Interesting moves afoot in intermediary classification
There are interesting developments in the works from the treasury when it comes to insurance intermediaries or known to most of us as brokers.
It used to be that intermediaries were classified into two groups, namely agents and brokers. Agents were people selling financial products on behalf of an insurer and were therefore paid by the insurer. While the word agent is not strictly speaking correct, I am using it here for simplification to describe someone working for the insurer.
The other was the broker, who although he was paid commission by the insurer was seen as the agent of the individual (or the person taking up the insurer). For years there was no problem with this construction and lots of case law, setting out this relationship developed, to the extent that this part of the law of agency was actually clear and understandable.
All of this, it seems, is now about to change. Below is an excerpt from a document circulated by Liberty’s head of Group Legal Services, discussing the moves afoot by treasury to try and change this construction:
“In terms of our common law of agency, insurance intermediaries are generally classified into two broad camps - agents of the insurer (typically referred to as “tied agents” or “insurer representatives”), and agents of the policyholder (typically referred to as “brokers” or “independent intermediaries”). This model is reinforced by definitions in the Long-term Insurance Act and the FAIS Act. The main legal consequence of this distinction is that, broadly speaking, insurers bear the risk for the advice and conduct of their agents, whereas the policyholder bears this risk in respect of brokers. This is the case irrespective of the source of the intermediary’s remuneration.
In their recent discussion paper on contractual savings, National Treasury have challenged this model, arguing that it creates inherent conflicts of interest. They have proposed, instead, that intermediaries be classified based on who pays them. They suggest that any intermediary who is remunerated by a product supplier (or multiple suppliers) should be regarded as an agent of that / those supplier/s, and that only those intermediaries who earn no remuneration from product suppliers at all, but are remunerated purely by client fees, should be regarded as agents of the client. As a consequence, only these last-mentioned intermediaries should be allowed to describe themselves as “independent”. This new classification would not only apply to insurance intermediaries, but to all financial services intermediaries.
Various commentators have highlighted the far-reaching legal and practical implications of this suggestion. For example, it would require a rewrite of various aspects of the FAIS Act. National Treasury have responded that they will reconsider the intermediary classification issues at a later stage. The industry would however be rash to assume that the proposal will simply be abandoned. The challenge to the industry is to devise and support adequate alternative controls to reduce the perceived conflicts of interest in the current model. In particular, insurers will need to be seen to take more responsibility (although hopefully short of full legal liability) for the market conduct of brokers from whom they accept business. Some proposals have been submitted to National Treasury.
The FAIS Advisory Committee is also in the process of considering changes to the FAIS General code of Conduct, introducing far more rigid controls on managing conflicts of interest. Inter alia, it is likely that all non-cash incentives to independent intermediaries will be prohibited (other than inconsequential gifts and educational events), and that disclosure of any remaining incentives in public registers will be imposed”.
The insurance industry has become extremely regulated over the last number of years, with amendments to the FAIS Act and the Long-term Insurance Act, all with the purpose of rooting out unscrupulous intermediaries and for the most part this has worked.
As one commentator said “the industry is already so overregulated that we really don’t need this too”. It seems that treasury is set on changing years of well-developed law and it seems as if this will only lead to more confusion. It might be worth your while to consider discussing the issue of intermediaries with your attorneys, if only in an effort to make sure you are making use of the services of an accredited intermediary.
Adrian Naudé
Naudes Attorneys
There are interesting developments in the works from the treasury when it comes to insurance intermediaries or known to most of us as brokers.
It used to be that intermediaries were classified into two groups, namely agents and brokers. Agents were people selling financial products on behalf of an insurer and were therefore paid by the insurer. While the word agent is not strictly speaking correct, I am using it here for simplification to describe someone working for the insurer.
The other was the broker, who although he was paid commission by the insurer was seen as the agent of the individual (or the person taking up the insurer). For years there was no problem with this construction and lots of case law, setting out this relationship developed, to the extent that this part of the law of agency was actually clear and understandable.
All of this, it seems, is now about to change. Below is an excerpt from a document circulated by Liberty’s head of Group Legal Services, discussing the moves afoot by treasury to try and change this construction:
“In terms of our common law of agency, insurance intermediaries are generally classified into two broad camps - agents of the insurer (typically referred to as “tied agents” or “insurer representatives”), and agents of the policyholder (typically referred to as “brokers” or “independent intermediaries”). This model is reinforced by definitions in the Long-term Insurance Act and the FAIS Act. The main legal consequence of this distinction is that, broadly speaking, insurers bear the risk for the advice and conduct of their agents, whereas the policyholder bears this risk in respect of brokers. This is the case irrespective of the source of the intermediary’s remuneration.
In their recent discussion paper on contractual savings, National Treasury have challenged this model, arguing that it creates inherent conflicts of interest. They have proposed, instead, that intermediaries be classified based on who pays them. They suggest that any intermediary who is remunerated by a product supplier (or multiple suppliers) should be regarded as an agent of that / those supplier/s, and that only those intermediaries who earn no remuneration from product suppliers at all, but are remunerated purely by client fees, should be regarded as agents of the client. As a consequence, only these last-mentioned intermediaries should be allowed to describe themselves as “independent”. This new classification would not only apply to insurance intermediaries, but to all financial services intermediaries.
Various commentators have highlighted the far-reaching legal and practical implications of this suggestion. For example, it would require a rewrite of various aspects of the FAIS Act. National Treasury have responded that they will reconsider the intermediary classification issues at a later stage. The industry would however be rash to assume that the proposal will simply be abandoned. The challenge to the industry is to devise and support adequate alternative controls to reduce the perceived conflicts of interest in the current model. In particular, insurers will need to be seen to take more responsibility (although hopefully short of full legal liability) for the market conduct of brokers from whom they accept business. Some proposals have been submitted to National Treasury.
The FAIS Advisory Committee is also in the process of considering changes to the FAIS General code of Conduct, introducing far more rigid controls on managing conflicts of interest. Inter alia, it is likely that all non-cash incentives to independent intermediaries will be prohibited (other than inconsequential gifts and educational events), and that disclosure of any remaining incentives in public registers will be imposed”.
The insurance industry has become extremely regulated over the last number of years, with amendments to the FAIS Act and the Long-term Insurance Act, all with the purpose of rooting out unscrupulous intermediaries and for the most part this has worked.
As one commentator said “the industry is already so overregulated that we really don’t need this too”. It seems that treasury is set on changing years of well-developed law and it seems as if this will only lead to more confusion. It might be worth your while to consider discussing the issue of intermediaries with your attorneys, if only in an effort to make sure you are making use of the services of an accredited intermediary.
Adrian Naudé
Naudes Attorneys