clawed back if a policy were terminated, made paid up, or if the premium was reduced at any time within the relevant period.
Mr Joubert says the LOA proposal should mean a significant improvement in early termination values for those clients who decide to end their contractual savings policy before full term, while at the same time still provide a reasonable amount of upfront remuneration for intermediaries.
Although financial advisors will receive less commission upfront, they will be able to build up a valuable asset base in the form of a book of clients for whom they receive both ongoing sales and service commissions.
“South Africa has little in the way of a social welfare benefit system and we must encourage private long term savings. To do this we need to ensure two things: that the customer is receiving value, and that he or she has access to these products through a widely spread advisory force. To this end we must have a sustainable remuneration structure for the industry,” he points out.
The LOA is hoping that the discussion between all stakeholders will reach consensus swiftly so that regulations could be promulgated later this year.
The costs incurred by life companies
Reducing the upfront costs of the life companies themselves (other than the commissions paid to intermediaries) is also an important issue, as this will allow charges to be reduced. Mr Joubert says the most effective method will be competitive pressures. Many new generation products, with better early termination values, have already been launched and these are typically fully transparent as far as charges are concerned.
Full disclosure of all charges and commissions is already required in terms of FAIS and the Policyholder Protection Rules. In addition, there is now the CPQ that makes it compulsory for assurance companies to show the combined effect of all their various charges in terms of one figure, called the Reduction in Yield (RIY).
“We urge consumers to compare the different charges applied by life companies and then make an informed choice,” he advises.
Example of new commission proposals on early termination charges
Using a 30-year-old client taking out a R500 per month retirement annuity, maturing at age 55. The duration of the contract would therefore be 25 years. Furthermore, we assume that this client does not negotiate a lower commission from the intermediary.
Currently, the first and second year commission on this contract would amount to a total of R6 000 (excl. VAT).
Under the proposed model, the advanced sales commission would be R900 for the first five years of the contract (3% of R6 000 = R180 x 5). In addition to this, an annual advice fee of R180 would be payable.
The graph was calculated using average industry early termination charges for the current dispensation, and assumed that intermediaries and product providers would share equally in any early termination charge in the proposed model. The graph illustrates the percentage of fund value that can be expected on early termination under the proposed model, where the fund value is grown using a 4% net growth rate.
The LOA welcomes input from all stakeholders, including the broader public, on its discussion paper. Readers are invited to send comments to [email protected] and to view the discussion under the News section, on www.loa.co.za
For further information please contact: Gerhard Joubert at the LOA on (021) 421 2586.