Two things that are really putrid in the financial services industry are:
- The way in which too many players in the industry seek to find ways to sidestep the law with fancy legal agreements and interpretations of the law. The ultimate aim is to sting you as a consumer. The latest example is the exposé we publish today on the way Regent Life has sidestepped various laws by providing its agents (namely motor vehicle dealerships) with perverse incentives to sell you its credit life assurance policies.
- The industry's use of the excuse that it is "common industry practice" to make the inexcusable excusable. This was the excuse that was rolled out when Personal Finance exposed the secret profits that were made by retirement fund administrators. Alexander Forbes, the company that initiated the practice, claimed it made the secret profits because this was common industry practice.
'Common practice' excuse
Nazeer Hoosen, the managing director of Regent Life, claims he tried to stop the abuse of commission regulations in the industry by reporting alleged abuses to the Financial Services Board (FSB) as far back as 2002 and on five or six occasions after that.
He also claims he had to follow suit in order for Regent to survive. This, however, is not good enough. The law has a purpose.
Anarchy is the word used to describe a situation where individuals and corporates take it upon themselves to decide which laws they will obey, which they will disobey and which they will sidestep.
Although this is extreme, on the basis of this "common practice" argument, could I murder a neighbour and claim I was justified in doing so because Cape Town has a very high murder rate?
Of course not. The same principle must also apply to abusing commission regulations.
Hoosen is also deputy chairman of the Life Offices' Association (LOA), which represents the interests of most of the life assurance companies. The question must be asked whether he raised the issue with the LOA; and if he did, what did the LOA do about it?
If Hoosen did not raise the issue with the LOA, he should immediately resign as its deputy chairman. If he did raise it, the LOA must explain why it did not take up the issue with both National Treasury and the FSB and issue a public warning to the life companies to stop the unacceptable practices revealed by Personal Finance today.
It should also be noted that the LOA has a code on commissions, and any complaints should have been measured against this code as well as the laws of this country.
Sidestepping regulations
The main problems involved in what has happened at Regent/Imperial include the following:
- Commission regulations. The exposé raises the question whether it is too easy to sidestep commission regulations; and/or whether the FSB has been lax in ensuring that commission regulations are properly applied.
The manner in which Regent and others have sidestepped the regulations needs to be investigated and if there have been contraventions of the law, action should be taken against the perpetrators. Commission regulation is in place to prevent commission-driven selling. The payment of excess commissions and other incentives has been repeatedly shown to drive mis-selling, particularly when the perverse incentives are not explicitly declared to you.
- Full and proper disclosure. Both the Policyholder Protection Rules and the Financial Advisory and Intermediary Services (FAIS) Act require proper disclosure of all information, including costs and commissions. My understanding is that generally there was not full and proper disclosure of costs, of the amounts paid above regulated maximum commissions and the way the premiums were being charged as a single amount and added to finance agreements, thus incurring interest payments. Thankfully, this last abhorrent practice has been banned in terms of the National Credit Act.
- Appropriate advice. The question about the financial impact on you of advice that is driven by commissions and other incentives has to be raised. Questions that need to be answered include:
* Were the commissions disclosed to policyholders?
* Were the policies sold and details of the policies properly disclosed to policyholders?
* Were consumers provided with a choice of life assurance products;
* Did the salespeople seek out and provide the best policies available? and
* Did the salespeople seek out policies where premiums would be paid on a monthly basis rather than as a single premium upfront added to the finance agreement?
The issue here is that since October 2004, anyone selling you a financial services product is required to be licensed by the FSB as a financial services provider (FSP) in terms of the FAIS Act.
The right advice
FSPs are supposed to provide you with appropriate advice. In my view, it is not appropriate advice to provide you with a product for which the premiums are paid upfront as a lump sum and added to a finance agreement.
The FSB, if it is to ensure public trust in FAIS, must investigate and suspend or remove all FSP licences where the requirements of FAIS were not met; and/or commission regulations were breached. This is apart from any other action that should be taken against Regent and any other insurance company that has not met the requirements of the commission regulations.
My view is that the FSB should insist that:
- Any commissions paid over the maximum by Regent, or any other assurance company, be repaid to policyholders. After all, the life assurance industry has always insisted that it pays commissions on behalf of policyholders.
- If Regent, or any other assurance company, cannot conclusively prove that each agent (motor dealership) provided comprehensive administration services which would entitle the agents to the maximum commission of 22.5 percent, then the excess amount over the normal commission (without administration services) of 7.5 percent be repaid to policyholders.
