conduct of business regulation - sauma the voice of uma · clearly delineate between the types of...

CONDUCT OF BUSINESS REGULATION

25 May 2018Presented by Lezanne Botha

Update on RDR and Fit and Proper

requirements for short-term insurance

Agenda

• The Retail Distribution Review

• RDR Phase 1: Amendments to the STIA

Regulations relating to binders and outsourcing

• RDR Phase 2 & 3: Intermediary activity

segmentation analysis

• Fit and Proper requirements under the FAIS Act

The Retail Distribution Review - Background

RDR paper published - November 2014

Identified risks in the existing distribution landscape, including distribution relationships

and intermediary remuneration models that potentially contribute to poor customer

outcomes

Proposed specific regulatory reforms for the distribution of retail financial products to

customers

Subsequently to initial proposals, two RDR status updates were published -

November 2015 and December 2016

The Retail Distribution Review - Objective

Place greater responsibility on product suppliers to ensure the delivery of fair customer outcomes through their chosen distribution channels

Introduce specific limitations on the types of remuneration payable to intermediaries to address conflicts of interest

Clearly delineate between the types of activities performed by intermediaries on behalf of product suppliers vs customers, to achieve greater transparency in remuneration practices to enable customers to better understand and compare the nature, value and cost of advice and other services provided by intermediaries

Ensure reasonable remuneration for actual activities being performed by intermediaries on behalf of product suppliers and/or customers

A phased approach to implementation

• RDR proposals to take effect in 3 phases

• Phase 1:

• Effected through amendments to Regulations and replacement of

PPRs 2017 – 1 January 2018

• Phase 2 & 3: Underway……. including -

• Premium collection requirements

• Activity segmentation

RDR Phase 1 proposals effected through…

FAIS General Code

FAIS Fit and Proper Requirements

STIA and LTIA Regulations

PPRs

The Insurance regulatory framework

• Fit and Proper requirements for FSPs

• General Code of Conduct

• Guidance

• Regulations

• PPRs

• Directives, Board and Insurance Notices, Information letters

• Prudential Standards

• Prudential Standards

• Conduct Standards

• Joint Standards

Financial Sector

Regulation Act

Insurance Act

FAIS ActAmended

STIA

Prudential

Conduct Conduct

Regulatory model

RDR Phase 1

• PURPOSE OF DRAFT REGULATIONS

Proposals relating to

remuneration and outsourcing

Proposal J: Outsourced services on behalf of product suppliers to be more

clearly identified and regulated

Proposal Z: Restricted

outsourcing to financial advisers

Proposal UU: Remuneration for

selling and servicing short-term

insurance policies

Proposal ZZ: Binder fees payable for

multi-tied intermediaries to be

capped

RDR Phase 1 :

Amendments to the Regulations under the STIA

relating to binders and outsourcing

Amendments to the Regulations

• ARPOSE OF DRAFT REGULATIONSAdditional requirements

relating to Binder

Agreements:

Governance and Oversight

Operational requirements

Reporting requirements

Remuneration

(Binder Caps)


Fees must be reasonable and commensurate with the actual

cost of performing the binder function, taking into account the nature of the function and resources, skills and

competencies required

Payment of binder fees must not result in the person being remunerated more than once for performing a

similar function on behalf of the insurer and / policyholder

Any actual or potential conflicts of interests must be effectively

mitigated

Payment of the fees must not impede the delivery of fair outcomes to policyholders.

General Principles for determining

remuneration for binder functions


Limitation on Remuneration for Binder Functions

Gives effect to RDR Proposal ZZ:

Binder fees payable to multi-tied

intermediaries to be capped

Insurer can bring application to Authority for approval to pay a binder holder a fee in excess of binder caps if Authority is

satisfied that the fee is consistent with the

general principles for determining remuneration

Caps apply to NMI

authorised to render

“advice” under FAIS


BINDER FUNCTION MAXIMUM FEE

PAYABLE

Enter into, vary or renew a policy -

function (a)

Determine wording of a policy -function (b)

Determine premiums under a policy -

function (c)

Determine value of policy benefits -function (d)

Function (a) only 3.5%

Function (a) and

one or more of

functions (b) – (d)

5%

One or more of

functions (b) – (d)

only

0%

Settle claims under a policy – function (e) 4%


Any new binders Binders entered

into after 1 Jan

2017

Binder entered into

prior to 1 Jan 2017

Immediately 6 months / when

amended

12 months / when

amended

Transitional arrangements to align to new binder

regulations:


Notification to the Authority:

• BINDER ARRANGEMENTS:30 days before entering into a binder arrangement.

