Bancassurance, vertical integration and customer outcomes

Bancassurance, vertical

integration and customer

outcomes

An independent review of the Bancassurance model in South Africa October 2015

ii

Document Reference: Bancassurance, vertical integration and customer outcomes (Final)

Date: October 2015

Contact Information

Genesis Analytics (Pty) Ltd

Office 3, 50 Sixth Road

Hyde Park, 2196, Johannesburg

South Africa

Post to: PO Box 413431, Craighall, 2024

Johannesburg, South Africa

Tel: +2711 994 7000

Fax: +2711 994 7099

www.genesis-analytics.com

Authors

Richard Ketley

Mauro Mela

Jairus Thomas

Debby Nixon

Craig Van Rensburg

Contact Person

Richard Ketley

[email protected]

iii

Table of Contents

EXECUTIVE SUMMARY ........................................................................................ IV

1. INTRODUCTION ............................................................................................... 1

2. BANCASSURANCE AND INCLUSION ............................................................ 3

2.1. The Bancassurance market in South Africa ............................................ 5

2.2. The size of the Bancassurance market ................................................... 8

3. INTERNATIONAL EXPERIENCE OF BANCASSURANCE ............................ 12

3.1. Development of Bancassurance globally .............................................. 14

3.2. Bancassurance models – country level evidence .................................. 16

3.3. International approaches to the regulation of Bancassurance ............... 23

3.4. Summary lessons from international regulation of Bancassurance ....... 33

4. EXISTING AND PROPOSED REGULATION OF BANCASSURANCE .......... 36

4.1. Regulation that is already in place ........................................................ 37

4.2. Upcoming regulatory requirements ....................................................... 41

4.3. Regulation and the Bancassurance value chain ................................... 47

5. REGULATORY CONCERNS WITH THE BANCASSURANCE MODEL ......... 50

5.1. The insufficiency of existing regulation .................................................. 53

5.2. Specific concerns with Bancassurance ................................................. 54

5.3. Locating concerns on the model ........................................................... 54

5.4. Unpacking regulatory issues ................................................................. 56

6. THE IMPORTANCE OF VERTICALLY INTEGRATED BANCASSURANCE MODELS ......................................................................................................... 65

7. CONCLUDING OBSERVATIONS ................................................................... 71

iv

EXECUTIVE SUMMARY

Bancassurance generally refers to the joint effort of banks, insurers and other product

suppliers to provide insurance and investment products and services to the bank‟s customer

base. Under this broad definition Bancassurance is both a channel for the distribution of

products to customers as well as a business arrangement between the bank and these non-

bank product suppliers.

The integration of financial services as exists in a Bancassurance model provides a number of

synergies to both the bank and the customer. At the same time regulators are concerned to

ensure that the closeness of these relationships does not compromise customer outcomes,

particularly when the business model involves vertical integration. The Financial Services

Board (FSB) has gone so far as to state that vertical integration is a “complex ownership

model” that compromises customer‟s ability to assess the status of advice and biases advice

given by intermediaries to customers, among other issues.

Ahead of a separate process to be undertaken by the FSB to review such complex ownership

models, Genesis Analytics was commissioned by the Banking Association of South Africa to

prepare an independent report describing the operation of the Bancassurance model in the

country, and to understand whether the range of regulatory requirements that already apply to

the model adequately address the regulator‟s concerns. An important part of this study is to

understand the impact of the model on customer outcomes.

The findings of this review are expected to contribute to a subsequent discussion between the

regulator and the industry on the merits of the South African Bancassurance model. The main

findings of Genesis‟ review are:

Bancassurance is key to financial inclusion. Bancassurance has an important role to play

in ensuring adequate levels of financial inclusion. By world standards, the penetration of life

and short term insurance in South Africa is high. In comparison, the density of premiums per

capita is low, a symptom of a large and growing inclusion gap in the country. The formal

insurance inclusion rate in South Africa is 37%, which is far below the inclusion mandate for

the insurance market outlined in the Financial Services Charter. Bancassurance relationships

are an essential channel to increase this level of penetration.

Bancassurance and vertical integration are synonymous in South Africa. Bancassurance

worldwide can take many shapes, ranging from simple distribution partnerships to full

integration between a bank and an insurer. The big four banks in South Africa are all vertically

integrated Bancassurers, where each bank owns a related insurance company or is related to

an insurance company within the same financial services group.

Bancassurance is a key part of the insurance and investment market. By Genesis‟

estimates the share of life and short-term insurance policies written in 2014 by the Big Four

banks was around 4% and 16% respectively. In terms of the number of policies in force in

2014, Bancassurers accounted for around 32% and 8% of the long-term and short-term

insurance market. Around 43% of investment funds under management were sold through

Bancassurers in 2014. Thus banks are an important channel for the distribution of investment

products and, to a lesser extent, life and short-term insurance policies.

v

Bancassurance adds diversity to a broker dominated market. Independent broker advisers

dominate the distribution of insurance and investment products in the country. Bancassurance

channels (both call centres and branch sales) make up around 12% and 15% of the short term

and long term insurance markets respectively. The majority of long term insurance and

investment sales occur in-branch whereas most short term Bancassurance insurance sales

are channeled through call centres affiliated with Bancassurers.

The conduct of Bancassurers in the sale of linked products and the provision of advice

to customers has been a catalyst for regulatory scrutiny. Bancassurance tends to be a

wealth and investment management proposition but the ability of Bancassurers to link the sale

of funeral policies (both individual and group schemes) and credit life policies into bank

products and processes has raised questions around market conduct and the treatment of

customers by the regulator. The provision of advice by bank intermediaries for the sale of

insurance or investment products underwritten or manufactured within the group has also

raised questions about potential conflicts of interest. Together, these concerns prompted first a

review of practices in the consumer credit insurance market by the National Treasury and then

a subsequent review of intermediary distribution and related remuneration by the FSB.

The context to reform in South Africa is quite different to that of international markets.

Regulators worldwide seem not to be concerned about Bancassurance per se, but certainly

with capital arbitrage in the universal banking model and poor outcomes for customers as a

result of conflicts of interest, layers of cost and opaqueness in the distribution of financial

products. The introduction of Solvency Assessment and Management and Basel III, together

with Twin Peaks, address the former and will give the regulator a basis for conducting financial

conglomerate supervision. In the latter, regulators have identified areas of poor customer

outcomes in the UK and Australia more strongly, prompting RDR in the UK and FOFA and the

Financial System Inquiry (FSI) in Australia:

RDR in the UK was narrower than it is in South Africa, focusing only on advice and

remuneration relating to the sale of investment products. It caused a withdrawal from

the advice market by Bancassurers in response to the reduced willingness to pay for

advice among middle income bank customers. Gradually however Bancassurers

returned to the market through guided advice platforms on a direct-to-customer and

business-to-business basis. While evidence confirms an advice gap was created in the

middle market, total product sales increased through these online alternatives.

FOFA in Australia was originally intended to be similar to RDR in the UK but it is yet to

be implemented. Where FOFA extends beyond RDR is the suggestion that „soft dollar‟

payments, dividends and equity interests between intermediaries and product

suppliers constitute a form of conflicted remuneration which should be banned.

The FSI investigated vertical integration among mortgage brokers and tackled issues

of conflict of interest relating to payments from product suppliers to intermediaries. In

doing so it found little evidence that vertical integration between banks and advisers

and between banks and wealth management product suppliers was harming

customers and limiting competition. It found that vertical integration did not need

addressing through more intrusive regulation and that disclosure of these ownership

structures should suffice. Furthermore, by shifting the onus on product suppliers to

develop appropriate product, advice and distribution strategies “vertical integration

would be a non-issue as the same obligations would be in place on all providers,

regardless of whether they are vertically integrated or not”.

vi

Bancassurance in South Africa is already well regulated. Bancassurers have to abide by a

host of existing regulation and requirements. Genesis‟ research suggests that each entity

incorporated into a Bancassurance model indeed complies with these requirements and

conducts itself at an arm‟s length basis with other entities in the same group. The regulator

however sees this „micro- or entity-level‟ compliance as insufficient to address broader conflicts

and pressures that are „inherent‟ in complex ownership structures. The conflicts that arise from

these ownership interests are seen by regulator as distinct from the conflict that arises from the

remuneration of intermediaries by product suppliers.

Aside from ownership interests, the regulator‟s concerns with Bancassurance are threefold:

1. The linking of products between banks and insurers – The practice of linking the sale

of credit life and funeral policies is seen to be opaque and potentially to introduce layers of

cost and conflicts of interest in the distribution of products to customers. As a result, the

regulator would prefer to see greater competition at the point of sale. However the

introduction of price caps on the fees that may be charged on credit insurance with the

result that product suppliers all charge the same rate, suggests that whether or not

providers are vertical integration is irrelevant to the price outcome.

A second issue the regulator has with product-level linkages, which is more complex to

address, is the practice of re-insuring business with the integrated product supplier which

the bank‟s integrated intermediary has placed with an independent product supplier.

According to the regulator, this effectively brings the business back onto the book of the

Bancassurer and fosters a misperception that customers are dealing with an independent

intermediary as well as introducing layers of cost into the distribution of the product by

virtue of all the contractual arrangements negotiated between all parties. Genesis believes

that more extensive enforcement of current disclosure obligations outlined in FAIS will

serve to mitigate this perception.

2. The management of leads between the bank, the insurer and the intermediary – The

regulator is concerned that Bancassurers can leverage their customer database (and

brand) in a way that exposes customers to conflicted or inappropriate marketing tactics.

Like linking products, leads management is a core component of the Bancassurance

model. There are however a number of regulations in place in South Africa that control this

relationship, namely to manage outbound sales on the principle of customer consent

(POPI) and that intermediaries that receive inbound sales have an obligation to act in the

client‟s interest (FAIS).

A competition issue could arise if integrated product suppliers were charged a lower fee for

accessing the bank‟s „leads engine‟ than non-integrated product suppliers. If this were the

case, integrated product suppliers would have a price advantage over non-integrated

suppliers – which, by making them more competitive, could allow them to „win‟ a greater

share of business from integrated intermediaries. The flow of revenue in the model

however precludes such a conflict. In the first place, the integrated intermediary is not

charged for leads by the bank. It has however a profit-share agreement with the bank that

compensates the bank for providing the intermediary access to its customers. Critically,

this revenue is not passed onto the integrated product supplier by the bank. The integrated

product supplier meanwhile still has to compensate the intermediary for services rendered

in the same way a non-integrated intermediary would. This compensation arises in the

form of regulated commission or regulated fees for providing certain binder functions or

outsourced services. In other words the intermediary‟s source of revenue is from product

suppliers, whether these are integrated or not, and not from the bank.

vii

Hence Genesis finds that integrated product suppliers compete on the same price basis as

independent/non-integrated product suppliers. At the same time, the bank is legitimately

compensated (by the intermediary) for providing leads to the integrated intermediary

through a share of that intermediary‟s profit.

3. Relationships between vertically integrated product suppliers and intermediaries –

The relationship between product supplies and intermediaries has been the catalyst to a

number of the proposals in RDR and applies equally to Bancassurance relationships. The

RDR proposals shift the onus for advice onto product suppliers, to review remuneration

structures for intermediaries and (it seems) to require a structural separation of

intermediary entities in line with the three tier definition of advice – tied, multi-tied and

independent. The regulator is also concerned that profit share payments made by

integrated intermediaries and integrated product suppliers to their bank or parent company

could be seen to create a conflict (and a pressure) which is not sufficiently addressed by

compliance to front-line disclosure requirements or remuneration standards for

relationships between product suppliers and intermediaries. It is not clear why this is the

case since in a Bancassurance model the two profit share payments are independent of

one another. Moreover, customers that are only offered the products of the integrated

product supplier are informed of this limitation. Meanwhile customers that are offered a

choice between integrated and independent product suppliers are protected by a host of

provisions contained within FAIS that hold intermediaries accountable for the placement of

business in the best interest of the customer and not product suppliers, whether integrated

or not. Finally, the merit of ownership interests in both an intermediary and a product

provider by a bank as a permitted form of remuneration is something that the regulator

intends to address through a subsequent review of FAIS (and conflicts of interest

requirements therein).

Since the experience delivered to customers is a core driver of trust in a bank brand, all

products and all channels provided to a customers are managed to strengthen not

detract from the customer experience. It would, however, seem to the regulator that the

bank brand is such a strong anchor to the customer‟s decision making that the bank can

leverage the customer‟s inherent „trust‟ to miss-sell certain products in the pursuit of profit.

