Financial Advisory and Intermediary Services Bill: hearings

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Finance Standing Committee

01 October 2001
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Meeting report

FINANCE PORTFOLIO COMMITTEE

FINANCE PORTFOLIO COMMITTEE
2 October 2001

FINANCIAL ADVISORY AND INTERMEDIARY SERVICES BILL: HEARINGS

Chairperson:
Ms Hogan (ANC)

Documents handed out:
Financial Advisory and Intermediary Services Bill [B52 – 2001]
Life Offices Association PowerPoint presentation
Association of Health Benefit Advisors submission
Life Offices Association submission
Banking Council PowerPoint presentation
[documents awaited]

SUMMARY
The Life Offices Association fully supports the Bill but raised issues of principles that they regard as shortcomings in the Bill. These concern the approach to banks, the exclusion of lending transactions, the exclusion of medical schemes (resolved) and the relationship between the Policy Protection Rules and the Bill.

The Black Brokers Company presented the views of disadvantaged brokers. It supports the idea that the industry need to be regulated. Its main concern is that of the disclosure of commission and it does not support this.

The Association of Health Benefit Advisors submits that health benefit advisors should be included in the FAIS Bill because if the total function of financial advice is covered, the public will be better protected.

The Banking Council agreed with the need for this kind of legislation but was concerned about the definition of ‘representative’. Banks are concerned that the Bill in its current form places a huge administrative burden on the banks, not to mention the cost implications. If the Bill remains as is, it could mean that lower income groups will receive less advice and some products will not be continued. The Banking Council suggests a change to the definition of representative. The chair appreciated the concern of the bank. There was a suggestion to include the Banking Code of Conduct in this Bill and in this way cover the concerns about the low value products but also thus providing protection to the consumers.

MINUTES
Life Offices Association (LOA)
Ms Leanne Dewrey, on behalf of the LOA, confirmed that her organisation supports the overall objective of consumer protection. The sound principles in the Bill were highlighted, namely:
- The risk of institutional failure is minimized
- The Bill adopts a holistic approach and this is good because there are many products
- It is not possible for unregulated players to enter the market
- The Bill reinforces the principle of adequate consumer recourse to deal with complaints
- The status of the intermediary must be disclosed to the customer
- Needs of the customer comes through strongly
- Cooling off period is good
- The consumer must be made aware of the specific risks, benefits and the extent of the obligations.

All of the above are sound principles but the LOA has specific concerns because the Bill does not extend as far as it is intended to due to certain exclusions. Another concern is the Bill’s relationship with the Policy Protection Rules (PPR).

Exclusions
The first exclusion relates to the banking sector. The LOA knows about the subsequent compromise suggested by the Financial Services Board and submits that it is still problematic. The banks argue that the definition of advice will mean that all 80 000 bank tellers will have to be licenced. Tellers typically do not give advice. The LOA submits that if a bank employee does give advice, there is no reasonable explanation as to why it must be excluded. All other financial service providers (FSPs) when giving advice about the products of banks, are covered. The Bill grants exemptions so if the banks feel that they qualify for the exemption, then they must apply to the Registrar. The LOA argues that if the compromise by the FSB is to be accepted, then why should it be limited to only bank employees.

Lending Transactions
Loans are the single biggest financial commitment a person will make. Even when considering small loans, the reality with public employees illustrates the debt trap people find themselves in. Surely consumers deserve good advice when they are involved in lending transactions as well. The LOA knows that this will be a significant task but what needs to be regulated is the advice about the viability of the transaction. If this regulation is not in the FAIS Bill, then the LOA asks where else should it be because the FAIS Bill regulates the giving of financial advice.

Medical Schemes
Initially there were concerns that medical schemes were to be excluded from FAIS. Thus the proposed amendment to include medical schemes is fully supported by the LOA as this type of advice has significant consequences for individuals.

