Presentation on theme: "Index Background to this presentation The RDR"— Presentation transcript:
1 NEW FINANCIAL SERVICES LEGISLATION AND ITS IMPACT ON THE SHORT TERM INSURANCE INDUSTRY
2 Index 1 4 2 5 3 6 Background to this presentation The RDR Linking TCF responsibilities with the draft market conduct policy framework paper2A brief overview of TCF and twin peaks5Anticipated affect on insurer’s (and UMA’s) relationship with brokers36Legislative changes (proposed & in place)
3 Background to this presentation The agreement in 2010 to follow the UK’s “TCF and Twin Peaks” model of Legislation;The TCF Assessment;The numerous papers issued by National Treasury;The warnings by the FSB of their intention to undertake “robust and intrusive” site visits and our experience of this;The many presentations given by the FSB;The FSLGAA;
4 The FSR Bill (2nd draft)Typical fines and penalties imposed by the UK authorities since the introduction of their twin peaks model in 2013;Treasury’s Market Conduct Policy Framework Paper;Board Notice 158 of 2014
6 TCF and Twin PeaksTCF Implementation began late 2013 and every FSP is expected to havesystems and procedures already in placeThe FSB’s experience has shown that relying on FSPs to do the right thing is not on its own sufficient to drive the behavioural and culture change required to deliver consistently fair outcomes for policyholders. As a consequence they introduced the concept of ‘Treating Customers Fairly’ (TCF).TCF is an outcomes based approach which ensures that the promises made by practitioners are actually delivered, demonstrated by formalising procedures and ensuring that the 6 TCF Outcomes are maintained throughout the policyholder’s insurance purchase life cycle, from product design and promotion, through advice and servicing, to complaints and claims handling
7 TCF and Twin PeaksLegislation being implemented over a 3 year periodResponsible for the oversight of the safety and financial soundness of financial institutions, including banks, insurers and financial conglomerates.Prudential Authority within the Reserve BankTo protect customers of financial services firms, and to improve the way financial service providers conduct their business.Financial Sector Conduct Authority
9 Legislative changes (proposed and in place) The Definitions of “intermediary”, “representative” and “services as intermediary” have been deleted from the STIA;Section 8.5 of the STIA has been deleted (trigger date TBA);Section 48 of the STIA has been changed to prohibit any intermediary from earning any remuneration from a policyholder, unless agreed in the Regulations (trigger date TBA);Restrictions imposed regarding advertisements:Curtailment of JR activities (trigger date 30 June 2015);Incorporates into FAIS ACT a full and understandable definition of ‘CPD’;Removes requirement to consult with an ‘Advisory Committee’;Incorporates ‘Fit and Proper’ requirements’ in all insurance laws;Section 13 Certificates to be produced prior to rendering a financial service;FSLGAA
10 Legislative changes (proposed and in place) Establishes the Prudential Authority (‘Twin Peaks’)Establishes the Financial Sector Conduct Authority (Twin peaks);Brings all financial institutions into the regulatory conduct net;Introduction of overarching Ombud;Additional conditions to ‘Outsourcing’New definition of ‘financial products’(includes a credit agreement):New definition of ‘financial service’ (includes services provided in relation to credit agreements);Introduction of a significant owner at 15% or more;Introduction of FSP license renewals;Passes interpretation of insurance laws to the FSCA;New requirements regarding debarment.FSR Bill
11 Legislative changes (proposed and in place) Typical fines imposed by the FCA immediately following the implementation of ‘Twin Peaks’NamePenaltyRand EquivWhat they didStonebridge International Insurance£8,300,000R149,000,000Did not give clear information, while post-sale support staff discouraged customers from cancelling policies.Santander£12,400,000R223,000,000Poor investment advice following mystery shopping by the FCA.Invesco Perpetual£18,600,000R339,000,000Exposing investors to greater levels of risk than they expected.State Street£22,900,000R238,000,000Charging for changes to asset portfolios without agreeing the charges with clients.Home Serve£137,610,000R412,000,000Misselling policies and not investigating complaints
12 All documents provided to the FSB are being scrutinised All Reps, Admin Staff, the FD, HR Department etc. are requested to be available for interviewsFSB checking compliance with FAIS and FICAInternal policies and procedures that are implemented must be common knowledge to all relevant staff membersOur experience of the FSB’s current site visits which demonstrate “robust and intrusive”
14 Sectors of the short term insurance industry which face particular challenges in respect of the RDR Call Centres(particularly outsourced contractors);Administrators (wholesale brokers);Reinsurance brokersTransport
15 3 different forms of advice The RDR3 different forms of adviceFinancial PlanningFinancial planning involves advice on structuring and arranging a customer’s financial resources to meet short and long term goals.Up-front product adviceUp-front product advice involves the provision of a recommendation, guidance or proposal to a client regarding the suitability of a product based on the identified needs of the client. It also entails the selection of specific products and/or product suppliers depending on the range of offerings to which the adviser has access.Ongoing product adviceOngoing product advice involves the provision of recommendations on changes during the life of a product in response to changing customer needs and circumstances.