FSB's potent weapon
If the life assurance companies refuse to co-operate, then the FSB should use its ultimate weapon, namely the removal or suspension of licences of financial services companies that do not behave in the best interest of consumers.
Laws are there to be obeyed both in letter and in spirit if we are to have a successful society. Captains of industry cannot go on about the breakdown of law and order in South Africa if they arrogantly decide which laws they will fully uphold and which they will ignore.
That was why it was so gratifying to see some of the alleged culprits of the retirement fund surplus-stripping debacle being marched into court in leg irons like common criminals last year.
What South Africa needs is a few more high-profile criminal cases where senior executives of companies are marched into court in leg irons, and, if found guilty, are sentenced to long jail sentences.
Then they may see the wisdom of fully obeying all laws and behaving like good corporate citizens.
Health Warning: protect yourself from unscrupulous selling
Here are some tips to protect yourself against avaricious selling of credit life assurance and in the process save yourself thousands of rands:
- Be aware that the main purveyors of credit life assurance are motor vehicle dealerships, furniture retailers, micro-lenders and banks, particularly when they provide home loans.
- You are not required to purchase credit life assurance from any company providing you with credit. A credit provider can insist you have assurance cover against such things as death and disability. However, the credit provider and /or its agent cannot insist that:
* You buy life assurance from them before they will grant you credit; or
* You purchase life cover from a particular assurance company.
You should check with your financial adviser what life assurance you already have and whether it would not be more sensible to cede an existing policy to cover the debt or to take out a new individual life assurance policy for the period of the loan which you can cede to the credit provider.
- Insist that the agent advising or selling you a policy properly identifies himself or herself in terms of the Financial Advisory and Intermediary Services (FAIS) Act. This includes providing you with a financial services provider (FSP) licence number. In the case of a motor dealership, the dealership itself is likely to be the FSP. This means the salesperson you are dealing with must be registered with the Financial Services Board (FSB) as an agent of the FSP.
Do not take the word of the salesperson that he or she is registered. The easiest way to check is to go to the FSB website ( www.fsb.co.za). Click on the FAIS button at the top of the screen and then click on the button providing details of licensed FSPs. Also take note that FSP licences give the FSP the right to sell certain products. So you must ensure that the agent selling you a product is actually entitled to sell it.
- All life assurance, including credit life, can be bought for specified periods and the cover can decline as your debt reduces. For example, if the debt is for five years, you can purchase a policy for that period with the amount of cover reducing in tandem with the reduction in your debt. The premium for the period is likely to be level.
- Demand that the FSP provides you with at least four or five written quotations from different underwriters (life assurance companies) for both credit life and ordinary individual life policies. Two warnings on this:
* Be sure you are provided with the names of the underwriters. Many companies sell what are called white-label products. For example, you may purchase a credit life policy from Acme Financial Services, but the underwriter is XXX Life Assurance Company. This means that you may be provided with two quotes from the same source: the white label and the underwriter. In all cases, you must ask for quotations only from the underwriters.
* Credit providers often sell on what is called a group basis. In this case, it does not matter whether you are young or old, in good or bad health, lead a placid existence or a dangerous life, as long as you are part of the group. Everyone pays the same premium. This means that a credit life policy may be cheaper for someone who is older and in poor health. An individual life assurance policy is likely to be cheaper for someone who is younger and in good health.
- Demand full disclosure of the costs of the policy. This must include:
* Commissions and any other incentives the FSP or its agent may receive for selling you a particular policy. Incentives could include tickets to rugby or soccer matches or foreign trips. Get this in writing. If the FSP or its agent receives any incentive other than commission, be extremely wary.
* Any penalties and/or administrative charges for cancelling a policy, for example, if you cancel the policy because of early repayment of your debt.
- Commissions are paid on your behalf and are therefore negotiable. If you take out a credit life policy, negotiate the commission down to at least 7.5 percent and ensure the benefit is passed on to you by way of lower premiums.
- Do not allow a credit provider or its agent to sell you other financial services products, such as investment products, attached to any life assurance policy, or to sell you a policy with a term longer than the debt. You should purchase this type of product only from your own financial adviser, who knows your needs based on a financial needs analysis. Be very careful about signing a document that says you do not need a financial needs analysis. This is a way that an unscrupulous FSP can avoid providing you with appropriate advice.