Policy Protection Rules and the FAIS Bill
The initial stance of the FSB was that PPR are repealed in so far as it relates to the rendering of Financial Services as contemplated in FAIS. The new proposal is that PPR remain in force but certain parts do not apply to insurers registered as FSPs

The presenter said that there was never an understanding that there would be two sets of rules in force. PPR was at all times considered to be an interim measure. If the new proposal is accepted a problem will be created for those who cannot register as FSPs because they will be subject to duplicate regulation. Insurers who only sell through brokers cannot register under FAIS because it will not be a FSP but will be fully bound by the PPR. The broker who sells on behalf of the insurer is covered by FAIS. Both parties will consequently be obliged to make the same disclosures to the client at the same time. But the insurer has no contact with the client before the receipt of the application. If the broker does not carry out his obligation, the law is broken. If the insurer relies on the broker to make full disclosure and the broker does not, then the insurer is breaking the law.

Also in terms of PPR, the insurer must accredit the broker. The broker in terms of FAIS will have to meet the ‘fit and proper’ criteria in FAIS. But FAIS does not call for this kind of accreditation the FSP is responsible for its representatives. Only insurers are put in this position. For example, unit trusts, bank deposits, pension funds, medical schemes, market conduct will be governed by FAIS.

The LOA suggests that the PPR must be repealed. Only those PPR obligations that cannot be fulfilled by intermediaries should remain in force.

In addition to the above problems the new proposal is in any event vague. It only creates the possibility of an exemption. If the new proposal is retained then Clause 45 must state that the exemption will be granted. As it stands, insurers do not know if exemptions will be granted and if so on what terms.

Conclusion
If the above shortcomings are addressed then the Bill will go a long way in achieving its aim to provide meaningful, fair and consistent protection to consumers.

Discussion
Ms Joemat (ANC) commented that when you go to a bank and encounter an advisor, one is unsure whether the person is part of the bank or an independent advisor.

Ms Dewrey replied that for this reason the Bill requires that the status of the advisor is disclosed to the client.

Ms Hogan asked why medical schemes should be included in the Bill.

Ms Dewrey said that the sale of a medical schemes is a financial service and attracts significant contributions. It falls squarely within financial advice.

Ms Hogan asked whether the regulatory regime under the Medical Schemes Council is inadequate.

Ms Dewrey said it was. There is only provision for accreditation and the payment of licencing fees. There are no disclosure requirements and no obligation for a needs analysis.

Mr Joubert (LOA) said that the regulatory framework does not go very far. There is no attempt to regulate how products can be marketed.

Ms Hogan asked if, in the Life Offices experience, there are those who only sell healt- related products.

Ms Dewrey replied that there are those who specialize but this is the exception rather than the rule.

Ms Hogan pointed out that the majority of health brokers will then be covered because they market other products included under the FAIS Bill.

Ms Dewrey explained that the conduct of these advisers will only be covered in respect of the other products, not the health products.

Mr Moloto (ANC) wanted to know the attitude of the LOA toward full disclosure of costs and commission and the possibility of the customer recovering damages.

Ms Dewrey replied that such disclosure is contemplated in the Bill and there is a comprehensive mechanism for compensation. The insurance industry supports this.

Mr Nene (ANC) asked for the LOA view on licencing.

Ms Dewrey confirmed that the LOA supports the licencing of FSPs. Representatives of FSP’s do not need to be licensed but the FSP’s are responsinle for them.

Ms Joemat needed clarity on the distinction between a broker and a representative.

Ms Dewrey said that a broker would need to be licenced. The broker could sell for a number of insurers.

Ms Hogan asked the Financial Services Board to comment on the specific disclosure requirements.

Mr Wessels (FSB) said that in terms of Clause 15 the registrar after consulting with all the role-players will draft a code of conduct for publication in the gazette.

Ms Hogan commented that the code would then be in the form of regulation.

Ms Dewrey said that she had seen the draft code and commented that it contained extensive disclosure requirements.

Black Brokers Company (BBC)
The presentation was presented by Mr Madikwa. The background to the BBC is that the organisation was formed in 1999 to represent previously disadvantaged brokers and it has a membership of 3000 brokers countrywide. He said that the BBC "helplessly watches" other brokers do business in the corporate sector and that they hope to filter through into this market. The BBC services a substantial number of clients and offers a good service to professionals and non-professionals.

The BBC subscribes to the view that the industry needs to be regulated but they need to guard against the borrowing of foreign ideas without interpretation. The geographical position and the social, political, economic modes of existence need to be considered. Africa is third world and must be slowly integrated into the first world.