16 3 different types of agent/broker The RDR3 different types of agent/brokerIndependent Financial Agent/Independent Insurance BrokerThe agent will be required to meet two sets of independence criteria – one set of criteria relating to the choice of product and product supplier, and a second set of criteria relating to being free from product supplier influence.Tied AgentAn agent is contracted to provide advice in relation to a single product supplier only.Multi-tied AgentThe agent is not a tied agent and also does not satisfy the criteria to be described as an IFA.
17 Standards to be set for “low/no advice” and “no servicing” models The RDRStandards to be set for “low/no advice” and “no servicing” modelsLimitWill be imposed on the types of products or product features that may be distributed using non-advice sales execution or low advice models and will be restricted to simple products that comply. Specific fit and proper standards will also be set for representatives providing factual information in these models.Measures to improve customer trust and improve customer outcomes will clarify the circumstances in which ‘no-service’ or ‘low/no advice’ distribution models are appropriate and the consumer protection measures required in such models.
18 Premium collection prohibitions The RDRPremium collection prohibitionsCollection of insurance premiums will not be permitted to be carried out by ordinary FSPs in respect of life and personal lines short-term insurance business. A transition period will be granted for FSPs to become compliant with such standards or for insurers to either take over this function themselves or outsource it to third parties who are not intermediaries or associates of intermediaries.
19 Standards to be set for aggregation and comparison services The RDRStandards to be set for aggregation and comparison servicesThis will include putting customers in a position to make meaningful comparisons between products on a number of criteria, not just price.
20 Standards to be set for referrals and lead generation The RDRStandards to be set for referrals and lead generationNon FSP provides lead to an FSP who contacts the clientNon FSP asks lead to contact another FSPFSP collects partial information and passes it to another FSP to contact the clientFSP collects full information and provides quotation and asks another FSP to undertake secondary underwriting
21 Additional disclosures to be made at Point Of Sale The RDRAdditional disclosures to be made at Point Of SaleType of advisor – tied, multi-tied or IFAType of advice – full, product, on-going or limitedKey product information (TCF initiative)New market standard disclosure standards to be developed
22 Juristic representatives The RDRJuristic representativesNot allowed to give advice in the juristic representative’s nameNatural representative must be under the control of the license holderNatural representative must have a direct mandate from the license holder
23 Representatives to represent one FSP only The RDRRepresentatives to represent one FSP onlyAdvisers will not be permitted to act as representatives of more than one juristic intermediary
24 Insurer to be responsible for advice given by tied agents The RDRInsurer to be responsible for advice given by tied agentsThe insurer will have to provide full product and sales training to enable the tied agent to provide the client with accurate information and advice on the products on offer as the insurer will be held accountable.
25 The RDRInsurer to be jointly responsible for advice given by multi-tied agentsSimilar to the responsibilities in respect of tied agents, the insurer will be held jointly accountable for the advice and distribution provided by multi-tied agents.It is possible that the training that will be provided by suppliers will form the basis of CPD, with the 2nd level RE examination removed from legislation.
