Move to curb the churn behind battle for brokers

A senior guy at Liberty called me last Friday. He was phoning to let me know for the sake of my reputation that an insurance broker I was planning to interview was under investigation by the Financial Services Board for product churn and did I realise that by giving him a platform I was undermining my own credibility?

Those are pretty serious allegations. But they are not hard to check.

Being manipulated to take a particular editorial stance is one of the perils of the job. At the same time, industry sources can be helpful when it comes to identifying whether this week's corporate high-flyer could be next week's Bernie Madoff. An apparently innocuous interview today can be brought up in future as an example of bad judgment, wilful ignorance or, worse, lead to allegations of corporate complicity.

All reporters get calls like this. Covering politics is particularly difficult in a world of seedy subterfuge, and reporters have to be constantly on their guard against being used as a conduit for someone else's dirty-tricks campaign.

As it turns out, the story was not accurate. The broker was not under investigation by the FSB, but, as is so often the case, the call revealed a far bigger story: that the person I was to interview had left Liberty for a rival and that there was a ferocious battle between insurance companies seeking to hire South Africa's top brokers.

A deputy executive officer at the FSB, Caroline da Silva, confirmed that the regulator was concerned about the practice of companies luring top brokers from their rivals with the promise of big sign-on bonuses. There is also an issue with the incentive-driven churn of insurance policies and investment products. There are ongoing investigations into some brokers and insurers suspected of behaving improperly. Not the guy my source mentioned, though.

One example of incentive-driven churn is when the broker who happily sold you products from Company A last week suddenly phones you from Company B to tell you that the product they sold you then is not nearly as good as the product they are selling this week. You move your business to Company B. Until recently, they would have harvested commissions from you twice.

Now, there is nothing wrong with brokers switching their customers from one product provider to another, as long as it is in the best interests of the client. The FSB is also only too aware that one of the reasons the country's top brokers are in such demand is that they are silver-tongued masters of the hard sell.

What the FSB is concerned about is how the industry's less scrupulous players job-hop not only for sign-on bonuses, but also to churn their clients to their new paymasters.

Proving intent is difficult. Just because a broker left Liberty and joined Discovery, for example (industry stats show much broker traffic has been going that way recently), and switched 100 of their biggest clients to their new employer does not necessarily mean they have done anything wrong - provided the changes were in those clients' best interests.

One would like to think that customers would question their broker about the incentive aspect. Apparently, we don't do it nearly enough.

In December, the FSB put a prohibition on sign-on bonuses in an effort to clean up the industry. To do so, however, it had to give the industry a month's notice. November turned into open season. "The industry made hay while the sun shone," says Da Silva. Brokers were like footballers in the transfer window seeking the best offers available.

She has asked the insurance industry for compliance reports for any tied agent paid a sign-on bonus in the two years preceding the December moratorium to ensure players stuck to the rules. Where there is a pattern of churning, the FSB will scrutinise every policy the broker switched from their previous employer to their new company.

It's illegal in terms of the code of conduct under the Financial Advisory Intermediary Services Act for a broker to churn clients purely to line his or her pocket.

Under the Retail Distribution Review there are proposals that will prohibit an adviser charging a commission if they switch you from one provider to another. Instead, you, as the customer, will be obliged to pay the adviser a fee if you choose to switch product houses.

Good advisers will charge for the service they deliver, rather than the product they sell. It's a move the FSB hopes will finally out the commission-gouging charlatans once and for all.

Whitfield is an award-winning financial writer and broadcaster