While these pressures may certainly exist at a micro-level (within individual businesses

integrated into a single brand), the broader interest of protecting the brand is the responsibility

shared between the bank and integrated product suppliers and therefore acts as an inherent

check on the conduct of these business over and above the presence of market conduct

regulation applicable to the vertically integrated entity.

It should be noted that this report has been based on a review of structures in the South

African market and the regulations that govern the linkages within vertically integrated

service providers. It has not conducted a micro-economic analysis of product pricing and

features and customer behavior that only the regulator can collect. With this caveat, the

research suggests that the linkages within the vertically integrated Bancassurance models in

South Africa will stand up well to a regulatory analysis:

There are existing regulations involving both price caps and compliance and conduct

requirements at each step of the value chain.

Such regulations serve to level the pricing playing field between vertically integrated

entities and third party arrangements.

viii

Increased disclosure of the „tied‟ relationships (and related interventions proposed

under RDR) between entities in vertically integrated structures ensure that customers

are aware of the relationships between product suppliers and intermediaries.

Whereas the strength of bank brands may result in customers not exercising their

rights to shop around, this does not evidence any abuse of the customer‟s rights, or

result in adverse pricing outcomes.

The conclusion is thus that the vertically integrated Bancassurance model is already

well and appropriately regulated and subject to sufficient competitive pressures to

preclude the need for a subsequent review of Bancassurance. There are sufficient

requirements placed on the Bancassurance model to ensure that the interests of customers

are broadly protected. Moreover a series of additional requirements are forthcoming to address

outstanding weaknesses relating to information asymmetry, conflicts of interest in the provision

of advice, and the fair treatment of customers. Provided they do not alter the incentive for

vertical integration, these reforms should strengthen the Bancassurance model and improve

outcomes for customers. The structure of the model itself is also such that Bancassurers seem

to have a genuine interest in serving the customer working together with insurance or

investment product suppliers. This relationship makes commercial sense – as the cross sale of

other non-bank products improves returns and entrenches affinity with the brand – and is

compliant with regulatory requirements at each stage of the process or value chain. The model

is also subject to sufficient competitive pressures at the point where customers are provided

optionality in the purchase of insurance or investment products to mitigate any potential

expression of market power.

1

1. INTRODUCTION

Bancassurance describes the process of using a bank‟s customer relationship to sell insurance

and investment products.1 Banks are extremely well placed to act as intermediaries for the

sale of insurance and investment products by virtue of their distribution network and client

relationships. This is particularly true in developing countries like South Africa where access to

financial services is limited and levels of financial literacy are low.

Despite the synergies that can be found in operating a Bancassurance model, regulators

around the world have raised concerns that Bancassurance may not always result in optimal

outcomes for customers, particularly when the business model involves vertical integration

between the bank and the insurer or investment product provider as occurs in South Africa.

This level of integration is seen by the Financial Services Board (FSB) as a “complex

ownership structure; which compromises the customer‟s ability to assess the status of advice

and biases advice given by intermediaries within a Bancassurance model”. Proposal GG

contained in the FSB‟s Retail Distribution Review 2014 document indicates that a process is

currently underway to review these arrangements in detail and calls for more information on

the model.

This document responds to this call for more information on the conduct of Bancassurance in

South Africa. Commissioned by the Banking Association of South Africa, it provides an

independent description of the operation of the Bancassurance model in South Africa. Its key

contribution is to highlight the importance of Bancassurance in promoting financial access, and

to show how various existing regulations that apply across the Bancassurance value chain

ensure customer outcomes that are neither conflicted nor compromised by the expression of

market power in a vertically integrated model. The report also examines in detail the approach

that has been adopted by regulators in other jurisdictions and whether conduct issues that

have been identified abroad should be a cause for regulatory concern in South Africa.

The report is structured as follows:

Section 2 – Bancassurance and inclusion – Overview of the role of Bancassurance

in promoting access to insurance and investment products in South Africa.

Section 3 – International experience of Bancassurance – Review of the coverage of

Bancassurance in other countries and the content or nature of reform that is relevant

to the Bancassurance model in those countries.

Section 4 – Regulation of Bancassurance in South Africa – Description of existing

regulatory obligations as they apply to Bancassurance and a review of proposed

reforms that may affect the Bancassurance model.

Section 5 – Regulatory concerns with the Bancassurance model – Discussion of

regulatory concerns against the structure of the Bancassurance model and the

outcomes that result from vertical integration of banks and insurers.

Section 6 – Customers benefits from a vertically integrated Bancassurance

model – Insight into the key drivers of trust in the banking industry, from a customer

1 The World Bank, Bancassurance: A valuable tool for developing insurance in emerging markets, 2012

2

perspective, alongside a description of the customer benefits that arise and the

commercial viability of the Bancassurance model.

Section 7 – Concluding observations – Identification of principles that could guide

future regulatory reform of the Bancassurance model.

3

2. BANCASSURANCE AND INCLUSION

South Africa has a modern and sophisticated financial sector. At the same time a large share

of the population lacks access to basic financial products, particularly savings and insurance

products. By world standards the penetration of life insurance and short term insurance

premiums at 12.7% and 2.7% of GDP is quite high.2 In comparison, the density of premiums

per capita is quite low by world standards, at only USD 844 for life insurance and USD 181 for

short term insurance.2

Table 1: Insurance penetration in South Africa compared to a basket of countries

Country GDP per capita

(USD)

Penetration (%) Density (USD)

Life Short term Life Short-term

South Africa 7,314 12,7% 2,7% 844 181

Average* 21,962 3,4% 2,2% 973 569

Source: Swiss Re, World Insurance Report (2014); World Bank (2012)

* A basket of 11 developing countries and 7 developed countries utilised in Table 5 in Section 3

The penetration of formal insurance holdings per person among adult South Africans is 37%

with 13.5 million people having some kind of formal insurance product. Among those with a

formal insurance product, a significant number only have the most basic funeral cover.

Holdings of investment products are much lower; with only 14% of adults holding unit trusts.3

In 2008, the Financial Services Charter set out an inclusion mandate for the insurance market

in South Africa. The life insurance and short term insurance markets were tasked with ensuring

that 23% and 6% respectively of the lowest 50% of income earners in South Africa would have

access to insurance. At a formal inclusion rate of only 37% for the entire population, these

targets have probably not been met. There is also evidence to suggest that on at least one

measure – that gap between what people require in retirement to the value of their savings –

has increased from R18.4 trillion to R24 trillion between 2010 and 2013.4 Promoting greater

levels of savings to mitigate risk in retirement is something that the National Treasury is

currently trying to achieve through the process of Retirement Reform. The coverage gap

however also extends to insurance and is greatest amongst the lowest income earners where

appropriate cover diminishes across income groups (Figure 1). Most worryingly, the last two

LSM quintiles amount to 42% of the South African population.

Figure 1: Adequacy of death coverage in South Africa (% of people appropriately covered, 2013)

Source: True South; Gap study, 2013

2 Swiss Re Insurance Report, 2014

3 FinScope South Africa, Consumer Survey, 2013

4 True South 2013 Gap Study

7%

10%

20%

30%

48%

Adequate death

coverage

Poorest 20%

Richest 20%

4th quintile

2nd quintile

3rd quintile

Proportion of each LSM quintile

that is appropriately covered

4

The fall in insurance and savings coverage with income is confirmed in customer segmentation

data received from the industry. As Figure 2 below shows, people earning less than R8,000 a

month only account for 34% and 2% of the long term and short term insurance market and at

most 26% of the investment market.

Figure 2: Market segmentation by customer numbers (2014)

Source: Genesis Analytics Team Analysis, 2015; Data obtained from individual banks; 2014

Note: Income brackets based on per month income before tax and deductions. Investment data is from a single bank.

What these statistics suggest is that much more work is required to ensure the desired level of

financial inclusion in South Africa. Bancassurance relationships are uniquely placed to play this

role:

Banks are at the heart of most consumers‟ borrowing and savings decisions and

through their branch network can provide advice on a wide range of financial products

and services. For most of the emerging population, especially those who are not in

formal employment, the bank branch is the first place people turn to for financial and

product advice.

Ensuring that consumer loans, both secured (mortgage and vehicle sales) and

unsecured (personal loans), are covered by life and, where applicable, short term

insurance policies, protects consumers and their families from unforeseen events, and

by protecting the insurer allows a much wider extension of credit than would otherwise

be possible.

The linking of funeral cover with transactional bank accounts also provides low cost

access to funeral cover for a wide number of people. This cover is provided as a value

added service to bank customers and is clearly disclosed in marketing collateral

provided by the bank.

Bank branches also provide a convenient channel to access basic insurance and

investment products, in addition to basic fiduciary services such as wills.

There is considerable evidence that insurance is „sold and not bought‟ – that

consumers left to their own devices probably under-insure with adverse social

34%

Life

3%

37%

17%

9%

Investments

5%

26%

45%

15%

9%

Short-term

2%

7%

57%

26%

8%

R8 000 - R25 000

Youth

R0 - R8 000

R25 000 - R58 000

R58 000 +

5

consequences; for instance failing to ensure their homes or cars, or failing to save

sufficiently for retirement. Banks are uniquely placed to use their extensive customer

data and insights to actively promote coverage of insurance products.

Being able to leverage their branch networks to support insurance product sales also

plays an important role in bank branch profitability, and thus in keeping open bank

branches. With the growing use of technology, the usage of bank branches is

changing, with branches becoming more dependent on sales, advice and the

management of documentation – including the signing of wills and other contracts.

It is therefore likely that in the absence of the current level of bank-insurer integration South

Africa would have achieved an even lower level of insurance and savings penetration, and

thus financial inclusion could be adversely impacted by forcing the unbundling of these

relationships. The next Section discusses the current relationships between banks, insurers

and investment product suppliers in South Africa in some more detail.

2.1. THE BANCASSURANCE MARKET IN SOUTH AFRICA

At the highest level, Bancassurance can take four different forms5 – as a:

Distribution partnership where the bank simply behaves as an intermediary, offering

products of more than one insurance company. The business logic for such a model is

the recognition by the bank of a real need to be in a position to offer insurance

products to its customers while being unable or unwilling to develop such expertise

internally, also because this would entail significant upfront investments.

Strategic alliance where the bank sells the products of one insurance company only.

In this model the insurer gains exclusive access to the bank‟s customer base without

having to make major investments in distribution. Likewise the bank gains product

manufacturing capability without having to invest to develop this in-house. A potential

disadvantage of this model, as occurs in a distribution partnership, is that low levels of

integration between the bank and the insurer remain, as both companies continue to

operate as separate entities.

5 Teunissen, M. (2008) Bancassurance: Tapping into Banking Strength, The International Association for the Study of

Insurance Economics

Bank

Ow nership link

Relationship

Insurer A

Insurer B

Insurer C

6

Joint venture where the bank and the insurer establish a jointly owned insurance

company or distributor (through more or less balanced shareholdings). The joint

venture becomes a new legal entity that distributes insurance or investment products

through the network of its banking parent. In some cases, the relationship between the

bank and the insurer is reinforced by a strategic shareholding.

Integrated Bancassurance where the bank owns the insurer or the insurer owns the

bank, either directly or through a shared holding company or parent – often referred to

as a financial conglomerate. Potential advantages of this model are that operations

and systems can be fully integrated; there is high capability to leverage on the bank‟s

existing customers; there is the possibility of one-stop shopping for financial services

for customers; and, finally, there is the potential for developing fully integrated

products by leveraging a common brand. They generally operate along the lines

shown below – suggesting a model that is either bank-led or a model that is led by a

broader financial services group holding company.

Figure 3: The prevailing models in South Africa – integrated Bancassurance

By this classification, all of the four largest financial conglomerate groups in South Africa are

integrated Bancassurers, where each bank owns a related insurance company or is related to

an insurance company within the same financial services group.