26 FSPs to charge clients for advice services The RDRFSPs to charge clients for advice servicesCurrent commission payment practices to be discontinued.FSP to charge the client for providing professional advice.Commission to be paid by insurer for business acquisition only.
27 $ The RDR Must obtain explicit customer consent. Charging for adviceMust obtain explicit customer consent.Must disclose the fee calculation basis, the manner of payment and the type of advice to which the fee relates.Advisers will be obliged to advise the insurer as to how the fees are calculated.The insurer to collect the fee on behalf of the adviser.The insurer is obliged to monitor advice fees charged by multi-tied advisers and IFA’s, where the product supplier facilitates the fee collection.There will be limitations on the extent to which advice fees charged may vary between product types.$
28 Regulated commissions to be reviewed The RDRRegulated commissions to be reviewedAll remuneration to be reasonable and commensurate with the actual services rendered.Remuneration structures to strike a balance between supporting ongoing service and adequately compensating intermediaries for up-front advice and intermediary services.Ongoing fees and/or commission will only be paid if ongoing advice and services are rendered.The different types of services and fees to be easily comparable by customers; andRemuneration structures will promote a level playing field between different types of intermediaries providing similar services.
29 “Equivalence of reward” structures to be reviewed The RDR“Equivalence of reward” structures to be reviewedThe principle of equivalence must apply for each individual tied agent.The nature of remuneration and benefits to be taken into account in assessing equivalence.The principle of equivalence to apply at appropriate time periods or across appropriate tranches of business.
30 Binder fees to be capped for NMIs The RDRBinder fees to be capped for NMIsProposed maximum fee structure: Enter into, vary or renew: 2% Determine the policy wording Determine the premiums under a policy 2% Determine the value of policy benefits Settle claims 1% - 3%
31 Outsourcing fees (Dir159) to be capped The RDROutsourcing fees (Dir159) to be cappedNo proposals as to the extent of capping has yet been published;Services to be included in ‘intermediary services to clients’ will be identified and removed from outsourced agreements;Policy issuing will not be allowed as an outsourced agreement where the intermediary has a binder; andWhere no binder exists, a set fee of R100 has been proposed for the issue of policies.
32 RDR Time framesPhase 1 changes is anticipated as being the 2nd half of 2015 and will includeAdvisers acting for more than one intermediaryRestricted outsourcing to advisersCommission regulation changesEquivalence of reward reviewBinder fee payment changesOutsourcing fee payment changes
33 Treasury’s market conduct policy framework paper This document proposes a comprehensive framework explaining how the market conduct regulator will operate in order to ensure that financial institutions treat their customers fairly.It ‘links’ to the responsibilities of every FSP as comprehensively detailed in the TCF assessment that all FSPs must by now have completed and entrenched in their businessesTreasury’s market conduct policy framework paper
34 Linking TCF responsibilities with draft market conduct policy framework paper
35 Management Commitment Linking TCF responsibilities with draft market conduct policy framework paperManagement CommitmentSenior management discussions relating to TCF must be formalised and documented;Mission statement or corporate strategy must reflect commitment to TCF;Appropriate management information must be actively used;KPIs must be introduced to assess TCF effectiveness and progress;Management information must besufficient to assess TCF effectiveness and performance;shared across the business;available to key audiences (e.g. Board, Senior Exec);reviewed to assess effectiveness of TCF strategy and used to guide decisions.
36 Linking TCF responsibilities with draft market conduct policy framework paper SalesThere must be a clear definition of your target market;Actual sales volumes must match predicted sales volumes;There should be a low proportion of sales to customers outside target market;There is a low volume of complaints (measured against market competitors);A low proportion of claims are turned down or reduced;There are very few technical queries from representatives; andLessons from complaints are fed back into product design.
