Whether tis nobler to suffer the slings and arrows of outrageous customer service and advice, or, by imposing regulation, hinder the very actions of servicing and advising these self-same customers? *
When is too much regulation? As an intermediary, I can’t profess to understand the impact of the maze of regulations on product providers, but I can hazard a guess as to the additional complexity and cost it has brought the industry, but, hopefully, it has also introduced peace of mind for consumers and authorities.
If we look at the volume of regulatory changes over the past five years, the effect of these changes on the industry is clear. With some trepidation, we sometimes wonder when the day will come that our compliance team outgrows our financial team!
In an unregulated environment, where large sums of money are involved, untoward business practices manifest themselves. However rare, the end result is that hundreds, if not thousands, of clients are impacted by the acts of a small band of unscrupulous players. In short, regulation is intended to protect the end consumer and safeguard their investments. Every game needs its rules to function.
If all of this sounds noble, that’s because it is, but the cost of compliance can become prohibitively expensive. So much so that the distribution channel may decide that income is outweighed by the cost of rendering advisory services to the lower end of the market (those who need it the most), which may lead to advisers fleeing this market to focus on higher paying customers. If this happens, the very intention of the regulation is undone, and the lower end of the market is left to fend for themselves.
The regulators understand this, which is why micro-insurance market regulations now exist. These new categories ensure that the proportionate scaling of regulations attempts to reduce the requirements imposed on micro-insurers, which reduces costs that may have previously been a deterrent to uptake by the lower-income target market.
Buying directly may be more affordable to clients in this market, but when a market is selling a product versus advising on risks and solutions, the customer faces some precarious decisions. The choice of solutions is limited to the range of offerings available by a particular provider.
Product vs. advice
Many customers have confused the roles of intermediary and insurer, and therein lies the problem: the customer is not always aware when they are receiving product information, as opposed to objective, independent advice.
Let’s look at what has happened over the past few years.
We have the regulatory exams that need to be passed for individuals to render advice or intermediary services. The regulatory exams do not test the knowledge and understanding of the subject matter, but rather how the service is delivered. This creates some concerns for customers, as it doesn’t convey whether the intermediary is truly an expert, or merely someone who has passed the exam and is deemed fit to render advice, however unsuitable. What’s more, employers are forced to look for candidates with minimum requirements to remain compliant, and those entering the industry may struggle to do so as emphasis lies on those who have the necessary paperwork. This is a hindrance to introducing new blood into the industry.
The FAIS Act regulates the services of intermediaries, and non-compliance can result in a fine of up to R10 million or imprisonment. The Financial Sector Conduct Authority can also suspend or withdraw the intermediary’s license. Do I have your attention now?
Policyholder Protection Rules
The Policyholder Protection Rules concern policies owned by natural policyholders and juristic policyholders with an annual turnover, or asset value, of less than R2 million. These rules provide protection that includes general provisions regarding the fair treatment of policyholders, and product design, as well as standards relating to measures like cooling-off periods, the waiver of rights, and the prohibition of the use of negative option selections.
Treating Customers Fairly (TCF)
This set of principles provide a useful and practical basis on which all exchanges in the financial services space should be undertaken. These principles understand the inequality of the relationships that exist between product providers, their distribution channels, and their common customer. TCF should be embedded in the whole value chain and the DNA of any organisation rendering financial services.
Outsource and binder agreements
This is a touchy subject, given that many business models were built on these prototypes and pricing structures. Over the years, however, these agreements have been abused, but it’s also important to realise that insurance has become progressively cheaper in the past thirty years. Anybody deriving income on percentage-based numbers, from commissions to outsource fees, was likely to experience a reduction in income, which may have led to some parties pushing the envelope in terms of realistic fee levels.
Whatever your views, ultimately the cost of the end product, and that of the competition, will drive the end pricing. If traditional insurers or intermediaries don’t reduce their cost of distribution, they will be taken out by their direct competitors. To counter this, intermediaries must show value through knowledge and experience, and thereby justify the price premium.
Records of advice
This is another very sensible requirement, which, in my view, is not only for the benefit of the end customer, but for all institutions. For it to be a useful tool to both parties, the context of the advice being rendered is always crucial. It’s important to remember that what appears straightforward to us as specialists may not be so obvious to those receiving advice. It’s vital that the technical aspects of what is covered are accurately conveyed in lucid, concise language, and are clearly understandable.
The above is not an exhaustive list of the regulations that have come about in the last few years, but an attempt to highlight a few changes, and give some perspective to people who bemoan the seemingly endless stream of business-changing rules coming into play.
If you take a step back, it makes objective sense why these changes have been made. Our regulators have always approached these matters with an open mind, as we’ve witnessed with the development of the COFI Bill.
Whether we’re in favour of regulation or not, it’s here to stay. Where we as intermediaries detect some negative outcomes unfolding, we can engage with the regulator via the FIA, and propose solutions to improve outcomes.
“If you think compliance is expensive, try non-compliance!,” the former US Attorney General PaulMcNulty said. I’ll leave it to you to decide the merit of these words.
* With apologies to William Shakespeare Esq.