Last Updated on 13, April 2014
(22 July 2013 update below on Providend)
Here is a history of commissions rebates in the life insurance industry.
Prior to 2002, life insurance agents were prohibited from rebating commissions to their clients.
In 2002, MAS lifted the ban in rebating commissions. The rationale was because of new rules recommended by Committee on Efficient Distribution of Life Insurance (CEDLI) and the upcoming Financial Advisers Act which imposed on agents to make recommendations that are suitable.
On 8 August 2002, LIA made its stand that it does not condone the use of commissions rebates by advisers to induce clients to accept their recommendations.
Around 2003, a company licensed under the newly launched Financial Advisers Act offered to rebate all its life insurance commissions because it uses the fee-only approach.
On 26 December 2009, the Straits Times exposed a scam in which financial advisers were churning CPF Members’ account and in doing so making premature withdrawal from CPF accounts. This is done by rebating part of the commissions to the CPF Members. The same article mentioned the involvement of loan sharks
On 24 July 2010 it was reported that a FA firm sold insurance which had no premium payable for the first year. This was done by the firm using the first year’s commission to pay the premium on behalf of the policyholders. Effectively, this is a rebate of commissions. Unfortunately, after 1 year, the policy lapse rate increased significantly and the insurer was demanding a clawback of commissions amounting to more than S$7 million from the company. Even MAS came into the picture by saying “They should not unduly influence the financial decisions of customers by offering rebates”. Coincidently the CEO of the insurance company resigned due to ‘personal’ reasons.
Around later part of 2010, iFAST and Navigator imposed a new turnover ratio to monitor churning activities for both wrap and non-wrap accounts for CPF. Prior before that, a simple 90 days “waiting period” were imposed but this meant churners can churn after 90 days.
On 11 December 2010, a lawsuit allowed the public to have a detail view of how the rebate for CPF unit trust investment worked.
On 28 April 2013, fundsupermart offered to rebate 50% of its life insurance commissions excluding CPF purchased products. The insurers which participated were NTUC Income, Manulife and Tokio Marine.
On 3 May 2013, fundsupermart inserted a 'message' on the website that the commission rebate is only a 1 month promotion.
As at 4 May 2013 1223 AM, all links with regard to fundsupermart insurance commissions rebates were removed. In fact, the entire life insurance tabs were removed as if something very wrong happened.
As at 13 May 2013, a newspaper reported that fundsupermart's rebate ceased because of complains from competitors: Online insurance offer axed after gripes
On 22 July 2013, Providend shocked the financial industry that it does not charge fees for providing insurance advice . For the first 10 years of its business, it was the only fee-only FA firm. That is to say that it provide financial advisory service for a fee without the vested interest of taking commission. In an advertisement HERE and its FAQ HERE, they are now keeping 50% of the commission subject to a capped at $5000. The magic figure ‘$5000’ is derived from the average fee for insurance advice it charged in the past. So looks like Providend is now a commission-based firm. Worst, by doing this they are entering into the mass market which is a dying market because of FAIR. Moreover, by not charging fee and rebating some commission, they – like many others – is potentially falling into the dark side of force (see below).
My comments:
Historically, rebating of commissions has been in the bad press because of the elements of inducement. I consider rebating of commissions as giving in to the ‘dark side of the force’. Most clients are unaware of this dynamics of the ‘dark side’ because they will always select the cheapest route. Therefore, the onus is on the adviser to do the right thing. Unfortunately, it is difficult to decouple rebate and inducement. In all cases, the line is blurred. My advice to any company or advisers to be very careful especially if not charging any advisory fee and neither offering any comprehensive financial plan. Doing a Type 1 or 2 KYC is not a comprehensive financial plan. In fact, according to MAS’ mystery shopper exercise, 90% of advisers did some fact find but only 28% made suitable recommendations. A professional must not exploit known weaknesses of clients by using commissions rebates to induce a purchase. A professional must do the right thing even if the client thinks otherwise. A professional has no control over what the decisions the clients make. But a true professional can always control what he does. If the client does not make rational decision, the professional must walk away. In the sense, a true professional places his or her integrity and ethical values above all things else.
A better way to reduce the cost of financial product is to have the product manufacturers distribute products at reduced commissions or without any commissions at all. This is what MAS wanted for insurance companies to sell products directly without commissions. For this to happen, MAS must step in to ensure the lack of commissions actually translate to reduce premiums. I have seen one particular insurer which sold ‘directly’ to consumers and disclosed in its benefit illustration that the distribution cost is $0 (i.e. no commission). However, when I check the premium, it is the same as that if purchased from a commission-based agent. This means that the lack of commission did not translate to actual savings to the consumer. In fact, the shareholders of the insurance company pocket the entire commission as retained earnings. The consumer is disadvantaged for buying direct because there was no cost saving and no servicing agent too! To prevent such unethical practice, MAS must step in.
Before I end, in my view rebating commissions is the wrong way of reducing cost for consumers. Rebating commissions is the lose-lose situation for advisers and consumers. For advisers, it means reduction in their earnings and soon many advisers will quit. Advisers have the right to earn a decent living just like everybody else. For consumers, they subject themselves to inducement. History tells us that the outcome inducement is misselling. To me, the best outcome is the professional approach and fee-based approach. Advisers must provide a higher advisory services so that clients are willing to pay for advice. To reduce cost, product manufacturers should reduce or eliminate commissions.
I am always willing to work with product manufacturers who are willing to structure products without commissions so that the cost can truly be lowered as I am fee-based. From my statistic logs and based on IP addresses, I know many insurance companies and even MAS reads my blog. If you are reading this, call me for a chat.
BTW, I found out that in most states in the United States, rebating life insurance commissions is considered as illegal and deceptive. Interesting! See Unfair and Deceptive Insurance Practices; Rebating
Sources:
http://www.lia.org.sg/node/1655
http://www.lia.org.sg/node/1656
http://www.mas.gov.sg/news-and-publications/press-releases/2000/mas-accepts-committee-s-proposals--05-dec-2000.aspx
http://www.cpf.gov.sg/imsavvy/infohub_article.asp?readid={42472741-5903-7052994965}
http://www.asiaone.com/Business/News/My%2BMoney/Story/A1Story20091224-187822.html
http://www.asiaone.com/Business/News/My+Money/Story/A1Story20091228-188382.html
http://www.wilfredling.com/content/view/1713/9/
Mystery Shopping Survey Findings
http://www.cpf.gov.sg/imsavvy/infohub_article.asp?readid={205765799-7337-2639581560}
http://www.mas.gov.sg/news-and-publications/press-releases/2008/mas-withdraws-the-exemption-of-three-insurance-brokers-under-the-faa.aspx
http://www.cpf.gov.sg/imsavvy/infohub_article.asp?readid={205768171-5975-471917986}
http://www.mas.gov.sg/news-and-publications/parliamentary-replies/2002/reply-to-pq-on-insurance-rebates--27-august-2002.aspx
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