Financial Services Providers (FSPs) outsource functions for various reasons, such as increasing efficiency, reducing operating costs, improving company focus and managing risk by sharing the risk. One way in which insurance companies outsource is through Binder Agreements.
This sub-set of outsourcing arrangements is regulated by the Financial Sector Regulation Act, Policyholder Protection Rules and Regulations to the Long-term and Short-term Insurance Act. The provisions specify who may perform the outsourced activities and the limitations of the activities.
Amendments to both the Long-term and Short-term Insurance Acts, which came into effect on 1 January 2018, introduced a remuneration cap of 9% of the policy premium for Non-Mandated Intermediaries (NMIs) – the intermediaries authorised to provide advice.
What drove the change?
The cap was introduced to mitigate a conflict of interest. The previous approach to setting binder fees did not adequately address the conflicts of interest that arose when an NMI performed a binder function on behalf of an insurer.
The FAIS General Code of Conduct defines ‘conflict of interest’ as a situation in which a provider or representative has an actual or potential interest that may, in rendering a financial service to a client,
- influence the objective performance of his or her obligations to that client or
- prevent a provider or representative from rendering an unbiased and fair financial service to that client, or from acting in the interest of that client. This includes a financial interest, an ownership interest or any relationship with a third party.
Alleviating conflicts of interest
The Financial Sector Conduct Authority (FSCA) believes a capped fee for binder functions will alleviate the conflicts of interest for binder holders who act as an NMI. This is because it is consistent and would be reasonable and commensurate to the function performed. It will prevent insurers from ‘buying’ FSP business by offering higher binder fees, and FSPs from shopping around for higher fees without taking clients’ interests into account.
The 9% cap for NMIs in respect of short term and long-term policies comprises:
- up to 3.5% for entering into, varying or renewing policies. This may be increased to 5% if an NMI also performs functions such as determining policy wording, premiums or benefits; and
- up to 4% for settling claims.
When do the new rules apply?
The amendments to the regulations apply as follows:
* If fees/remuneration are amended on these agreements before the commencement date, the new capping provisions apply immediately.
All binder remuneration must be reasonable and commensurate with the cost of performing the binder function, taking into account the nature of the function and the resources, skills and competence required to perform the function. It must not result in double counting. Conflicts or potential conflicts with policyholder interests must be mitigated, and payment must not impede the delivery of fair outcomes to policyholders.
In addition to the binder regulations, the new Fit and Proper Regulations introduce operational requirements for FSPs that outsource. The person to whom the function is being outsourced must be capable and, if necessary, authorised. The FSP must have measures to assess the standard of performance of the outsourced delivery. A written agreement should govern the outsource arrangement and include the rights, responsibilities, service level requirements and terms of access to the business and information by the FSP and Registrar.
FSPs need to consider the impact of this remuneration cap in their business and assess whether their business model will withstand the financial impact.
To help FSPs deal with these changes, our Risk Management workshop addresses the risks in each area of the business, including operational requirements, to ensure outsourcing arrangements do not compromise the fair treatment of, or continuous and satisfactory service of clients. It also gives FSPs tools to draft their own policies and procedures.