New binder regulations – is the writing on the wall?
Having read, re-read, and discussed the new rules relating to binders and binder agreements, we wonder whether the new regulations will really achieve the Financial Services Board’s (FSB) objectives or indeed if there is a future for broker-held binders at all.
There can be no doubt that the FSB has, for a long time, seen binder agreements as ‘unfair’ to policyholders. Undeniably, binder-holders frequently used their binders as ‘leverage’ to entice insurers to pay additional or higher fees. As the fees have to be built into the total cost of insurance, this, in the eyes of the FSB, is tantamount to treating customers unfairly.
More than 5 years ago the FSB made it quite clear that they were unhappy with binder arrangements. In December 2012, after consultation with industry, they imposed Regulation 6 of the Short Term Insurance Act (STIA) known as the Binder Regulations.
Despite comprehensive instructions as to how the Binder Regulations were to be applied, Insurers continued to find ways to pay their binder-holders additional fees, primarily through ‘incidental activities’. In an attempt to eradicate this practice, the FSB’s Information Letter 3 of 2013 emphasised that binder functions, and the activities incidental thereto, should be described in all binder agreements together with a fee breakdown for each different binder function and/or activity related thereto.
Many insurers ignored this instruction. The FSB’s ‘Thematic Review of Binders’ that took place during 2014 highlighted non-compliance by many insurers, which continued through 2015. At the close of 2015 the FSB, in their RDR review document, stated that new and more stringent Regulations would be introduced. These new Regulations have now been published and although there is one last chance to comment, the proposed implementation date is 1st May 2017.
If implemented, a broker registered for advice will no longer be able to have a binder in respect of commercial lines insurance, nor will that broker be able to have a personal lines binder which includes determining the wordings, premiums and/or the policy benefits. Moreover, the maximum fee that a broker registered for advice can earn from a personal lines binder will be 4%.
The FSB will, however, allow a broker that is only registered for intermediary services to have both commercial and personal lines ‘full’ binders but if that broker is associated with another broker that is registered for advice, the fees payable will be subject to a maximum of 6% on each binder. Lower fees will apply if the functions are limited.
The FSB will also be changing the FAIS Act to disallow a representative from working on two licenses. Consequently, if a broker that is registered for advice establishes a separate FSP to manage its binders, it will have to employ specific representatives to do so. Will it be able to manage a full business on 6%? We think that this is unlikely.
Brokers currently with binder facilities and who are registered to render advice may have to reconsider their entire business models.