[Conduct of Business Return]
The Authority set out in FAIS communication 16 of 2021 that they are developing a Conduct of Business Report (“CBR report”) that will apply to all regulated entities that will have to be submitted to the Authority on an annual basis. The CBR report, once finalised, will replace the compliance report contemplated in section 17(1)(c) of the FAIS Act. In light of the aforementioned, the Authority decided, as was the case in 2019 and 2020, that no compliance reports need to be submitted to the Authority during 2021.
The new reporting format sets out the information that will be required relating directly to the intermediary’s operating model, the records which an intermediary is responsible to maintain and the intermediary’s business structure, governance and control functions, cancelling and replacing products, advertising, remuneration of representatives, lead referrals, recruitment, outsourcing and handling premiums.
Cancelling and Replacing Policies
It will be necessary for an intermediary to provide the process that is adopted when cancelling a product. In the draft conduct of business document, the word ‘cancel’ is attached to the words ‘terminate’ and ‘lapse’, which correlates with the FSCA’s draft PPR Rule 19.1 wherein the words ‘termination’, ‘lapse’ and ‘non-renewal’ are linked in the same definition. Consequently, if introduced, there will be no differences in meaning between these terms.
Unless specifically mandated by its client, an insurance intermediary cannot cancel a policy without explicit instructions from the client. Only an insurer, or an underwriting management company in terms of a binder agreement, has this authority.
Nevertheless, the FSCA will want to know the intermediary processes when recommending a client replace one financial product with another. In particular, if the replacement product results in any penalties or fees being charged, the FSCA will specifically request an explanation as to how the risk to customers is mitigated.
There can be no doubt that the number of replacement policies that were issued during the compliance year will also be requested so it would be prudent for an intermediary to keep these records on hand.
Advertising and Marketing
The FSCA is very interested in the advertising material developed and used by intermediaries and insurers when interacting with clients. In respect of new services or products, they will be asking for copies of the advertisements and/or ‘links’ if electronic.
In respect of all advertising, the actual sign-off process will also interest them as they will want to know who has the authority to do so. Moreover, an explanation as to how the intermediary ensured that the advertising material was suitable for the relevant customer group/s will have to be included.
Remuneration of Representatives and Key Individuals
An intermediary is expected to employ sound and sustainable remuneration policies and practices that promote the interests of the intermediary while avoiding unfair treatment of customers.
As an example, if representatives’ remuneration includes both fixed and variable components, the fixed portion should represent a sufficiently high portion of the total remuneration to avoid over-dependence on the variable components.
To ensure that an intermediary does have an appropriate remuneration model, the FSCA will ask for an explanation regarding the remuneration structures that apply to representatives, particularly: The nature of the remuneration (e.g. commission, salary, fees etc.), Production-based targets, and Incentives linked to production.
It is likely that they will also require details of fringe benefits or other non-cash benefits, incentives, rewards or bonuses (including share options, profit shares, and the like).
Lead Referrals
In the RDR, the FSCA stated that lead referral activities currently fall outside the regulatory framework other than in limited circumstances. Although it is accepted that not all forms of referrals or lead generation warrant market conduct regulatory intervention, they clearly state that certain business models do constitute a form of financial intermediation with the potential to expose customers to conflicted or inappropriate marketing tactics.
Although standards for lead generation will not be included in phase 1 of RDR, it is clear that the FSCA is preparing for this by including questions in the report on the manner by which intermediaries pay or receive ‘lead fees’ and the amounts thereof.
Recruitment
An intermediary must ensure that where it appoints a person as a representative, that person is ‘Fit and Proper’ as defined in our insurance laws (s13.2 of the FAIS Act). In the report, the intermediary will have to explain the process that is followed and how compliance is ensured.
The FSCA will also want to know details of the internal controls in place to ensure that the representative register is kept up to date.
Outsourcing
The new Financial Sector Regulation Act provides a definition of ‘outsourcing’ which relates to all financial institutions, including intermediaries. Although the definition excludes the activities of representatives, all other functions that are integral to the nature of a financial product or financial service that the intermediary provides are deemed to be ‘outsourcing’
‘Outsourcing’ is very broad in meaning and includes systems platforms, compliance services, administration and the like. As outsourcing applies equally to insurers, questions can be expected on insourcing as well as outsourcing. Therefore, questions on binders and other insourcing agreements can be expected.
Handling Premiums
Where an intermediary collects the premium, the authorisation provided to the intermediary to do so must be in writing as demanded by Regulation 4.1(1).
The FSCA will require a copy of that written authorisation, but as it has been common for an insurer to build the authorisation into the intermediary agreement, an intermediary will have to supply a full copy of that agreement.