Bank Insurer

Ow nership link

Relationship

Insurer Bank

JV entity

Ow nership link

Relationship

Bank

Short-term

InsurerLife insurer

Investment

company

Short-term

Intermediary

Life

Intermediary

Short-term

Insurer

Short-term

Intermediary

Life

Intermediary

Holding

company

Bank Life insurerInvestment

company

Ow nership link

Relationship

Model A Model B

7

These relationships have developed overtime, but Bancassurance took off in earnest in the

1990s when many of the large commercial banks developed close relationships with existing

insurers. The big four banks each followed different journeys. Standard Bank acquired control

of Liberty in 1999 after owning 50% of the life insurer since 1983. Old Mutual acquired a

majority stake in Nedbank in 1986 however in 2009 Old Mutual‟s stake of the Bancassurance

subsidiaries was bought back by the Nedbank Group. ABSA was formed in 1991 through the

merger of United Bank, the Allied Bank, the Volkskas Group and a share of assets from the

Sage Group (a life insurer). The First Rand Group acquired Momentum and Southern Life that

merged under the Momentum brand in 1998. Momentum went on to merge with Sage in 2005

which contributed to making Momentum a leading insurance and asset company in South

Africa6. FNB offered insurance to its clients for the larger part of the 1990‟s and early 2000‟s.

Table 2 identifies the main legal entities that are incorporated into each Bancassurance group.

Table 2: Operating model players

Group Market Product Supplier Large JVs AFSP

Standard Bank Bank led

Short term Standard Insurance Limited Standard Bank Insurance Brokers

Life Liberty Life

Standard Bank Direct Life Services

Standard Bank Financial Consultancy

Investments Stanlib

Fiduciary Standard Trust Limited

ABSA Barclays Bank led

Short term ABSA Insurance Company Absa iDirect

ABSA Insurance and Financial Advisors

Life ABSA Life

Investments

ABSA Wealth ABSA Asset Management ABSA Investment Management Services ABSA Asset Management Private Clients

Fiduciary ABSA Trust ABSA Consultants and Actuaries

Nedbank Insurer led

Short term Nedgroup Insurance Company Nedbank Insurance Distribution Life Nedgroup Life

Investments

Nedgroup Investments Nedgroup Financial Planning Nedbank Private Wealth Stockbrokers

Nedbank Broker Consultants Nedbank Financial Planners Nedbank Stockbrokers

Fiduciary Nedgroup Trust Nedbank Business Development Consultants

First National Bank Financial Services Group led

Short term FNB Insure RMB Structured Insurance

Outsurance FNB Insurance Brokers

Life FNB Life RMB Structured Life

Momentum

RMB Investments and Advisory Investments

FNB Wealth RMB Unit Trusts

MMI Discovery

Fiduciary FNB Trust Services

Source: Company websites; FSB list of Authorised Financial Services Providers

6 Company website, Momentum, 2015

8

2.2. THE SIZE OF THE BANCASSURANCE MARKET

Approximately 13.5 million people have formal insurance in South Africa. This is just above the

number of formally employed adults in the country – at 13.1 million people. The 13.5 million

people that have formal insurance hold a total of ~87 million policies; or an average of around

6 policies per insured person. The market is fairly evenly distributed in terms of the number of

policies in force (see Table 3 below); however life insurance accounts for the bulk of gross

premiums written on account of higher insured values per person. Total insurance premiums

written in 2014 amounted to around R 520 billion, or 14.7% of GDP.

Table 3: Distribution of product holdings (2014)

Insurance Category Life Short-term

Gross written premiums (GWP) 421,043,334,559 99,345,843,385

Market share by GWP 81% 19%

Policies in force 46,987,777 40,523,705

Market share by policies 54% 46%

Source: Genesis Analytics Team Analysis, 2015; Timetric Reports, 2014; FSB Insurance Quarterly Reports, 2014 Note: Excludes health insurance policies.

The life insurance market is also fairly evenly distributed across the main product lines while

the short-term market is principally composed of property and motor insurance cover that are

closely linked with core bank credit products. With respect to investments, the combined value

of local and international investment funds registered with ASISA in 2014 amounted to

~R1,694 trillion (or 48% of GDP).

Figure 4: Distribution of insurance and investment products (number and % of policies, 2014)

Source: Genesis Analytics, Team Analysis, 2015 Timetric Reports, ASISA industry results, SAIA Annual Review, 2014

54%

(46 987 777)

46%

(40 523 705)

Short-term Life

87 511 482

(Policies)Insurance

24%

(404 683)

Interest bearing Real estate Multi-asset Equity

Investment23%

(392 547)

49%

(835 219)

R 1,694,795 million

(AUM)4%

47% Property

Motor

3% Marine, aviation, transit

General third party5%

45%

General annuity

24%

24%

4%

Individual life

Unit-linked

Individual pension

24%

24%

Group life

9

Figure 5 below identifies the share of the market held by the largest product suppliers of

insurance and investment products. As shown, the short-term market consists of a large group

of product suppliers, with insurers incorporated within a banking group accounting for

approximately 8% of the market. The long-term or life market consists of a smaller group of

product suppliers, and insurers incorporated within a banking group only account for around

5% of the market.7 In the investment market, which is more evenly distributed among product

suppliers, investment companies operating within banking groups make up around 19% of the

market.

Figure 5: Market share across short-term, life and investment markets (% of total GWP in 2013)

Source: KPGM Insurance Industry Report 2014; ASISA CIS Flow Statistics, 2014

The market share of insurers and investment companies is a partial view of Bancassurance. It

captures products underwritten or assets under management by companies that share a bank

brand. It does not capture all insurance and investment products sold through Bancassurers;

i.e.: through bank channels.

To account for all products sold through banks, Genesis obtained data from three of the largest

banks in the country to identify total gross written premium and number of policies in force for

the calendar year 2014 (Table 4). According to this information, bank channels accounted for

4% of life premiums and 16% of short-term premiums written in 2014. In terms of the number

of policies in force, bank channels accounted 32% of all life insurance policies and around 8%

of short-term policies. In the investment market, bank channels sold 43% of assets under

management in the market.

7 This excludes long term insurers that may be affiliated with a bank through a holding group relation.

5%

5%

6%

7%

SIL

Zurich

ABSA

Guardrisk

Nedgroup

OUTsurance

Hollard (incl. Etana)

Mutual and Federal

Santam

Short term

1%

2%

10%

12%

23%

Other

Other

Other

5%

9%

Other

33%

11%

25%

ABSA

Sanlam

Liberty

Old Mutual

Hollard

Momentum

Nedgroup

Life

2.5%2.7%

3%

4%

5%

5%

5%

6%

7%

8%

Foord

ABSA

Investec

Momentum

Coronation

Stanlib

Old Mutual

Allan Gray

Nedgroup

Prudential

Sanlam

Other

12%

12%

Investment

13%

Insurance company integrated

within a banking group

10

Table 4: Market share by sales through the bank (calendar year 2014, all products)

Source: Bank submissions to Genesis Analytics; FSB Insurance Short-Term and Long-Term Quarterly Reports; ASISA CIS Statistics and Timetric Global Insurance Data.

Note: * Information obtained from ABSA/Barclays, Nedbank and Standard Bank. FNB portion calculated as a simple average of the information provided by the other three banks.

What this information shows is that banks account for a significant proportion of the number of

life policies sold (almost 32%), but not necessarily the value of life premiums underwritten (at

only 4% of GWP). This is consistent with banks being an important channel for the sale of

credit life and funeral policies. Banks are also important channels for the sale of short term

insurance products (16% of GWP and 8.5% of policies in force) and for a significant proportion

of investment products sold in the market (around 44% of assets under management).

Another way to view the Bancassurance market is to consider the contribution of different bank

channels to the sale of insurance and investment products. These could include online

platforms, bank call centres, third party call centres and broker intermediaries – operating on a

tied basis or as multi-tied agents with relationships with multiple product suppliers. Table 5

breaks down the share of life and short-term insurance sold through various channels.

According to this classification, Bancassurance channels (most narrowly call centres and

branches) account for 12% and 15% of total sales of life and short-term insurance,

respectively. Brokers, which are predominantly independent financial advisers, account for the

majority of life and short-term policies sold, as well as a large share of investment sales. It is

important to note that brokers could also include bank brokers (tied or multi-tied agents

operating in branches) and so it is likely that Bancassurance channels account for a greater

share of the market than is represented by branches and call centres only.

Table 5: Distribution of market sales by channel8

Channel Share of short term

insurance sold Share of

life insurance sold

Insurance broker 44% 55%

Call centres* 26% 26%

Bancassurance 12% 15%

Call centre agents 9% 9%

Branch 3% 6%

Direct 18% 7%

e-commerce 1% 0%

Other 2% 1%

Source: Genesis Analytics Team Analysis, 2015; Timetric Reports; ASISA Statistics

* Refers to call centre agents affiliated to companies selling insurance.

Gross written premiums Number of policies in force AUM

Life Short-term Life Short-term Investment

Bancassurers* R 17,846,768,227 R 15,992,048,555 14,995,988 3,430,508 R 740,756,000,000

Total industry R 421,043,334,559 R 99,345,843,385 46,987,777 40,523,705 R 1,694,795,064,840

Bancassurance share 4.2% 16.1% 31.9% 8.5% 43.7%

11

The information presented thus far reveals how difficult it is to accurately capture the exact

size of the Bancassurance market. In part the difficulty arises from the different interpretations

of Bancassurance; as a channel or as the integration of product suppliers within banks and

bank holding groups. The use of multiple channels within a bank model, each operating on a

multi-tied or tied basis for different products, adds a further layer of complexity to the market.

What is clear, however, based on what information is available is that Bancassurance emerges

as an important part of the insurance and investment market in South Africa. Traditional bank

channels and bank branches in particular add diversity to an otherwise broker-dominated

market and therefore play an important role in extending access to financial services across

the country.

The next section of this paper considers how the Bancassurance model in South Africa is

similar (or not) to bank/insurer relationships seen elsewhere, as well as how and why

Bancassurance relationships are regulated in other countries.

12

3. INTERNATIONAL EXPERIENCE OF

BANCASSURANCE

As a model for the distribution of insurance and investment products, Bancassurance is a

relatively common feature of the financial services industry in many countries across the world.

Its prevalence however is not uniform – in some countries it is the most popular model for

distributing financial products, while in others it is disallowed entirely. Because Bancassurance

covers different sectors of the financial services industry (banking, investments and insurance)

it is generally subjected to several sectoral legislations simultaneously as well as a variety of

regulatory regimes. Because it closely integrates products sales from a number of different

entities, regulators have been concerned about issues of market power and risk concentration.

The purpose of this section is to describe how the Bancassurance model and there regulation

thereof has been approach in a number of comparative countries (Australia, Brazil, Canada,

China, Korea, Kenya, France, Nigeria, Singapore, the United Kingdom and the United States).

Overarching Summary

Asymmetries in the development and sophistication of the Bancassurance model worldwide

result from differences in industry structure, scale and nature of customer demand, as well as

regulatory architecture. Across the world, however, there is evidence of a trend in the industry

toward vertical integration as well as greater recognition by regulators of the inclusion and

access benefits that arise from vertical integration in Bancassurance. The tables below

summarise the state of Bancassurance coverage and regulation in various countries across

the world; differentiating between countries with a high share of Bancassurance, high growth,

low growth, and countries where there are still restrictions on the Bancassurance model.

Countries with high growth in Bancassurance

Examples Singapore China Korea

Bancassurance life share

27% 16% 9%

Bancassurance short term share

Very small Very small 4%

Key market characteristics

Insurance penetration:

- Low levels of insurance penetration

- Growth in insurance coverage has been attributed to Bancassurance uptake Bancassurance models:

- Vertically integrated Bancassurance models are commonplace between banks and insurers with products typically sold through multi-tied agents

Regulatory environment

- Caps have been placed on the proportion of new sales that Bancassurers could make to one insurer, as a result of competitive concerns in Korea

- Bancassurance in China was initially only permitted as a distribution model however in 2009, to spur insurance penetration and increase access to financial services, vertically integrated Bancassurance models were allowed

Relevance The lack of extensive regulatory constraints in these countries has enabled vertically integrated Bancassurance models to thrive. Where competitive issues have been identified, the regulatory response has been less intrusive, with open architecture models facing restrictions on the proportion of sales channeled to one product provider. The development of Bancassurance in these countries has been accompanied by high levels of insurance penetration.