60 days prior to terminating a binder arrangement.


Notification to the

Authority - any new

binder:

Developing

template …

• Details of the relationship between parties

• Term of the agreement & total remuneration payable

• Details of any other remuneration payable to the binder holder by the insurer

• Details of any fees, charges or costs directly recoverable from policyholder by

binder holder

• Detailed reasons why the insurer believes that entering into the binder agreement

will:

• (i) promote the delivery of fair outcomes to policyholders.

• (ii) result in greater operational efficiencies and a reduction of overall costs

for policyholders.

• Details on how the insurer will exercise effective and on-going oversight over the

binder holder taking into account the nature, scale and complexity of business

outsourced

• Details on how insurer will satisfy itself that the binder holder is appropriately fit

and proper to perform the binder function and has specific technical expertise

required

• Controls in place to ensure the validity, accuracy, completeness and security of

policy and policyholder information

• Details on binder holder’s operational ability to ensure proper data integration

• Proof of activity based costing or similar exercise completed by the insurer to

ensure the appropriateness of remuneration

• Copies of disclosures to policyholders relating to all remuneration, including fees

and charges

• Proof of due –diligence done on binder holder


Policy data administration services (PDAS)

Constitutes “services as

intermediary”

= commission

UNLESS …


Notification to the Authority:

• ANY OTHER REMUNERATION:30 days before entering into an arrangement to pay

remuneration to an independent intermediary or

representative for a service, function or activity

which in the opinion of the insurer does not

constitute services as intermediary or a binder

function

• Includes OUTSOURCING


No

tifi

ca

tio

n t

o t

he

Au

tho

rity

-

Oth

er

rem

un

era

tio

n:

Total remuneration to be paid

Value, nature and frequency of the remuneration payable for

the service, function or activity.

Proof of activity based costing or similar exercise completed

by the insurer to ensure appropriateness of

remuneration

Detailed reasons why the insurer believes the service,

function or activity does not fall within definition of “services as

intermediary” and does not constitute a binder function (or

incidental to binder).

Any other agreements in place between the insurer and

independent intermediary or representative

The nature, frequency and form of the remuneration payable in terms of other

agreement

Detailed description of the service, function or activity to

which the remuneration arrangement relates

Any additional fees, charges or costs directly recoverable

from the policyholder in respect of the service, function

or activity

Copies of all disclosures to policyholders relating to all

remuneration, including fees and charges

Any other arrangements entered into by the insurer with

the intermediary (e.g. intermediary or binder

agreements, shareholding/profit share

arrangements) and all remuneration payable in this

regard.

Minimum supporting

documentation

Any steps to be taken by the insurer to mitigate any

potential conflicts of interest arising from the arrangement,

if applicable.

RDR Phase 2 & 3:

Intermediary activity segmentation analysis

RDR Phase 2 and 3

• ARPOSE OF DRAFT REGULATIONSUnderstanding the delineation of all

activities for which short-term

intermediaries are remunerated under

the existing regulatory framework

Including types of remuneration (regulated and unregulated)

currently payable across the short-term industry for such activities

Understanding of the nature and

type of activities that fall within the scope of binder

and other outsourcing

functions

Objectives of the intermediary activity

segmentation analysis

Binder fee caps to be looked

at holistically, to ensure that

the impact of any limitation

introduced during Phase 1 of

RDR would be appropriately

considered during formulation

of proposed RDR interventions

relating to other forms of

intermediary remuneration,

planned for Phases 2 and 3.

Intermediary Activity Segmentation Analysis

30 March 2016:

Phase 1 RDR Short-term Insurance Industry Workshop

April 2016 to October 2017:

Draft Activity Segmentation compiled based on numerous engagements with individual insurers, intermediaries and other relevant stakeholders

December 2017:

Draft Activity Segmentation issued to RDR Short-term

Insurance Industry Reference Group for input by 30 March

2018

Current:

Inputs being analyzed and

further technical work continuing

The process thus far….