37 Linking TCF responsibilities with draft market conduct policy framework paper Aftersales ServiceThere is a low volume of rejected or reduced claims;There is regular and ongoing communication with customers;There are clearly defined service standards and appropriate monitoring of achievement of those service standards; andClaims expectations are clearly outlined in the policy literature sent to clients (not just claims conditions and requirements).
38 Linking TCF responsibilities with draft market conduct policy framework paper ComplaintsComplaints management information must be consolidated and reported to senior management and actively worked;There should be few (if any) complaints referred to the Ombud (OSTI and FAIS) that are upheld;There is evidence of excellent and comprehensive complaints record-keeping;No person’s remuneration can be based on the volume of complaints handled;Full training and support must be given by insurers (and UMAs) to intermediaries for handling complaints;There must be a comprehensive process for root-cause analysis of complaints; andThere should be a clear division of responsibility between those who may have caused the complaint and those who investigate it.
39 Employment conditions Linking TCF responsibilities with draft market conduct policy framework paperEmployment conditionsStrategies, budgets and remuneration of managers and staff should reflect TCF principles;Bonus and incentive schemes for senior executives and directors should support TCF principles;The FSPs employment conditions that influence behaviour must support TCF principles (e.g. growth strategies, disciplinary procedures);TCF principles must be fully reflected in ongoing or induction training; andTCF principles must be developed in respect of each department or staff role.
40 Anticipated affect on insurer’s (and UMA’s) relationship with brokers
41 Anticipated affect on insurer’s (and UMA’s) relationship with brokers One of the intended effects of TCF is to rebalance responsibility between product suppliers and financial advisers – delivering TCF outcomes is a shared responsibility”Product suppliers are expected to take greater responsibility for outcomes arising from their chosen distribution model”Some extracts from the FSB’s presentations
42 Anticipated affect on insurer’s (and UMA’s) relationship with brokers Outsourcing the distribution function does not entitle the supplier to abdicate responsibility for customer outcomes. The principal remains fully accountable over and above the distributor’s responsibilities”Before and after contracting controls should be in place to assess and monitor customer outcomes”Some extracts from the FSB’s presentations
43 Anticipated affect on insurer’s (and UMA’s) relationship with brokers Controls to be implemented by insurers (and UMAs) in terms of B/N 158An insurer must adopt, implement and document an effective governance framework that provides for the prudent management and oversight of its insurance business and adequately protects the interests of its policyholders”.Some extracts from the FSB’s presentations
44 Our views on the anticipated affect on insurer’s (and UMA’s) relationship with brokers Typical questions that the Insurer (and UMA) will have to ask its brokers?Do you have a service level agreement with your client?Do you understand the difference between your TCF responsibilities and those of ours as insurer (or UMA)?Do your clients know the difference between your TCF responsibilities and ours?How do you ensure that our disclosures are presented to your clients?Do you realise and accept that we must communicate with our ‘common’ clients?
45 Our views on the anticipated affect on insurer’s (and UMA’s) relationship with brokers Typical questions that the Insurer (and UMA) will have to ask its brokers (continued)How do you measure TCF delivery in respect of the products we supply?To what extent has your staff been trained in TCF – particularly internal and administrative staff?To what extent do you test the clarity and appropriateness of our product material before offering it to clients?How do you ensure that clients get post-sale information when they need it?What level of feedback will you provide to us as product suppliers regarding our products??
46 Our views on the anticipated affect on insurer’s (and UMA’s) relationship with brokers Typical questions that the Insurer (and UMA) will have to ask its brokers (continued)?What controls do you have in place to monitor the risk of poor advice by your representatives when distributing our products?Do you have controls in place to inform us immediately when you receive a complaint which relates to one of our products?What will you do if you discover a problem with the advice that your company gave in respect of one of our products?
47 “A riddle, wrapped in a mystery inside an enigma” Anticipated affect on compliance officers?“A riddle, wrapped in a mystery inside an enigma”Winston Churchill referring to Russia 1st October 1939Watch this space…………………………………
48 NEW FINANCIAL SERVICES LEGISLATION AND ITS IMPACT ON THE SHORT TERM INSURANCE INDUSTRY