The cost of the Bill is to high for the broker. This has a negative impact because the consumer bears the cost. Previously disadvantaged brokers must be given a chance to upgrade themselves before the commencement of the Bill. There must be proper training of the disadvantaged by the FSB and the insurance companies. Members of the BBC must be involved in the administration of the Bill. Consumer education must precede the commencement of the Bill because even if the Bill is in place, the uneducated will still fall prey to unscrupulous advisors.

The BBC applauds the consultation process that was involved with the FAIS Bill but consultation does not matter if the comments are not considered. An example is that the BBC objected to the disclosure of commission. There is no need to disclose commission. Intermediaries will be negatively affected. One needs to consider the mode of existence. If people see how much brokers earn, then they will not sell the policy. There is much jealousy out there and an alternative would be to include the commission in the total cost of the policy.

In conclusion the presenter said that to make the FAIS Bill work there must be reciprocal action.

Discussion
Dr Rabie (ANC) asked how the unscrupulous are going to be identified if the commission is not disclosed. He also asked how is consumer protection different in the first world and the third.

Mr Madikwa replied that the BBC agrees that consumers need to be protected but not at the expense of the intermediary. In response to the second question he said that a broker doing business in the urban areas can pick up a phone and arrange an appointment. But in the rural areas the broker will have to drive to a client to arrange an appointment and then return the next day with there being any certainty that a policy is going to be sold. This costs the broker money.

Prof Turok requested that the presenter present the Committee with examples of how a specific clause will produce casualties.

Mr Madikwa gave the audit report requirement as an example and said that this is unaffordable and will cause the closing down of businesses. The employees and their dependents will also suffer due to these closures. This is but a simple example. The presenter undertook to provide a written report to the Committee specifically dealing with the possible hardships.

Association Of Health Benefit Advisors (ABHA)
The submission was presented by Andre Jacobs and Mark Arnold.

Mr Jacobs said that ABHA is making the presentation not because of unscrupulous brokers but because of the complex nature of financial services. ABHA agrees that Medical Schemes should be included under the FAIS Bill.

In ABHA written submission, the reasons for the inclusion of health advisors are the following:
- Health advisors provide a financial service
- The public will be better protected
- Proper dispute resolution measures exists under the FAIS bill
- Public opinion is completely in favour of health advisors being governed by the FAIS Bill
- The inclusion of health advisors under the FAIS Bill will reduce the cost of compliance.

Mr Jacobs continued and said that if one looks at the nature of financial services it is clear that health advice is a financial service. Internationally health advice is regarded as a financial service.

To address the misconceptions about the Medical Schemes industry, Mr Jacobs said that health care intermediaries are not part of a small market. There are 6000 who are accredited. These would include brokerages, admin and management staff and even some call centre managers because companies want to play it safe. These 6000 are mainly general brokers and also advise on other products. The minority are specialised health brokers but they do not receive their full income by placing people in medical schemes. They receive fees for advising companies and from other products that have a bearing on health care.

The next misconception is churning. This is the moving from one medical scheme to another. Churning will happen in the normal course of business due to marketing campaigns and member dissatisfaction. But every time a person changes jobs, there could be a move to another medical scheme. With the Bill, the movement from one scheme to another will be properly done, that is, in relation to the impact on the client.

Another misconception is that the health advisors remuneration is too high. Health benefit advisors render a service from day one. They educate the members on a continual basis. Every time a scheme changes its benefits and fees, the advisor interacts with the client. It is different from life policies, short term policies and endowment policies. On average a client puts in 30 claims a year and the health benefit advisor must pay out these claims. The principles for remuneration are fair and equitable. ABHA agrees that it must be disclosed but this must go hand in hand with consumer education.

A case study was presented to show why it would be better to have health advisors regulated under the Bill: Taking into account the needs and disposable income of a client he is advised to decrease his health cover and increase other cover that is considered as a priority. An accident occurs and complications result and the health cover is insufficient. The client is out of pocket by R50 000. If the FSB were to investigate the complaint and do a needs analysis, the finding will be that the advice is appropriate. If the Medical Schemes Council investigate, it could well be that the advice is seen to be inappropriate.

ABHA submitted that the only regulator that is able to do a comprehensive needs analysis is the FSB. The public and the industry-related associations accepted this principle.