Intermediary Activity Segmentation

“Advice”

• related activities that can be described as services rendered directly to the customer – in future likely negotiated/recoverable directly with customer only

“Intermediary activities”

• falls squarely within the current definition of “services as intermediary” and which are currently subject to regulated commission

“Binder activities”

• currently remunerated through binder fees payable in terms of the Binder Regulations

“Outsourced activities”

• currently remunerated through outsourcing fees payable in terms of the Outsourcing Directive

“Other activities”

• not readily definable under the current regulatory framework.

Incidental Binder Activities

“incidental activities”Binder activities includes

references to activities that may be regarded as “incidental

binder activities”.

In the absence of a binder arrangement, these

“incidental binder activities” could however fall within one of the other categories, most

notably “outsourcing” activities.

Information letter 3 of 2013


• Significant duplication and overlaps in activities for which intermediaries are remunerated - real risk of duplication of fees

• Inconsistent interpretation of what constitutes “services as intermediary” (remunerated by commission) vs. outsourced activities

• Inconsistent interpretation of the distinction between binder activities and other outsourced activities

• Remuneration levels for binders and outsourcing are largely based on prevailing market practice

• “negotiable” rates proposed by the outsource provider in exchange for placing business with a particular insurer, with little evidence of robust activity based costing linked to actual cost of activities performed

Preliminary key findings

• do not correctly reflect the value and cost of intermediaries’ activities

• do not drive efficiency for customers and insurers alike

• do not support sustainable intermediary business models

• increases the risk of conflicted financial advice

Preliminary findings reinforces view that current remuneration practices -


Framework to be used as basis to determine how and by

whom intermediaries should be remunerated for each of

the identified activities.

Determine need for additional conduct standards in

respect of these activities.

Understand the knock-on effect of binder fee caps on

other remuneration streams currently available to

intermediaries.

As part of the exercise – review of the level of activity

based costing that is currently applied by insurers and

intermediaries in determining appropriate remuneration

levels for the different types of activities.

RDR Phase 1:

Fit and Proper requirements under the

FAIS Act

FAIS Competency requirementsCategory I – FAIS Competency Requirements

General Requirement

An FSP, key individual and representative must -

(a) have adequate, appropriate and relevant skills, knowledge and expertise in respect of the financial services, financial products and functions that it performs;

(b) comply with the minimum requirements; and

(c) maintain their competence.

Minimum Requirements

Person Experience Qualifications Exams Class of businessProduct

specificCPD

FSP Must have adequate and appropriate experience in the rendering of a

particular financial service in respect of a particular financial product and

particular category of FSP, for which it is authorised or in respect of which

authorisation is sought.

Recognised

qualification

RE 1

Exemption

FAIS Notice 24 of

2018

Yes Yes Yes

KI At least 1 year experience in management or oversight of rendering of

Cat I financial service

Recognised

qualification

RE 1

Exemption

FAIS Notice 24 of

2018

Yes No Yes

Rep Must have adequate and appropriate experience in the rendering of a

particular financial service in respect of a particular financial product and

particular category of FSP, for which it is appointed or in respect of which

appointment is sought.

Recognised

qualification

Exceptions:

▪ Scripted sales

execution - all

products –

Grade 12

RE 5

Exemption

FAIS Notice 24 of

2018

Yes

Exceptions:

▪ Tier 2 products (Short-

term Personal Lines A1) –

all services

▪ Tier 1 products – scripted

sales execution only

Yes Yes

Exceptions:

▪ Tier 2 products (Short-

term Personal Lines A1)

– all services

▪ Tier 1 products –

intermediary services

only

FAIS Competency requirements

class of business training vs. product specific training

“class of business training” means the training referred to in

section 29(4) in respect of a class of business and which

training is provided and assessed by an accredited provider

(accredited by a Quality Council as defined in the NQF Act) or an

education institution (as defined in NQF Act).

“product specific training” means the training referred to in

section 29(5) in respect of a particular financial product and which

training is assessed, including any amendments to that particular

financial product.

Cross reference in the PPRs

Rule 12 in 2017 PPRs:

• Insurer may only enter into intermediary agreement

with -

o an independent intermediary if it has taken reasonable steps

to satisfy itself that the independent intermediary and, where

applicable, any persons rendering services as intermediary

on the independent intermediary’s behalf, meet the FAIS

product knowledge competency requirements.

o a representative if meets any requirements to be fit and

proper prescribed under the FAIS Act in respect of that

representative and the policies offered by the insurer

including but not limited to the FAIS product knowledge

competency requirements.

THANK YOU

conduct of business regulation - sauma the voice of uma · clearly delineate between the types of...

Documents