13

Countries with a high share of Bancassurance

Examples France Australia Brazil


55% 43% 54%


13% Very small 9%



- Relatively low levels of insurance penetration but high share of Bancassurance

Bancassurance models:

- Full integration between banks and product suppliers

- Product suppliers typically have exclusive distribution agreements with their parent bank so that their products are fully integrated with the bank‟s product range


- Regulation differs depending on the market context. In developed markets like France the onus is on shoring up the capital position of financial conglomerates without fragmenting vertically integrated Bancassurance models. In Australia the context to reform is different but reviews of the conduct of Bancassurers did not identify any specific issues related to vertical integration. Finally in Brazil, a developing country, prohibitions are being considered on the transfer of customer information between banks and insurers but no prohibition is being considered on the cross ownership between banks and insurance or investment product suppliers

Relevance Like in South Africa, Bancassurance plays an important role in the market. As in France, reforms are already in place to strengthen the prudential regime applicable to financial conglomerates in South Africa. As in Australia, reforms are already underway through RDR to address identified market conduct issues. Reforms in South Africa have not yet identified particular issues related to vertical integration while in Australia vertical integration was not found to be a catalyst to negative customer outcomes.

Countries with low growth in Bancassurance

Examples UK United States Kenya


20% 2% Very small


19% Very small Very small



- Insurance penetration rates are lower than markets with a high share in Bancassurance and countries with high growth in usage of Bancassurance

- Distribution agreement and joint ventures are most common Bancassurance models:

- The market is dominated by mature, independent agency broker networks

- Widespread development of online platforms for the purchase of insurance and investment products


- Vertically integrated Bancassurance models are permissible in the US and UK - countries which have historically favoured the universal banking model

- RDR in the UK, which entailed the banning of commission payments to intermediaries, prompted a withdrawal from the market of several vertical integrated Bancassurance models in favour of direct to customer online channels tailored to higher income customer segments

- A historical ban on vertical integrated Bancassurance models in Kenya (in favour of distribution-only models) was overturned in 2014 in an attempt to

14

increase insurance penetration

Relevance Similar to the finding in these countries, the South African life insurance and short term insurance market is dominated by independent insurance brokers. The key differentiator is that the ramification of intrusive regulatory measures (such as RDR in the UK) has been to drive the adoption of online channels as a means of serving the insurance and investment needs of mass market customers. This, however, is not replicable in the South African context, where limited access to online channels and affordability among middle income customers might preclude access to a large proportion of the market.

Countries where restrictions have been imposed on the Bancassurance model

Examples Nigeria, Canada


Bancassurance model:

- Where ownership arrangements between banks and insurers are allowed, strict limitations are placed on the sale of the products to customers


- The initial policy stance in Nigeria was to ban vertically integrated Bancassurance models. Following a series of crises, banks were requested to divest any interests not associated with core banking activities, principally to prohibit the widespread abuse of capital in conglomerate structures. Against the backdrop of low insurance penetration, however, the regulator is currently reviewing the restriction on Bancassurance models

- Canadian banks are permitted to own insurance subsidiaries however strict limitations are placed on the sale of insurance by banks and their subsidiaries. Canada remains one of the only major developed countries that have not been deregulated to full vertical integration in Bancassurance

Relevance A number of countries are yet to permit vertically integrated Bancassurance models. The reasons for doing so, however, vary. In some countries, the reasons may be long standing prudential concerns with the universal banking model. In others like Canada the decentralised structure of regulation itself has prevented the emergence of integrated ownership models. Such fragmentation has never been considered in South Africa and a number of regulatory reforms are forthcoming to strengthen the capital position of financial conglomerates.

3.1. DEVELOPMENT OF BANCASSURANCE GLOBALLY

Relatively uncommon in the 1960s and 70s, Bancassurance emerged as a key model for the

distribution of insurance and investment in Europe in the 1980s and has since become a

common feature of the financial sector in many countries. France is perhaps the oldest

Bancassurance market but in countries like Spain, Italy and Portugal Bancassurance occupies

a large share of the market. Bancassurance is also growing rapidly in many developing

countries, particularly in South America and South East Asia where regulators are starting to

view it as an important model to deepen insurance coverage, and seeking to lessen the

influence of brokers.

Table 6 outlines the state of development of the insurance markets in a number of countries

and the state of Bancassurance coverage in those markets. In the table, both the penetration

and insurance density (premiums per capita) need to be observed to understand the current

insurance market in the country. The UK, for example, has a life penetration rate of 8.8% and

life premiums per capita of USD 3,474, both of which are relatively high, indicating a well-

developed insurance market. Australia, meanwhile, appears to have a relatively low insurance

penetration rate at 3%, which is lower than other countries such as the US and Italy, but a

higher than most insurance density of USD 2,056. Developing countries like Kenya and Nigeria

15

display very low insurance penetration rates and density, significantly lower even than India

which has a comparable per capita GDP.

Table 6: Insurance density and penetration 2013 (Ranked by combined Bancassurance penetration)

Country GDP per

cap (USD)

Life premiums

per cap (USD)

Non-life premiums

per cap (USD)

Life penetration**

Non-Life penetration

Banc-assurance life share

Banc-assurance

non-life share

France 39 759 2 391 1 345 5.70% 3.20% 64% 9%

Brazil 11 320 246 197 2.20% 1.80% 55% 13%

Italy 33 813 1 895 750 5.50% 2.20% 59% 2%

Malaysia 10 432 341 176 3.20% 1.70% 45% 10%

Australia 67 436 2 056 1 472 3% 2.10% 43% Very small

India 1 503 41 11 3.10% 0.80% 38% -

Chile 15 245 396 268 2.50% 1.70% 13% 19%

UK 39 337 3 474 1 087 8.80% 2.80% 20% 9%

Singapore 55 182 2 388 863 5.90% 4.40% 27% -

China 6 093 110 91 1.60% 1.40% 16% Very small

Poland 12 721 217 252 1.60% 1.80% 14% Very small

Korea 24 454 1 816 1 079 7.50% 4.40% 9% 4%

RSA 7 314 844 181 12.70% 2.70% 6% 2.50%

US 53 143 1 684 2 296 3.20% 4.30% 2% Very small

Thailand 5 480 214 96 3.80% 1.70% - -

Hungary 12 560 196 158 1.40% 1.10% - -

Kenya 933 12 23 1.20% 2.30% - -

Morocco 2 902 31 66 1% 2.10% - -

Nigeria 3 006 3 8 0.60% 0.20% N/A N/A

Average (ex. SA)

21 962 973 569 3.4% 2.2% - -

Sources: Swiss Re, World Insurance Report (2014), World Bank, Bancassurance: A Valuable Tool for Developing Insurance in Emerging markets (2012)

* Premium per cap is equal to total premiums divided by population

** Penetration is equal to the total premiums divided by GDP

The table highlights different levels of Bancassurance. In France and Italy Bancassurance is a

core part of the life market with shares of 64% and 59% respectively. Meanwhile in the UK the

share of Bancassurance is lower and it only accounts for around 20% of the life insurance

market. The UK however shows higher insurance penetration and higher premiums per capita

than both France and Italy, suggesting a generally positive relationship between

Bancassurance coverage and insurance penetration. The penetration of insurance thus tends

to be higher in countries where Bancassurance has a high share of the insurance market.

Some countries such as Korea and China, with Bancassurance shares of 9% and 16%, have

shown rapid growth in Bancassurance since their financial sectors were deregulated. China

which has a lower penetration of life insurance (at 1.6%) has seen Bancassurance growing

16

quicker to take a larger share than in Korea, also partly due to the regulatory constraints still in

the country. South Africa‟s relatively high life penetration rate with low premiums per capita

principally reflects the level of income inequality in the country and the large gap in access

among the emerging population.

3.2. BANCASSURANCE MODELS – COUNTRY LEVEL EVIDENCE

Asymmetries in the development and sophistication of the Bancassurance model worldwide

result from differences in industry structure, scale and nature of customer demand, as well as

regulatory architecture. Drawing on the distribution of countries presented in Table 5, the next

part of this Section considers the Bancassurance market in key groups of countries in more

detail to reveal insights that may be relevant to the South African context.

3.2.1. Countries with a high share of Bancassurance

Countries where Bancassurance has a high share of the market tend to be those where the

insurance market is relatively less developed (as shown by lower penetration rates) and where

brokers or intermediary agents do not already have a dominant hold on the industry. Countries

where Bancassurance has a high share of the market also tend to be those where banks and

insurers are generally fully integrated. These countries include France, Australia and Brazil.

France

Bancassurance Model Total penetration

Life penetration


Bancassurance non-life share

Full integration 9% 5.7% 64% 9%

Source: Swiss Re, World Insurance Report (2014), World Bank, Bancassurance: A Valuable Tool for Developing Insurance in Emerging markets (2012)

Of the four possible Bancassurance models, the most common in use in France is full

integration between banks and insurers. This has allowed Bancassurers to capture a dominant

share of the life market, with 64% of life premiums written through bank points of

representation. While Bancassurance had its roots in the 1960s, when banks were allowed to

market insurance products, the move to universal banking in the late 1980s provided a

platform for the growth of Bancassurers by allowing banks to acquire insurance companies.

Banks that integrated with insurance companies included the largest in France: Credit

Agricole, BNP Paribas, Societe Generale, BPCE, Credit Mutuel and La Banque Postale. The

outcome of this integration is that the French banking system is now dominated by six large,

vertically integrated banks which all have insurance operations selling both life and non-life

products. These banks are now also the main providers of investment advice in the market.

Bancassurance product suppliers (life and investment companies) in France have entered into

exclusive distribution agreements with their parent bank so that their products are fully

integrated with the bank‟s product range and value proposition. Most practically, these

agreements permit the product suppliers to sell their products through in branch just like

regular banking products. When these products are sold, entry and trail commissions are paid

by the Bancassurer to the bank to compensate for the use of the bank‟s channels and

intermediaries. Depending on each bank‟s intermediary remuneration model, these

commissions can either be directly passed onto advisors or retained and paid out as bonuses

linked to specific performance metrics.

17

Australia

Bancassurance Model Life penetration




Full integration 3% 2.1% 43% Very small


Following the deregulation of the industry in 1981, the four leading banks in Australia were

quick to establish life insurance subsidiaries. Of the banks to form insurance subsidiaries only

The Commonwealth Bank of Australia acquired an existing life company. National Australia

Bank, ANZ and Westpac all created their own life insurance companies. The creation of these

integrated financial services providers has played a large part in the growth of distribution of

insurance products in Australia and, to this day, Bancassurers account for around 43% of the

life insurance market.

Since the early 2000‟s Australia‟s financial sector has also been the subject of extensive

regulatory review. Regulators have placed considerable emphasis on market conduct and the

regulation of activities where financial sector participants can exert market power to the

detriment of customers. Following a market inquiry in 2009 the Australian regulator has

recently proposed new regulation to govern the sale of financial products and the provision of

financial advice (called Future of Financial Advice). The intended outcome of FOFA is to

strengthen standards for the conduct of financial advisory service providers, including those

involved in Bancassurance. The content of FOFA and its implications for vertically integrated

Bancassurers is discussed in the next Section.

Brazil





Integration / Joint venture 2.2% 1.8% 55% 13%


Banks have played an important role in the Brazilian insurance market for a number of

decades, but Bancassurance in particular grew rapidly after 2001 driven by the rapid

expansion of Brazil's banked middle class and a consequent surge in consumer finance.

Interestingly, while Brazilian regulation expressly prohibits the transfer of customer information

between banks and insurers, it places no limits on cross ownership between banks and

insurers (except in the case of government banks).

Like their counterparts in other middle income countries, banks in Brazil can leverage their

large distribution network to access lower income customers more efficiently than standalone

insurers which have no physical points of representation (and are reliant on brokers).

Research conducted by Everis Consulting suggests, for example, that the banks‟ cost of

distribution and collection of premiums is 3% lower than that of standalone insurers, whose

cost of distribution and collection is 16%.9

9 Reported on Exame.com, quoted from Everis Consulting

18

3.2.2. Countries with a high growth in Bancassurance

While some of the countries surveyed have been slower to adopt Bancassurance, many have

shown significant growth in the channel since banks started offering insurance products. These

include Korea, Singapore and China.