Mr Arnold continued and again confirmed that health advice must be included in FAIS. The consumer is best served by catch-all legislation for financial advice which includes health advice. If there is one Bill, there will be legal certainty.

Arbitrage in the following areas will also be limited if health benefit advisors are included in FAIS.
- education
- regulation
- practice
- disciplinary aspects
- administration

The FAIS Bill is the proper dispute resolution mechanism because independent objective bodies hear complaints. The Medical Schemes Act places an obligation on the Council for Medical Schemes to consider the interests of members. There is not an independent third party dealing with complaints.

The FAIS Bill promotes consistent professional standards, the Medical Schemes Act is less strict. If there are two codes of conduct there will be inconsistent professional standards.

The only concern that ABHA has is that the Pension Fund Act regulates prudential requirements of retirement funds and the prudential requirements of unit trusts are governed by the Unit Trust Control Act. The FAIS Bill covers the prudential requirements and the market conduct requirements of medical schemes and it was submitted that medical schemes must be treated the same as the others.

Mr Arnold said that the Council for Medical Schemes has some concerns about the inclusion of medical schemes under FAIS Bill but that the concerns are not real.

Ms Hogan asked the FSB to explain the compromise that they suggest in relation to medical schemes.

Mr Wessels said that FAIS will deal with market conduct but that health advisors will still be accredited in term of the Medical Schemes Act. There was no objection to this proposal, however, there will still be two regulators because the Council for Medical Schemes must accredit and the FSB must licence. On the other hand the accreditation only relates to the payment of commission but there is still the possibility of two regulatory bodies.

Ms Hogan referred to the Nel Commission report that calls for one regulator. At the moment there is still a dual regime which could create problems in the future in terms of regulatory authority.

Mr Arnold commenting on the dual regime said that the Medical Schemes Act only covers commissions flowing from the medical scheme to the intermediary. This only applies to the first introduction. The ongoing service of that client is not regulated. He does not believe that there will be extensive problems because of the nature of the medical schemes industry.

Ms Hogan said that surely the Medical Schemes Council has a transitional role to play but that ultimately the FSB would be the regulator.

Mr Arnold replied that the Council deal with non-compliance of payments to members and this should not change. The FSB deals with improper or wrong advice.

Ms Hogan asked ABHA to make available the details of the concerns of the Medical Schemes Council and the reply thereto so that the Committee can have it at hand when the Council makes its submission.

In ABHA’s written submission, its preferred solution is summarised as follows:
- A singular approach is needed to regulate financial services
- Public clarity about where to seek recourse
- Avoid duplication of costs
- Establish and implement impartial dispute resolution procedures
- No opportunities must be created for regulatory arbitrage
- Encouragement of fit and proper individuals
- Maintenance of ethical standards
- Enhancing public confidence
- The support of cost effective, flexible and practitioner based regulation
- Enforcing minimum standards
- Reducing the problem of asymmetric information to the public
- Increasing the supply of correct information
- Addressing any potential moral hazard by detailed and consistent disclosure requirements
- Decreasing the regulatory cost of supervision
- Allowing for an inexpensive and expeditious way of solving legal consumer disputes relating to financial advice.

Banking Council
Mr Tucker complimented the FSB on a ground-breaking piece of legislation and said that the Banking Council had only one concern.

Banks give a range of advice that is governed by FAIS Bill such as short and long term insurance, collective investment schemes, many other investments and bank deposits of more than twelve months. Banks also provide intermediary services such as the life and funeral insurance that is embedded in many products. Banks also collect payments on everyone else’s products. There is an exclusion in the Bill if the bank is merely acting as a conduit. But when the bank is collecting its own premiums, then the bank is an intermediary. The problem is that the payments are coming through thousands of branches and thousands of tellers. Tellers take lunch breaks and the shift changes. Staff is rotated and casual staff are used on Saturdays. There is a high turnover of staff because nobody makes a career out of being a teller. So what the banks are likely to do is designate advisors who qualify in terms of the Act. All other bank staff will be prohibited from giving advice. There is a problem with this because banks should be giving more advice not less, especially to the lower income groups.

Ms Hogan asked if the exclusions in the Bill did not cover the concerns of the Banks.

