Short-term advisors who charge clients an agreed fee in addition to commission will need to ensure the fee complies with Rule 12.4.1 of the Policyholder Protection Rules (PPR) before an insurer can collect the fee on behalf of the advisor.
The Rule, which comes into effect on 1 January 2019, following the repeal of Section 8(5) of the Short-Term Insurance Act on 1 January this year, has implications for insurers and short-term advisors.
The insurer must be satisfied that:
- the policyholder explicitly agreed to the fees, in writing,
- the advisor’s service did not fall under the definition of “services as intermediary” as set out in the regulations to the Short-term Insurance Act, and
- the FSP is not being paid twice – by the insurer and the policyholder – for the same service.
If you as a short-term advisor would like to charge an additional fee, you will need to be clear about the value that will be provided to clients and ensure the fee does not compromise fair outcomes for them. In considering this approach, a simple process to follow would be:
- Establish what services may be charged for
Commission is paid to advisors for rendering “services as intermediary”. Make sure you do not charge a fee for any of the services for which commission and/or binder or outsourced fees is paid.
- Establish what it costs to deliver these services
This may be a bit more difficult, but it is acceptable to build a suitable margin into such fees. It may involve work to ensure you have a clear idea of what services you will provide, the cost of providing those services, and what you should charge for them.
- Establish how these services will be agreed with clients
Clients must provide explicit consent in writing to pay fees to you. This could be done using a Service Level Agreement or a separate Fee Agreement. As a guideline, the Fee Agreement should contain at least the following:
- the FSP name and number,
- the policyholder’s name and identity number,
- a reference to the fact that the FSP has been appointed to render services in respect of short-term insurance policies,
- an acknowledgement that the policyholder is aware the FSP will earn commission for rendering “services as intermediary”,
- that the policyholder explicitly consents to pay fees, in addition to commission, for other services rendered that are not defined as “services as intermediary” (these services must be clearly set out in the agreement),
- a declaration that the fees do not relate to a service for which the FSP is already being paid, and
- a cancellation clause affording both parties an opportunity to cancel the agreement.
Commencement and deadline for implementation
Although this Rule only comes into effect in January, some insurers may already require you to meet the conditions. Going forward, you will need to have processes in place to show you comply with these provisions.
Masthead assists advisors to ‘cost their value proposition’. You can attend a seminar or request an onsite consultation. Please contact your Masthead Compliance Officer or Masthead Regional Office for more information.
Masthead has created a Fee Agreement template in terms of Rule 12.4.1 of the Short-Term Insurance Policyholder Protection Rules. Masthead members may access this template from the Masthead Connect site or your Masthead Compliance Officer.