Korea





Distribution agreement / Joint ventures

7.50% 4.40% 9% 4%


After the Asian Financial Crisis of 1997 the Korean government looked to increase the stability

and efficiency of the financial sector. As part of the government‟s package of reform, significant

changes were made to the supervisory regime for life insurers, including the phasing-in of

Bancassurance. By phasing in Bancassurance and allowing banks to sell insurance products

the government sought to shore-up the capital of insurers, many of which faced significant

solvency problems during and after the crisis. This reform was strongly opposed by sections of

the insurance industry (principally insurers with large broker networks), which felt that it may

lead to an anti-competitive environment in favour of the banks and would be detrimental to the

large number of agents selling insurance in the country. This opposition was so strong that it

was successful in blocking the second phase of Bancassurance implementation in 2008, which

sought to allow banks to offer individual protection-type products and car insurance.

Since Bancassurance was (at least partially) permitted in Korea there is evidence that it has

met the government‟s initial objectives. The Korean Institute of Finance (KIF) reported in 2013

that since Bancassurance was permitted insurance prices had fallen due to the cutting of sales

expenses and increasing cost efficiencies of insurers. Smaller standalone insurers also

flourished, particularly under a requirement that caped the proportion of new sales that

Bancassurers could make to one insurer to 25%. This meant that banks selling insurance were

forced to offer products from multiple product suppliers. According to the KIF Bancassurance

also contributed to the professionalisation of the advisor force in Korea; which had primarily

been made up of female shop owners and homemakers with little formal financial training.

Singapore

In 2000, the Monetary Authority of Singapore (MAS) introduced a programme to liberalise the

insurance industry. This programme removed the closed-door policy on direct insurers and

allowed the admission of new entrants into the market, including partnerships with banks.

While insurance agents still make up the main sales channel for life insurance, their market

share has declined from a high of 66% in 2004 to 45% in 2011 as a result of this programme.

As of 2011 Bancassurers also accounted for over 35% of the volume of new business

(measured as total weighted new business premium income) in the country10

. Since the

insurance market was liberalised, the strong growth in the insurance market has therefore

been attributed predominantly to the rapid rise of Bancassurance, which has grown by almost

100% year-on-year according to the MAS.

10

Towers Watson Distribution debrief Issue 26, 2011

19

China





Distribution agreement/ Joint ventures

1.60% 1.40% 16% Very small


China‟s insurance industry has grown rapidly in recent years, due in large part to the

emergence of Bancassurance as a key channel for the sale of insurance products.

Bancassurance was permitted in China in 2002 when banks were granted permission to sell

the products of insurance companies (but were not allowed to own an insurer).

In September 2006, however, the China Insurance Regulatory Commission (CIRC) permitted

insurance companies to invest in local commercial banks and by 2009 regulation had been

drafted by the China Banking Regulatory Commission (CBRC) providing the rules for

commercial banks investing in and owning insurers. By 2012 six major Chinese banks had

acquired majority holdings in relatively small insurers, and one major insurer had acquired a

bank. Though the penetration of insurance is still very low in China, the relatively high share of

the market captured by Bancassurers in just two years suggests that the Bancassurance

market will expand considerably as median incomes rise in the country.

3.2.3. Countries with a low growth in Bancassurance

Countries that have experienced a low growth in Bancassurance are those which have

previously had regulation in place preventing or obstructing vertical integration between banks

and insurers, or where the brokers had, and still occupy, a large share of the market. These

countries include the United States, United Kingdom and Kenya.

United States





Distribution agreement 3.2% 4.3% 2% Very small


The consensus view in the US after the Great Depression and at the time of the passage of

the Banking Act of 1933 (Glass-Steagall) was that it was safer to legislate for the complete

separation of banking and other financial activities. This attitude persisted until the 1990‟s

despite the existence of other models of banking in equally successful advanced, industrialised

countries such as France, which allowed „universal‟ banking.

The repeal of Glass-Steagall and its replacement by Gramm-Leach-Bliley (GLB) Act (also

known as the Financial Services Modernization Act) in 1999 was partly motivated on empirical

evidence suggesting that even in the US the alleged dangers of the universal banking model

had been exaggerated and they had not played a crucial role in the Great Depression. The

passage of GLB facilitated the merger between Citigroup and Travelers, two leading

institutions in their respective industries (banking and insurance). The GLB Act allowed

commercial banks, securities companies, and insurance firms to consolidate which has

20

(amongst other forms of integration) effectively made Bancassurance permissible by allowing

ownership ties between banks and insurers as well as the sale of most insurance products

through bank channels.

In spite of this reform, available evidence suggests that Bancassurance has grown slowly in

the US. While the historical regulatory environment contributed to the slow growth of the

model, other factors also seemed to have played a role. In particular, the market is dominated

by a mature and competitive agency and broker network model and consumers are used to

buying their insurance and investment products through these brokers, many of which have

national reach. Early adoption and widespread usage of online channels for the purchase of

insurance and investment products also seem to have stifled the use of bank branches or

agents.

United Kingdom





Distribution agreement / full integration

8.80% 2.80% 20% 9%


Although Bancassurance has historically always been permitted in the UK, it has not

penetrated the market to the same extent as other countries in Europe – reaching a share in

the life market of around 20% compared to the over 60% in Southern Europe, for example.

This is partly due the strength of the dedicated independent advisor/broker model in the UK

(estimates suggest it accounts for between 50/60% of the market) as well as the maturity of

the life market in particular where there has also been a strong movement towards buying

insurance either online (either insurer websites or through aggregators), over the phone or in a

workplace setting.

Bancassurance models in the UK are either full integration or distribution agreements.

Distribution agreements tend to be led by the insurers – where AVIVA, for example, has

partnerships with banks such as Barclays and HSBC. Full integration meanwhile tends to be

bank-led – HSBC, for example, has its own insurance subsidiary.

Over the last ten years regulators in the UK have raised numerous concerns over the nature

and quality of advice that is provided to customers purchasing financial products, including

through integrated Bancassurance models. A string of scandals, first revealing significant

churn in investment products by IFAs, and the miss-selling of payment protection insurance to

customers that were not eligible, highlighted significant conflicts of interest between product

suppliers and intermediaries. These scandals and concerns led to a number of regulatory

reviews, the most significant of which was the Retail Distribution Review (RDR) which banned

the use of commission as a tool to reward intermediaries for the sale of investment products.

Whilst RDR is explored later in this report in more detail, this ban significantly affected the

Bancassurance market, with a number of high profile industry players opting to exit the advice

market in favour of launching direct to customer online platforms. These included HSBC, Royal

Bank of Scotland, Barclays and Santander. Legal & General, the last remaining Bancassurer

that provided face-to-face advice, scrapped its broker support team in December 2014, citing

that customers no longer had a need for such advice and that the business would only provide

advice going forward over the telephone or online.

21

Kenya





Distribution agreement 1.2% 2.3% N/A N/A

Source: Swiss Re, World Insurance Report (2014)

While Kenya has a relatively developed insurance sector compared to most African countries,

penetration rates have remained low in the country for two reasons: low income levels and a

historical ban imposed on banks from owning insurers or even selling insurance products.

Anecdotal evidence attributes this historical stance against Bancassurance has been driven by

a very strong broker lobby to the regulator.

In 2014 regulators took the first steps to promote the use of Bancassurance (as a „one stop

shop‟ in the words of the regulator) to deepen insurance penetration in the country. To do so,

the Insurance Regulatory Authority issued a guideline to the insurance industry that it would

permit the use of Bancassurance in the country; either as a distribution agreement or full

integration in the country. Now that the Bancassurance model has been formally recognised it

is likely that more insurance companies will form partnerships with commercial banks to tap

into the wide distribution channels that these banks provide. Among the listed companies,

BRITAM partnered with Equity Bank Ltd to sell insurance and investment products in 2013.

Jubilee Insurance has also recently partnered with National Bank of Kenya to roll out its life

insurance products through the bank‟s branches. Given the higher penetration of bank

channels over insurance channels in Kenya it is likely that Bancassurance will become an

important channel for the distribution of insurance and investment products in the near future.

3.2.4. Countries with restrictions on Bancassurance

While an increasing number of regulators worldwide have recognised the role of

Bancassurance in deepening financial inclusion, there are still a few that restrict

Bancassurance. The reasons for doing so clearly vary; in some cases it may be as a result of a

broader prohibition against vertical integration in the financial sector, or it may be a desired to

maintain a strict separation banking business and insurance businesses. These are the

reasons cited in Nigeria and Canada respectively.

Nigeria



Banc-assurance life share

Banc-assurance non-life share

Disallowed 0.2% 0.5% N/A N/A

Source: Swiss Re, World Insurance Report (2014)

Nigeria has a history of financial crisis, particularly in the banking sector which has been

plagued by a combination of poorly thought-through regulation and widespread rent seeking.

Together, these factors have resulted in a succession of bans and subsequent permissions for

banks, insurers and investment companies to vertically integrate.

After a domestic banking crisis in 2010 the Central Bank of Nigeria (CBN) stopped banks from

undertaking any form of vertically integrated Bancassurance when it directed banks to divest

interests from any activities not directly linked to core banking activities. This was principally to

prohibit widespread abuse of capital in conglomerate structures that compromised the stability

22

of the financial sector. Practically, this meant that banks had to sell off their insurance holdings

or capitalize these businesses separately under a holding company structure. Under this

model Bancassurance was only permissible through a distribution agreement between

separate insurers and banks. In July 2014, the CBN repeated this policy stance and directed

banks to obey the 2010 regulation barring them from conducting non-permissible activities,

including underwriting and Bancassurance.

In light of the Federal Governments‟ renewed interest on getting the insurance sector to

contribute meaningfully to the economy, however, there have been indications that the CNB

may reconsider this restriction against Bancassurance models. Nigeria‟s current insurance

penetration is considerably lower than other emerging markets such as Ghana and Kenya and

the size of total insurance assets is far below other emerging markets. Given the low insurance

penetration in Nigeria, the CBN is now believed to be revisited the ban on vertical integration

and is now considering a Bancassurance model that would best suit the inclusion and

coverage needs of the Nigerian population.

Canada





Integration (but limited cross selling)

6.9% 2.9% 1.1% 0.3%

Source: Swiss Re, World Insurance Report (2014); Timetric, 2020 Foresight: Bancassurance (2013)

Although Canadian banks are legally permitted to own insurance companies, strict limitations

are placed on the sale of insurance by banks and their subsidiaries. In 2010, spurred by

widespread customer distrust in the banking sector, the Bank of Canada issued a directive

splitting insurance products into authorised (credit and travel-related insurance and non-

authorised insurance products (life, property and casualty insurance), with banks restricted to

sell restricted insurance products only.11

What this meant is that federal charter banks can only

sell loan protection insurance and travel insurance within their branch networks. For other

products, banks which own life assurers are only allowed to provide links from their corporate

web-pages to the subsidiaries. They are also not permitted to actively promote these products.

These life insurance subsidiaries are usually small, with the notable exception of the Royal

Bank of Canada, which has a very large life insurance subsidiary.

The result of this ban on the bank is that the lower income customer segments and those that

live in rural areas without access to brokers have insufficient access to insurance products.

The separation in the sale of bank and insurance products also seems to have created

somewhat of an anomaly in the market – and reports of customers walking out of bank

branches only to „go next door‟ to the branch of an affiliated insurer are commonly cited as a

duplication of distribution capacity.

3.2.5. Summary factors that contribute to the development of Bancassurance

While Bancassurance has managed to take up a large market share in some countries, it has

not yet made as large an impact in all countries. The largest obstacle to the development of

Bancassurance appears to be the regulatory environment. Countries which previously had

regulation against Bancassurance include the US, South Korea and Kenya. The motivations

for the constraints differed; as the US had regulations in place since 1933 that focused on

11

Exaxe (2014), Canada keeps Bancassurance at bay

23

prudential issues, whereas South Korea and Kenya had a strong broker presence which put

pressure on the government to protect them from what they saw as unfair competition in the

distribution of insurance and investment products. In other countries, like the UK and Australia,

Bancassurance and vertical integration have also been targeted because of poor conduct of

business outcomes.

Another finding is that insurance penetration seems to be highest where there are no outright

prohibitions on vertically integrated Bancassurance models. In these countries, Bancassurance

is recognised as a key channel for increasing access to insurance products. Even in countries

where there are prohibitions on vertically integrated Bancassurance local policymakers and

regulators are considering the role of Bancassurance as a channel for increasing access to

financial services.