Mr Tucker agreed with the Chair but said that in some instances the function being performed needs a level of judgment so the banks would want the exception to be clearer. He said that it seems as if the Committee agrees that the exemption is intended to cover admin and clerical staff but Clause 1(3)(b)(ii) is not clear.

It was submitted that the definition of representative needs to be amended to show that the bank is clearly excluded. The definition of representative should exclude a person:
"who is employed by a bank, or by a mutual bank, or by a long term insurer, or a short term insurer, or by a collective investment scheme, and who does not furnish advice as contemplated in terms of subsection (a) of the definition of ‘financial service provider.’"

This is the only substantial issue that the Banking Council has.

The presenter continued and said that banks handle five million transactions per day and a substantial amount involves the lower income group who ask for simple guidance. A typical example is whether a savings account or a fixed deposit should be opened. The answer to this question is the equivalent of giving financial advice. So if a person comes in with a R50 and asks if it will be better to pay it into their savings account or their loan account, this is advice and the Bill says that a needs analysis is required. This happens thousands of times a day.

Ms Hogan asked if a person is informed about the costs involved when a new account is opened.

Mr Tucker replied that in terms of the Banking Code of Conduct, the costs must be disclosed.

Ms Hogan then asked if the banks disclose to their existing clients the fact that the cost of a product is going to change.

Mr Tucker again said this was disclosed.

Ms Hogan said that she cannot believe that as most costs are hidden and people do not know the costs from one month to the next.

Mr Tucker clarified the concern of the banking industry and said that the administrative burden that will be caused by the Bill is the problem. The banks are not trying to get out of any of their responsibilities.

Ms Hogan said that she understands that the banks deal with vast amounts of transactions every hour.

Mr Tucker continued with his presentation and said that deposits are simple products and are different from investment products. The value of deposits do not decrease. Only if the deposit is for a long term does the value of money become a factor. The twelve-month proposal is therefore supported. This proposal addresses the issue of the time value of money.

Referring to lending transactions Mr Tucker said that advice on loans does not belong in the FAIS Bill.

It was further submitted that the Bill contains inherent contradictions. There is pressure on banks to educate and advise the public and particularly the previously disadvantaged. If there is a cost burden on giving advice which makes the product unprofitable, institutions will either prohibit the giving of advice or discontinue the product. Therefore the off-the-shelf low value products should be exempted from the provisions of the Bill.

Ms Hogan said that with the high volume and low value products there is still a possibility of abuse. She cited the example of pensioners whose accounts get debited for funeral policies.

Mr Tucker said that there is a code of conduct and only recently has there been an independent banking adjudicator. It is too early to say that the banks are not complying with the code of conduct.

Ms Hogan agreed that simple products do not need a financial analysis but it is clear that people need to be protected. She asked the FSB if they have any ways of dealing with simple products that are for less than twelve months.

Mr Wessels (FSB) said that he had no problem excluding all front line and support staff but all advice must be covered in the Bill.

Ms Hogan said that that the lower income group only need advice on ordinary things but it is time that more attention be paid to this customer. The employees should be trained to deal with the lower end of the market and also be subject to a code of conduct.

Mr Tucker commented that at the end of the day, they are only talking about six major banks. If people are needed to advise customers who come in with R50 then the market says that there is no way that the banks can remain in competition if this service has to be rendered. A code of conduct does not need a needs analysis.

Ms Hogan said that the banking code of conduct already calls for disclosure of costs and she asked Mr Tucker if he was saying that the banks cannot afford their own code of conduct. She said that it is clear that the whole needs analysis is not needed but some kind of protection is needed. She asked for the FSB to have a look at the banking code of conduct.

Mr Wessels commented that he could look at the code but at the end of the day it is a voluntary code and all that the banking adjudicator can do is make recommendations.

Ms Hogan clarified her point and said that the FSB should look at incorporating the code into the Bill to cover the products that the banks are concerned about.

Mr Tucker said that another option would be to have the code and the adjudicator in the office of the market regulator.

Ms Hogan commented that the insurance industry is different to the banking industry but all that is wanted is some kind of protection for the consumer.

Mr Tucker confirmed that there was no resistance to having a statutory adjudicator and code because this will legitimise things even more.

There were no further questions or comments and the meeting was closed.

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