What can be done and what needs to be done?
“Broker fees”, “debit order fees”, “admin fees” and even “compliance fees” have been common terms used to substantiate fees charged over and above policy risk premiums for many years, but times they have now changed!
INSURER FEES: While there has never previously been any restriction on insurers charging a fee, the FSB (now FSCA) released a draft “undesirable business practice” document in July 2012. This document gave the intended view of the regulator that an insurer should not be charging an “admin fee” over and above the risk premium, due in part to the fact that such fees fall outside the solvency calculations of insurers and the belief that the costs of delivering an insurance product should all form part of the premium charged, so there is no need for a separation.
What did insurers use these fees for? Reduction of management expense ratios was one thing. Funding binder fees for brokers and/or UMAs was another.
While the draft undesirable business practice document never saw the light of the regulatory day. it has appeared as part of the Policyholder Protection Rules (PPR) that became generally effective from January 2018. These regulations, insofar as fees charged by insurers, becomes effective from June 2018, but don’t forget that the PPR applies to Personal Lines and small Commercial Lines (client turnover/asset value below R2m pa), so the restriction is technically not applicable to larger commercial clients.
Will insurers apply this distinction? Our view is that because of the administrative complexities of monitoring commercial clients that do or do not “qualify”, insurers should opt for the easier option of not charging fees across the board.
Time will tell as to how insurers choose to apply this standard, but for those insurers that used the fee to fund binder fee payments, the practical impact of simply collapsing these fees into the risk premium will not be as simple as first thought, depending on the reinsurance programme in place.
BROKER FEES: Section 8(5) of the Short-term Insurance Act was for many years, despite clear FAIS-based standards that should be followed, the standard by which brokers justified fees charged to policyholders. It had no real requirements on justification of the fee, and all FAIS forced brokers to do was to clearly disclose those fees, which was done with little or no impact for the broker. All was well.
As far back as 2013 the regulator made it clear, via the Financial Sector Laws General Amendment Act, that section 8(5) fees were on their way out. As was to be expected, brokers preferred to adopt a “wait until I have to change” approach, and little or no preparation was done for the day when 8(5) fees would fall away. And fall away they did, from 1 January 2018.
What is the effect of this enactment of the removal of 8(5)? In simple terms, the FAIS standard now has no opposition as it had in the past. It does not mean, as many have said, that a broker cannot charge a fee, simply that (well maybe not that simple) the FAIS standard on disclosure of and acceptance of fees being charged must be followed to legitimise those fees.
So, what are those standards?
Well in simple terms (you can review the full current wording in Section 3A of the General Code of Conduct that sets out the standards for what a “provider” (FSP) can earn), they demand that any fees have to relate to “a financial service” for which commission and fees (essentially binder and outsource fees) are not paid. The important aspect is that such fees:
· Are specifically agreed to by a client in writing; and
· May be stopped at the discretion of that client; and
· Are “reasonably commensurate to the service being offered”.
These standards are subject to a proposed amendment to the code, expected to be finalised in July 2018, that seeks to add clarity to what the standards are.
So what does this mean to a broker who currently charges a fee? In simple terms, they can carry on charging a fee, but not necessarily the same fee. All such brokers need to:
· Establish what services they actually provide to a client that is not provided for in commission and/or binder/outsource fees. The recently released RDR based Draft segmentation analysis document, although still in draft, is a useful tool to assist in establishing these services.
· Establish what it costs to deliver said services. This is slightly harder, but it has to be done as insurers will be checking (see below), but remembering it is acceptable to have an acceptable margin in such fees.
· Establish how said services will be disclosed to clients; and probably more importantly how the clients will provide the necessary “explicit consent” to the paying of the fees? There are many ways to achieve this. Our view, as Associated Compliance, is a client Service Level Agreement (SLA). The content of such an SLA is the topic of another article, but simply put, such an agreement, if properly structured, will prevent the need for continual client acceptance across all policies sold to them and will set a professional basis for providing financial services by a broker to a client.
As a broker why must I go to all this trouble?
· Because the regulations say so;
· Because your friendly Compliance Officer will be looking to see that you are complying; and
· Because your insurer has been charged with the responsibility of keeping an eye on your processes.
What the new PPR regulations state is that where an insurer “facilitates” the collection of broker fees (and remember PPR applies to personal lines and small commercial business), they must ensure that the principles are being adhered to, i.e. at the most basic level you have the client consent to be paid these fees. It is not yet clear exactly how this monitoring will practically be applied, possibly because of the fact that their deadline for implementing such a standard is only January 2019, but some insurers are already out of the box on the issue.
The way we would expect to see the controls applied is that if a broker has a standard, has implemented a standard and continues to pursue client acceptance of this standard, specifically on existing business where client acceptance will be the most difficult area to comply to the letter of the law, then punitive standards, i.e. withholding broker fees by insurers, will not be applied.
One aspect where clarity is still sought is the position of an insurer who has outsourced a broker to collect premium on its behalf, i.e. a broker with an IGF. Is the granting of such an authority “facilitating fee collection” as noted in PPR? To be anything else would make little practical sense, but clarity is awaited from the regulator.
Notwithstanding the areas still in need of clarity, if you, as a broker, charge any type of fee to your client, it is no longer business as usual and steps need to be taken to ensure that you obtain client permission and that your processes can stand the insurer tests that will become increasingly prevalent as the year progresses.
If you need assistance, speak to your compliance advisor/officer.