What this suggests is that vertical integration between banks and insurers is becoming

commonplace across the world as countries look to deepen insurance penetration and as

providers look to draw on the synergies inherent in conglomerate structures. As the next

Section will show, some countries (most prominently Australia) have also recognised that

outcomes arising from potential conflicts between product suppliers and intermediaries within

Bancassurance models are independent from the vertically integrated structures within which

these businesses operate. This distinction between the structure of the model and the

outcomes provided to customers is particularly relevant to the South African context and to the

way in which the regulator is considering complex ownership models. The purpose of the next

Section is to survey these and other international approaches to the regulation of

Bancassurance.

3.3. INTERNATIONAL APPROACHES TO THE REGULATION OF

BANCASSURANCE

While Bancassurance is growing in importance around the world, regulators have been

concerned that the growing integration of financial services and financial service providers is

not in the interests of consumers. This Section considers the regulatory issues that have been

raised in different countries surrounding vertically integrated structures and the Bancassurance

model in particular. The purpose of this analysis is to determine how similar or different the

rationale for regulating Bancassurance or vertically integrated structures is in these other

markets when compared to South Africa.

Box 1: Overarching summary of international approaches to the regulation of Bancassurance

The origin of regulatory reforms impacting Bancassurance can be differentiated between prudential

issues and conduct of business issues. The relevance of each of these is as follows.

Prudential reforms

The core focus of prudential reforms across Europe has been to strengthen the resilience of

financial conglomerates to systemic risks, in the form of Basel III and Solvency II which were

implemented specifically to shore up the capital and liquidity positions of banks and insurers.

The Financial Conglomerate Directive (2002/87/EC) providing supplementary prudential supervision

over financial conglomerates was revised in Europe due to the potential for regulatory arbitrage in

vertically integrated conglomerate structures. This level of supplementary supervision was

historically hindered since national supervisors were given leeway to choose between banking or

insurance supplementary supervision. In light of this, the gap in legislation was amended so that

24

national supervisors were given cross over jurisdiction.

Relevance to South Africa

Following the Global Financial Crisis, there has been an increased focus on prudential risk

associated with financial conglomerate structures. To combat this, policies and procedures in

Europe have focused on potential capital arbitrage, double gearing and contagion from intra-group

exposures. Measures have also been put in place to strengthen the protection of policyholder and

depositor funds by means of stricter prudential requirements. These same policy reforms are being

considered in South Africa even though the financial sector was not significantly affected by the

crisis. The focus on conglomerate supervision under Twin Peaks in particular is expected to lead to

much more intrusive prudential supervision of financial conglomerates, including Bancassurers in

the near future.

Market conduct Reforms

Market conduct reforms in Europe are driven through the Markets in Financial Instruments Directive

(MiFID) as well as the Insurance Mediation Directive (IMD). These Directives required product

suppliers to fully inform customers of fees, commissions and benefits that the product supplier will

receive as a direct result of the specific sale. Regulators have alluded to potential conflicts of

interests arising through payments from third parties to independent advisory firms, over and above

the regulated limits, which lead to bias advice. One of the key stipulations is that firms will be

prohibited from retaining any fees, commission or incentives received from third parties. This ban on

commission specifically impacts independent advisory firms. Of note, this did not impact the

vertically integrated Bancassurance models since these models offered restricted advice from

integrated products suppliers, where commissions can continue to be paid and received (subject to

complying with inducement rules).

In the UK, RDR sought to mitigate any advice bias or influence from product suppliersas a result of

perceived customer abuse in the retail investment business market. Changes to intermediary

remuneration were legislated at the end of 2012. RDR led to a withdrawal by Bancassurers from the

face-to-face advice market in response to a lower willingness to pay for advice among middle

market customers. The unintended consequence of RDR was thus an advice gap in this market.

Bancassurers then focused on serving higher income customers and developing direct-to-customer

online propositions providing basic advice to middle market customers.

In Australia, the government pursued a series of reforms to improve trust in the advisory market on

the back of the failure of high-profile intermediary failures in the market. These reforms led first to

the Future of Financial Advice (FOFA) inquiry (which is still ongoing) and later the Financial System

Inquiry (FSI) to address broader issues relating to the structure of the financial sector. The FSI in

particular found that although the difference in quality of advice between independent advisory firms

and aligned or vertically integrated firms was negligible, there was value in making ownership and

alignment more transparent to customers. However, the regulator found that vertical integration was

not a pressing issue and did not need addressing when it came to improving customer outcomes.

Moreover, it found that the fair treatment of customers could be achieved through more concrete

disclosure of ownership arrangements and through a shift in the burden of responsibility for effective

and customer centric product design and distribution onto product suppliers. Provided these

standards affect all product suppliers equally, the regulator in Australia indicated that vertical

integration would not matter to customer outcomes.

Relevance to South Africa

Internationally there is no apparent trend to limit or prohibit vertical integration from a market

conduct perspective. Regulatory programmes have been initiated by specific instances of market

failure by intermediaries providing advice in particular. The content of these reforms has been

somewhat homogenous in Anglosaxon jurisdictions, focusing on reviewing remuneration structures

of advisors, shifting the responsibility for advice onto product suppliers and improving disclosures.

25

These same reforms are being considered in South Africa – but without a significant market failure

in the provision of advice as a catalyst.

The proposed approach to reviewing the intermediary market in South Africa is much broader and

more prescriptive than equivalent approaches taken in Europe, the UK or Australia. This approach

also implicitly considers the potential that certain customer outcomes may be directly attributed to

the structure of the industry; which extends to Bancassurance models. Drawing on the results of the

FSI in Australia, at a group level, vertically integrated Bancassurance models may not require

intrusive regulatory scrutiny in South Africa, so long as the necessary disclosure requirements are in

place and product suppliers are responsible for the performance of their products and the manner in

which these are distributed.

3.3.1. Prudential reforms

The focus on financial stability has been a significant part of the global reform agenda after the

Financial Crisis. A lot of emphasis has particularly been placed on the capitalization of banks

and finance houses and on the solvency of insurers in order to mitigate the fiscal impact of

protecting depositors and policyholders in the event of another crisis.

The most significant prudential reform programmes undertaken to strengthen the resilience of

financial conglomerates to systemic risks include Basel III and Solvency II. Basel III has been

implemented to shore up the capital and liquidity position of banks. Solvency II has been

implemented to do the same for insurers. Both of these frameworks impact Bancassurance

groups but in different ways. Solvency II in particular is expected to favour big Bancassurers

with a large portfolio of products that they can use to diversification risk while computing their

capital. Under Basel III, banks are required to hold a substantial amount of Tier I capital, which

may pose a greater challenge for banks with insurance subsidiaries, as the capital

requirements and book value of investments of the subsidiary will be deducted from Tier I

capital. Bancassurance groups in countries where the deduction is taken from total capital

rather than Tier I capital will also experience a greater impact if they hold business

subsidiaries. The high cost of the capital adequacy requirement may lead some banks to

question the capital merits of integration with insurance subsidiaries.

The potential for regulatory arbitrage in the universal banking model has been another major

concern for European regulators since the Crisis. The potential for such arbitrage is seen to be

strongest in the vertical integration of banks and insurance companies. To safeguard against

potential arbitrage, the Financial Conglomerate Directive (2002/87/EC) required supervisors to

apply supplementary supervision on vertically integrated conglomerates over and above any

sector specific (banking and insurance) supervision. The experience of the Financial Crisis

however forced the European Commission to re-evaluate the effectiveness of Directive and to

acknowledge that supplementary supervision could not be carried out on certain financial

groups because national supervisors were free to choose between either banking or insurance

supplementary supervision. This gap in legislation was addressed in 2011 when national

supervisors were given cross-over jurisdiction and authority over both banking and insurance

activities of financial conglomerates.

3.3.2. Market conduct reforms

The conduct of banks and financial conglomerates in general is also frequently the target of

regulatory intervention. This intervention is aimed at protecting customers from abuse or poor

conduct of business by financial service providers. Evidence of abuse or product scandals of

26

this kind has prompted regulatory intervention in Europe, the UK, Australia and Singapore to

name a few countries. The outcome of increased regulatory scrutiny into the operation of

universal banks and financial conglomerates has been the implementation of wide ranging

reforms to the provision of advice, disclosure to customers, pricing of products and

remuneration of intermediaries. These reforms are discussed in this next Section.

MiFID and MID in Europe

The conduct of the financial sector in Europe is being reformed through the Markets in

Financial Instruments Directive (MiFID) and the Insurance Mediation Directive (IMD). The

shared objectives of both Directives are to increase competition and consumer protection in

investment services and insurance, and to harmonise conduct of business rules across

Europe.

MiFID II in particular introduces changes to the remuneration of advisors which are similar to

those that are being considered in South Africa. It stipulates that firms providing investment

advice on an independent basis or portfolio management will be prohibited from retaining any

fees, commission, or benefits received from third parties. If received, these payments must be

passed onto clients. MiFID also prevents financial service providers from setting-off payments

of fees between them and imposes a statutory obligation on product suppliers to inform clients

about all fees, commissions and benefits that the product supplier has received or will receive

from the sale of financial products.

These changes have been introduced to address potential conflicts of interest arising where

advisory firms and portfolio managers that claim to be independent receive payments from

third parties. These flows, according to regulators, bias advice provided to customers. The

impact of this ban on commission is expected to be significant for firms providing independent

advice or portfolio management services. While such firms would have previously been able to

be remunerated by commission, this will cease. For firms from some EU Member States

(notably the Netherlands, Italy and France), there has already been a ban on investment firms

receiving payments from third parties so this may not represent such an impact in these

countries. As the majority of advisory firms in Europe generally operate a bancassurance

model (offering restricted advice from their own in-house insurer), where commissions can

continue to be paid and received (subject to complying with the inducement rules), this may

not be a big impact. However for product supplier firms distributing through independent

advisory firms or dealing with portfolio managers, this ban is expected to have a big impact on

their distribution arrangements.

RDR in the UK

In 2006 the then-Financial Services Authority embarked on a significant review of intermediary

remuneration in the UK; called the Retail Distribution Review (RDR). The review came in

response to widespread evidence of customer abuse in the retail investment business market

which exposed unfair and opaque charging practices by product suppliers and conflicted sales

techniques by intermediaries – the most commonly cited example of which was the miss-

selling of payment protection insurance to customers that were not eligible for the cover. RDR

therefore sought to ensure the independence of advice from bias or any influence from product

suppliers that would limit the range of financial products or solutions recommended to retail

customers.

27

After a long period of consultation and design, changes to intermediary remuneration were

finally legislated at the end of 2012. The most important change was to change adviser

remuneration for recommendations made about investment products away from commission to

customer-agreed fees. Furthermore, in an effort to clarify the status in which intermediaries

acted, advisers were required to inform customers of whether they are providing advice on an

„independent‟ or „restricted‟ basis; depending on the range of products they provided access to.

A provision for „basic advice‟ was also included in the rules that permitted restricted advisers to

offer a simplified (and typically automated) form of financial advice that uses pre-scripted

questions to determine whether a financial product will be suitable for a customer. In those

circumstances, restricted advisers can legitimately obtain fees, commission or other benefits

from product suppliers.

The immediate impact of RDR in the UK was to cause an exit from the advice market by

banks. The cost to the customer of receiving advice, they argued, would be too high and result

in such a contraction in demand as to make the advisory business sustainable. For example

Axa‟s estimated for its Bancassurance arm to be profitable it would have to charge an advice

fee of 6% or the equivalent of GBP220 (ZAR 4000) an hour, and as a result closed its

bancassurance arm.12

Similarly Barclays closed down its advice division in 2011. Lloyds

closed its mass market advice service in 2012, while Santander stopped offering advice to new

customers early in 2013. HSBC also took the decision to stop offering advice to customers that

fall below a certain net worth. When Axa closed its bancassurance arm, its two banking

partners, the Co-Operative Banking Group and Clydesdale and Yorkshire Banks, pulled out of

offering advice. By mid-2013 the FSA estimated that the closure and restructuring of advice

services within banks resulted in around 7,200 job losses.13

Gradually, banks returned to the advice market but with very different propositions. Faced with

the high cost of providing face-to-face advice some banks like HSBC and RBS opted to focus

only on high-net-wealth customers. Others turned toward other, lower cost, alternatives for the

sale of investment products where they could still earn commission. This created an

opportunity for organisations to develop complex technology solutions that could provide

regulated advice, either directly-to-customers (D2C), or on an intermediated business-to-

business (B2B) basis. A number of banks (including Lloyds, RBS and Barclays) therefore re-

entered the market by leveraging these online propositions and partnering with insurance

companies to provide basic advice offerings and discretionary fund management services. As

Figure 6 below shows, the increase in sales through D2C and B2B platforms in the UK is in

contrast to the decline in direct sales.

