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 paper 2
A brief overview of TCF and twin peaks 5
Anticipated affect on insurer’s (and UMA’s) relationship with brokers 3 6
Legislative 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

5. TCF and Twin Peaks

6. TCF and Twin Peaks
TCF Implementation began late 2013 and every FSP is expected to have
systems and procedures already in place
The 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 Peaks
Legislation being implemented over a 3 year period
Responsible for the oversight of the safety and financial soundness of financial institutions, including banks, insurers and financial conglomerates.
Prudential Authority within the Reserve Bank
To protect customers of financial services firms, and to improve the way financial service providers conduct their business.
Financial Sector Conduct Authority

8. Legislative changes (proposed and in place)

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’
Name
Penalty
Rand Equiv
What they did
Stonebridge International Insurance
£8,300,000
R149,000,000
Did not give clear information, while post-sale support staff discouraged customers from cancelling policies.
Santander
£12,400,000
R223,000,000
Poor investment advice following mystery shopping by the FCA.
Invesco Perpetual
£18,600,000
R339,000,000
Exposing investors to greater levels of risk than they expected.
State Street
£22,900,000
R238,000,000
Charging for changes to asset portfolios without agreeing the charges with clients.
Home Serve
£137,610,000
R412,000,000
Misselling 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 interviews
FSB checking compliance with FAIS and FICA
Internal policies and procedures that are implemented must be common knowledge to all relevant staff members
Our experience of the FSB’s current site visits which demonstrate “robust and intrusive”

13. The RDR

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 brokers
Transport

15. 3 different forms of advice
The RDR
3 different forms of advice
Financial Planning
Financial planning involves advice on structuring and arranging a customer’s financial resources to meet short and long term goals.
Up-front product advice
Up-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 advice
Ongoing 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 RDR
3 different types of agent/broker
Independent Financial Agent/Independent Insurance Broker
The 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 Agent
An agent is contracted to provide advice in relation to a single product supplier only.
Multi-tied Agent
The 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 RDR
Standards to be set for “low/no advice” and “no servicing” models
Limit
Will 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 RDR
Premium collection prohibitions
Collection 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 RDR
Standards to be set for aggregation and comparison services
This 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 RDR
Standards to be set for referrals and lead generation
Non FSP provides lead to an FSP who contacts the client
Non FSP asks lead to contact another FSP
FSP collects partial information and passes it to another FSP to contact the client
FSP 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 RDR
Additional disclosures to be made at Point Of Sale
Type of advisor – tied, multi-tied or IFA
Type of advice – full, product, on-going or limited
Key product information (TCF initiative)
New market standard disclosure standards to be developed

22. Juristic representatives
The RDR
Juristic representatives
Not allowed to give advice in the juristic representative’s name
Natural representative must be under the control of the license holder
Natural representative must have a direct mandate from the license holder

23. Representatives to represent one FSP only
The RDR
Representatives to represent one FSP only
Advisers 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 RDR
Insurer to be responsible for advice given by tied agents
The 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 RDR
Insurer to be jointly responsible for advice given by multi-tied agents
Similar 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 RDR
FSPs to charge clients for advice services
Current 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 advice
Must 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 RDR
Regulated commissions to be reviewed
All 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; and
Remuneration 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 reviewed
The 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 RDR
Binder fees to be capped for NMIs
Proposed 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 RDR
Outsourcing fees (Dir159) to be capped
No 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; and
Where no binder exists, a set fee of R100 has been proposed for the issue of policies.

32. RDR Time frames
Phase 1 changes is anticipated as being the 2nd half of 2015 and will include
Advisers acting for more than one intermediary
Restricted outsourcing to advisers
Commission regulation changes
Equivalence of reward review
Binder fee payment changes
Outsourcing 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 businesses
Treasury’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 paper
Management Commitment
Senior 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 be
sufficient 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
Sales
There 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; and
Lessons from complaints are fed back into product design.

37. Linking TCF responsibilities with draft market conduct policy framework paper
Aftersales Service
There 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; and
Claims 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
Complaints
Complaints 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; and
There 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 paper
Employment conditions
Strategies, 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; and
TCF 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 158
An 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 1939
Watch this space…………………………………

48. NEW FINANCIAL SERVICES LEGISLATION AND ITS IMPACT ON THE SHORT TERM INSURANCE INDUSTRY