12

Money Marketing (2013) The death of bank advice: more than just RDR to blame 13

Money Marketing (2013) The death of bank advice: more than just RDR to blame

28

Figure 6: Gross quarterly sales by distribution channel (GBPm)

Source: Extracted from Europe Economics (2014) Retail Distribution Review Post Implementation Review

In combination, the withdrawal from the advice market by banks and the rise of online

alternatives has had a mixed impact on access to advice among customers. In this regard the

findings from the Financial Conduct Authority‟s Post-Implementation Review regarding the

much-debated advice gap are informative:

Customers that have a need for investment advice but are not engaged in the

market do not constitute an „advice gap‟ since they are not actively looking for advice.

“The exit of banks from the provision of advice however may have increased the size

of this group as evidence suggests bank-based advisers were effective in prompting a

decision to invest from unengaged customers”.

Customers that have a need for investment advice but are unwilling to pay for

advice at true cost tend to have exited the advice market. By revealing the true cost

of advice RDR is likely to have increased the size of this group, though in time it is

expected that the market will adjust to address at least part of this gap by developing

cheaper advice offerings that these consumers may consider value for money. In

support of this view, the post-implementation review finds evidence that new

investment among the lower wealth segments has fallen. This may imply that some

consumers have simply left (or not entered) the investment and savings market

altogether. The decline has been most notable for customers with pre-existing

savings/investments in the GBP 50,000 - GBP 99,999 segment but also among

consumers earning between GBP 20,000 and GBP 49,999.

29

Figure 7: Proportion opening investments in the last year, by market segment

Source: Extracted from Europe Economics (2014) Retail Distribution Review Post Implementation Review

Customers that have a need for investment advice that firms are unable or

unwilling to serve represent a true „advice gap‟. This group of consumers is likely

to have increased under RDR as a result of firms moving to target higher wealth,

higher margin customers. To the extent that there are firms willing to provide advice to

lower wealth consumers, the market should be able to resolve this gap in time.

Overall then, RDR seems to have had a mixed impact in the market. From a regulatory

perspective it has introduced standards on products, advice and remuneration which were

previously absent. It seems to have reduced churn in the sale of investment products but

reduced coverage among middle market customers that are unwilling to pay for advice and

that were previously served by banks. This reduction however seems to have been offset by

an increase in total product sales arising from online alternatives offering „basic advice‟ or

guidance in the selection of investment products. In terms of vertical integration between

advisers and product suppliers, the most significant development has been the exit of large

vertically integrated firms, in the form of the withdrawal of some of the retail banks from the

advice market. Among integrated firms, the trend has been to provide „restricted‟ advice to the

mass market. Among firms that are not integrated the trend has been to provide „independent‟

advice, principally to wealthier customer segments.

Finally, a note on the benefits of technology and vertical integration is important to make.

Though online platforms provide value to customers, there is however widespread perception

that an element of regulatory risk will be induced as a result of these platforms, due to the

uncertainty around what exactly constitutes a non-advice sales model. According to the FCA,

the specific concern is that: “whilst a simplified advice solution can be cost-efficient, an

algorithmic error could result in systemic advice problems. In this respect, simplified advice

could necessitate the introduction of simpler products to mitigate some of the risks associated

with liabilities. This implies a significant role for vertically integrated firms, which would be in a

position to develop the products and then promote them through their newly developed

simplified advice offerings”.

30

Future of Financial Advice (FOFA) in Australia

Over the past five years the Australian government has pursed a series of reforms to improve

the trust and confidence of retail investments in the financial services sector and to ensure the

availability, accessibility and affordability of high quality financial advice. This process,

however, become increasingly politicised and a series of amendments and repeals have

frustrated the implementation of actual regulations proposed.

After the failure of a number of high profile intermediaries in the market14

, a Commission of

inquiry into the sale of financial products was established in Australia in 2009 with a mandate

to review:

The role of financial advisers in the market and the impact of commission

arrangements or other remuneration models between advisers and product suppliers;

The appropriateness of information and advice provided to consumers, and how the

interests of consumers can best be served considering their knowledge of financial

products; and,

The regulatory environment for financial products and services as well as the

adequacy of licensing arrangements advisers sold the products and services.

The findings of the commission (known as the Rippol Report) suggested a number of reforms

were needed to limit conflicts of interest arising between financial planners and their clients, to

improve investor education and access to sound financial advice, and to increase the

Australian Securities and Investment Commission (ASIC)‟s oversight and enforcement

capability. These findings prompted the then-Labour government to institute a Future of

Financial Advice (FOFA) reform committee in 2010 to tackle commissions on the sale of

wealth products, conflicts of interest, to institute a requirement for advisers to act in the best

interest of customers, to review scaled advice and the role of advisers.

The most significant outcome from the FOFA review was the proposal for a ban on

commissions, volume payments and so-called „soft Dollar‟ payments as forms of conflicted

remuneration. In addition, the charging of ongoing fees was revised through an opt-in

requirement for clients to elect to pay fees for a period longer than 12 months. Scaled advice

was also disallowed and all forms of advice were harmonised as „general advice‟. These

reforms came into law and became mandatory for financial advisers in July 2013.

Shortly after becoming mandatory, a new Coalition government came into power and

announced that it would amend FOFA through separate regulations that would provide

exemptions on commissions for general advice and remove the opt-in requirement. The

amendments also sought to re-recognise scaled advice and differences between advice

products (tier 1) and simpler products (tier 2)15

as the harmonisation was harming customers –

which practically would have all their interactions within a bank branch, for example,

administered, regulated and charged as if they were receiving advice from a financial planner.

14

In 2008, Opes Prime Group Limited, an Australian securities lending and stockbroking firm, suffered a dramatic collapse as a result of margin-lending malpractice which lead to insolvency of the firm. In 2009, thousands of investors lost their life savings, and in some extreme cases, their homes as a result of highly geared investments which posed a substantial risk to the vulnerable customer group. This ultimately triggered a second collapse of a similar broker called Storm Capital in early 2009 and another broker Trip Capital later the same year. 15

Tier 2 products would include basic banking products, general insurance products and consumer credit insurance

31

The amendments proposed by the Coalition government were reviewed by the Senate in 2014

but were ultimately rejected, effectively reinstating the previous government‟s FOFA rules that

banned commission, introduced an opt-in requirement and harmonised the nature of advice.

The result of this legislative change is that there was a period between December 2013 and

November 2014 where advisers were complying with regulations that were never legislated. To

date, however, it is unclear how ASIC will approach enforcement of the FOFA reforms. The

direction that ASIC takes is being carefully scrutinised by Bancassurers in Australia which are

most exposed to the way general advice and scaled advice is regulated.

The Financial System Inquiry in Australia

At the same time as FOFA was being formulated, the Australian government established A

Financial System Inquiry (FSI) to lay out a „blueprint‟ for the country‟s financial system over the

next decade. This inquiry follows similar ones undertaken in 1981 and 1997 that led to,

amongst others, the floating of the Australian Dollar, the deregulation of the financial sector

and the adoption of a Twin Peaks model of financial sector regulation.

Issues of domestic competition, consumer protection and conflicts of interest featured among

the many terms of reference set for the FSI.

The reference to domestic competitiveness reflected two concerns related to vertical

integration, involving: i) the banking sector, and ii) the superannuation sector.16

I. In the banking sector the principal concern was vertical integration of mortgage

brokers.17

Specifically, that the major banks in Australia had increased concentration

and integration in the banking sector through acquiring other banks and integrating

with mortgage brokers. According to the FSI, this level of integration could distort the

way in which mortgage brokers directed borrowers to lenders – effectively reducing

competition between smaller lenders and the major banks. In the end, the FSI did not

make a final recommendation on mortgage broking, deferring this to a subsequent

review by ASIC. It did, however, make a recommendation to rename „general advice‟

as consumers receiving financial advice from an entity owned by a large financial

institution (but operating under a different brand name) wrongfully interpreted the entity

as being „independent‟ and the advice as being „personal‟. Therefore, in the words of

the panel: “although stakeholders have provided little evidence of differences in the

quality of advice from independent or aligned and vertically integrated firms, the inquiry

sees the value to consumers in making ownership and alignment more transparent”. It

went on to recommend that mortgage brokers and advisers in general should clearly

disclose the nature of their ownership to consumers receiving financial advice.

II. In the superannuation sector the FSI sought comments from the industry as to whether

the recent trend toward greater vertical integration in the wealth management and

superannuation sectors within large financial groups was reducing competitive

pressures and contributing to higher superannuation fees. Having received feedback

from the industry, the FSI found that poor consumer outcomes were not the outcome

of vertical integration but resulted from “poor product design and distribution practices

16

Financial System Inquiry (2014) Interim Report. 17

An intermediary that brings mortgage brokers and mortgage lenders together but that does not use its own funds to originate mortgages. The key responsibility of the mortgage broker is to gather paperwork from a borrower, and passes that paperwork to a mortgage lender for underwriting and approval. An origination fee is paid to the mortgage broker as compensation for its services. In South Africa, these are known as mortgage originators.

32

that disregarded consumer behavioural biases and information imbalances”18

. As the

FOFA had already made significant changes to reduce incentives for inappropriate

distribution where personal advice is provided, the only area for intervention left was to

make product issuers more responsible for product distribution. To do so, the FSI

recommended the introduction of a targeted and principles-based product design and

distribution obligation – which would require product issuers and distributors to

consider a range of factors when designing products and distribution strategies. These

factors would include the type of consumer that would be targeted and the channel

that was best suited to distributing the product. The industry would then be allowed to

supplement this principles-based obligation with appropriate standards for different

product classes.19

Finally the FSI also tackled issues of conflict of interest, particularly the payment of so-called

„grid commission‟ to stockbroker advisors20

and high upfront commissions to life insurance

intermediaries which are exempt from the FOFA ban on commission. For life insurance, the

FSI recommended a level commission structure whereby upfront commission cannot exceed

the level of ongoing commission. Critically, the FSI did not recommend removing all

commissions as it recognised that some consumers may not purchase life insurance if the

advice involves an upfront fee. For stockbroking the FSI recommended that a review should be

conducted by ASIC on current remuneration practices in the sector.

In conclusion the FSI found little evidence that vertical integration between banks and advisers

and between banks and wealth management product suppliers was harming consumers and

limiting competition. It therefore concluded that vertical integration did not need addressing

through more intrusive regulation when it came to ensuring the fair treatment of consumers.21

Instead, it simply suggested that disclosure of these ownership structures should be more

concrete and even include branded documents or materials. Furthermore, by shifting the onus

on product suppliers to develop appropriate product and distribution strategies that take

account of whether advice is needed and what channel is best suited to meet the clients‟

needs, David Murray, the Chairman of the FSI remarked that: “vertical integration would be a

non-issue as the same obligations would be in place on all providers, regardless of whether

they are vertically integrated or not”.22

FAIR in Singapore

The Monetary Authority of Singapore (MAS) recently introduced the „Financial Advisory

Industry Review‟ (FAIR). FAIR‟s primary aims are to enhance the standards and

professionalism across the industry and to improve the efficiency of the distribution of life

insurance and investment products in Singapore. FAIR has five core principles:

1. Raising the competence of financial advisory representatives through regular training.

2. Raising the quality of financial advisory firms. Through assessing leadership and

compliance.

3. Making financial advice a dedicated service.

18

Financial System Inquiry (2014) Final Report 19

Financial System Inquiry (2014) Final Report 20

Effectively allowing stockbrokers to earn commission-based remuneration soon after advice is given, creating a conflict of interest between the adviser and the consumer. 21

Finsia (2014) Murray plays down vertical integration threat 22

Finsia (2014) Murray plays down vertical integration threat

33

4. Lowering distribution costs. Rather than impose a cap on commissions, regulation

looked to increase competition.

5. Promoting a culture of fair dealing. In order to address this, the Panel advised firms to

adopt a balanced scorecard remuneration framework.

Singapore is carefully considering the possible impact on the industry for financial advice from

the possible banning of commissions, and is looking to the lessons from the UK and Australia

to guide their actions.

Increasing integration and consumer protection in China

From 1 April 2014, Bancassurers have faced stricter regulation in China. The main

components of this stricter regulatory regime include:

Re-enactment of the three insurer limit: restricts a commercial bank from distributing

insurance products on behalf of more than three insurers.

Customer suitability test: banks will be required to conduct a needs analysis and risk-

bearing assessment for potential customers and only sell them appropriate insurance

products based on this testing.

Minimum portion of low-risk policies: At least 20% of the premiums received by a

commercial bank, together with its provincial level branches, must relate to „low-risk‟

policies (such as pension and endowment insurance policies with terms in excess of

10 years, accident injury policies and health policies).

Extended cooling-off period: The cooling-off period will be extended to 15 days.

Sales personnel must be properly managed: Banks must have a sales management

system with appropriate technological and background support to allow proper risk

control. Sales personnel must work under clear instructions from the bank and must

require customers to complete application forms themselves; a sales person may only

do so on a customer‟s behalf if he/she has the customer‟s authorization.

Where premiums are to be paid from a customer‟s bank account, the customer must agree

when and how much will be deducted and from which account.

3.4. SUMMARY LESSONS FROM INTERNATIONAL REGULATION

OF BANCASSURANCE

Having reviewed the content of regulation that affects Bancassurance models and the

treatment of vertically integrated structures across the world, a number of conclusions can be

drawn that are relevant to considering the approach that is being taken in South Africa.

Internationally there is no evidence of a trend to limit or remove vertical integration

between insurers and banks. In most developing countries, including China, Kenya

and Brazil the coverage benefits of vertical integration in extending access to financial

services are in fact being actively encouraged or recognised.

In the wake of the Global Financial Crisis conflicts of interest in the Eurozone are

principally seen through the lens of prudential risk. Through Solvency II and Basel III

34

the focus has been to limit the potential for capital arbitrage, double gearing and

contagion from intra-group exposures as well as to strengthen the protection of

policyholder and depositor funds by means of stricter prudential requirements.

Financial conglomerates in Europe are also required to put in place policies and

procedures for identifying and managing potential intra-group conflicts, including those

that may arise from intra-group transactions, charges, up streaming dividends, and

risk-shifting. Vertical integration is therefore an accepted feature of the market

provided that financial conglomerates adhere to enhanced disclosure standards and

higher prudential requirements.

In other countries vertical integration has suffered as a result of reforms designed to

improve market conduct. In the UK and Australia, for example, a string of scandals

involving the miss-selling of financial products exposed the remuneration of

intermediaries by product suppliers as a conflict of interest. The regulatory approach

taken to correct this in both countries has been similar; to limit adviser remuneration

and increase disclosure of the status in which advice is provided. The impact of this in

the UK, however, has been to diminish the willingness of middle market customers to

pay for advice, forcing Bancassurers to scale back on advisory channels in search of

lower cost and more direct alternatives through which to deliver restricted advice on a

narrower range of simple products.

Over and above intermediary remuneration, regulators in Australia also considered

whether vertical integration in the banking sector was the source of worse outcomes

for customers. However, having reviewed the structure of the industry, the regulator

came to the conclusion that vertical integration did not need addressing when it came

to the fair treatment of customers, as this outcomes could be sufficiently achieved

through more concrete disclosure of ownership arrangements and through a shift in

the burden of responsibility for effective and customer centric product design and

distribution onto product suppliers. Provided these standards affect all providers

equally, the regulator in Australia is of the view that vertical integration would not

matter to customer outcomes.

In summary this section has shown that regulation of the Bancassurance model differs across

the world according to the relative development of the market. Countries where insurance

penetration is low have tended to promote the development of Bancassurance as a means of

rapidly scaling access to financial products. Meanwhile countries that were most affected by

the global financial crisis focused on prudential issues that could arise in financial

conglomerates – opting for tougher prudential standards and broader disclosure of ownership

status. Where there has been evidence of market misconduct, regulators have also moved to

increase the burden of responsibility for customer outcomes onto product suppliers instead of

intermediaries exclusively.

The approach taken to the regulation of intermediary remuneration in South Africa somewhat

resembles the approach taken in the UK and Australia. At the same time, the market context in

South Africa differs quite a lot; insurance penetration and financial literacy is far lower yet the

financial sector is relatively sophisticated and Bancassurers proved resilient to prudential

issues arising from the crisis. In addition, because independent advisors occupy a preeminent

role in the market, conduct standards on the nature of advice, range of products and

disclosures to customers were already in place in South Africa to govern financial advice well

ahead of the reviews considered in the UK and Australia (more on this in the next section).

35

This uniqueness of context is important to acknowledge when considering what approach to

take in the regulation of Bancassurance in South Africa. The most important lesson that can be

drawn is that fair outcomes for consumers can be achieved irrespective of ownership interests,

provided that product suppliers are held accountable for the design and distribution of products

sold to customers and that customers are fully aware of the nature in which intermediaries act.

The next Section of this report seeks to explore the extent to which such standards are in

place in South Africa.

36

4. EXISTING AND PROPOSED REGULATION OF

BANCASSURANCE

The previous section has discussed international trends in the regulation of Bancassurance

models and highlighted a principal focus among regulators worldwide on conflicts of interest

and improving the quality of advice provided to customers.

This Section describes the range of regulatory measures that are in place to govern aspects of

Bancassurance in South Africa. These include the Long Term Insurance Act, Short Term

Insurance Act, Consumer Protection Act, the Protection of Personal Information Act, Financial

Advice and Intermediary Services, Binder Regulations and the Outsourcing Directive.

It also describes the range of upcoming reforms or reviews that will have an impact on the

Bancassurance model when implemented. These include: Treating Customers Fairly,

Solvency Assessment and Management, reviews of Third Party Cell Captives, Retail

Distribution Review and the Technical Review of Consumer Credit Insurance. The relevance of

each of these reforms, regulations or reviews to the Bancassurance model is described in the

following section.

Table 7 below summarises this section by providing an overview of the adequacy of current

and proposed regulatory measures in relation to each component of the vertically integrated

Bancassurance value chain.

Overarching summary

Table 7: Adequacy of current regulation governing activities of vertically integrated Bancassurers

Specific activity

Adequately addressed in existing and proposed regulation? Value Chain Component

Manufacturing

Product design and pricing P

art

iall

y

The LTIA, STIA and CPA Acts provide overarching governance over product pricing and design. Measures outlined in the RDR, CCI and the market conduct component of Twin Peaks are aimed

at correcting perceived imbalances in pricing and will shift the onus of product supervision on product suppliers in a way that improves customer outcomes (in particular transparency).

Distribution

Lead generation and database management

Ye

s

Guidelines around the management and transferal leads are contained in POPI. Moreover, customer treatment provisions are provided in FAIS, the LTIA and STIA. Twin Peaks, RDR and TCF

will instill more intrusive standards on the use of and access to the customer database in vertically integrated Bancassurance models.

Matching products to specific sales channels P

art

iall

y The manner in which products are matched to a specific sales

channel is governed implicitly in the FAIS, LTIA and STIA Acts. The CPA also has requirements associated with the linking of products. More prescriptive requirements are outlined in RDR to

justify the adequacy of specific channels for the sale of products.

The intermediary sales process

Ye

s

Requirements around the use of specific sales channels to provide customers‟ access to financial products are provided in FAIS and in the LTIA and STIA Acts. RDR has placed a spotlight on non-

advice sales execution and advisory channels which are currently adopted by Bancassurers.

37

Fulfillment Sales and servicing Y

es

Either an intermediated component or conducted by the integrated product provider, these activities – servicing and maintaining customer policies, administrating policyholder claims and benefits – are firmly governed as part of the FAIS, Binder Regulations and Outsourcing Directive. Provisions around the

appropriateness of remuneration for providing intermediary services are also contained in these Acts. RDR places further

emphasis on the activities of integrated intermediaries on behalf of product suppliers and associated remuneration arrangements.

Customer management

Managing the debtors book and customer relationship management

Ye

s

The LTIA, STIA and Banks Acts currently govern the activities of

integrated product suppliers responsible for managing customers. Additional reform though TCF and Twin Peaks will enhance

market conduct responsibilities to ensure that positive customer outcomes are preserved throughout the life cycle of the product.

Summary:

Extensive regulatory measures are already in place to govern each component of the Bancassurance

value chain. In addition, a further range of reforms under RDR and TCF are expected to further improve

customer outcomes. In light of this, stricter enforcement and oversight of these measures may preclude

the need for further revisions of vertically integrated Bancassurance models.

In addition to market conduct issues, the regulator is of the view that additional regulatory scrutiny is

required around payments by intermediary entities and integrated product suppliers to their group holding

or parent. As such, proposals GG and CCC under RDR are aimed at assessing how certain ownership

structures are a source of conflict of interests in the sale of products to customers. It is expected that the

outcome of this assessment will inform the development of an updated FAIS framework dealing with

ownership interests. These issues, however, are not unique to Bancassurers and are shared across all

financial conglomerates in the financial sector.

4.1. REGULATION THAT IS ALREADY IN PLACE

4.1.1. Long Term Insurance Act

Because such a large share of life insurance is sold through Bancassurance channels the

requirements of the Long Term Insurance Act (LTIA) (52 of 1998) are particularly important to

the operation and conduct of Bancassurance groups. The LTIA sets specific guidelines for

business practices, policies and policyholder protection, as well as guidelines around the

limitation on remuneration to intermediaries. It also provides comprehensive guidelines for

product manufacturers and guidelines for intermediaries selling long term insurance products.

In addition, the LTIA provides guides in terms of the disclosure obligations required by long

term product suppliers.

Importantly, the LTIA sets firm guidelines around the representations made by the product

suppliers, the requisite premiums payable as well as the insurable events covered. With

reference to the Bancassurance model, the LTIA provides firm guidance on the range of

activities for which long term insurers can remunerate intermediaries. These are commission

as remuneration for rendering services as an intermediary (LTIA Part 3), fees as remuneration

for performing binder functions as part of a binder agreement (LTIA Part 6.4) and fees as a

remuneration for a function outsourced which does not constitute services rendered as an

intermediary or binder functions.

38

4.1.2. Short Term Insurance Act

All Bancassurance groups have relationships (either in ownership or in partnership) with a

short term insurer. Like the LTIA, the Short Term Insurance Act (STIA) (53 of 1998) is

therefore relevant to the activities of these entities, and provides guidelines for the control of

certain activities. Pertinent provisions of the Act that apply to the regulation of Bancassurance

include the limitation on services being provided by intermediaries. Customer protection is also

underscored as part of STIA in the form of a prohibition on inducements and undesirable

business practices.

With specific reference to the Bancassurance model, guidance is provided to short term

insurers in terms of the applicable remuneration payable to intermediaries. These are

regulated commission as remuneration for rendering service as an intermediary (STIA Part 5),

fees as remuneration for performing binder functions as part of the binder agreement (STIA

Part 6.4) and fees as remuneration for a function or service outsourced aside from services

rendered as an intermediary or binder activities performed.

4.1.3. The Financial Advisory and Intermediary Services Act

The Financial Advisory and Intermediary Services Act (37 of 2002) or FAIS regulates the

manner in which authorised financial services providers (AFSPs) conduct their business and

interact with customers. FAIS also prescribes the licensing conditions for all AFSPs and

ensures that that they abide by particular fit and proper standards to maintain their license.

Under FAIS any legal entity that gives advice or renders an intermediary service in respect of a

financial product must be authorised as a FSP, or must be appointed as a representative of an

AFSP.

FAIS also sets out specific accreditation and training requirements for representatives of

AFSPs, including regulatory exams (RE) to ensure customers are serviced by advisers that are

adequately skilled to provide financial advice. The purpose of the FAIS regulatory exam is to

set minimum standards in terms of the knowledge and understanding of roles and

responsibilities of a key individual or a representative under the FAIS Act. Level 1 REs are

required for Representatives and Key Individuals while Level 2 REs are required for advisors

that need to display product specific understanding to customers (i.e.: for agents selling

transactional and advisory products). Level 5 REs need to be written by all Bancassurance

agents, including bank staff selling products on a linked, non-advice basis.

Finally FAIS provides the anchoring legislation for a General Code of Conduct that governs the

conduct of financial of AFPS and representatives, the range of permissible remuneration that

may flow between product suppliers, financial service providers, representatives and third

parties without constituting a conflict of interest.23

4.1.4. Consumer Protection Act

The Consumer Protection Act (CPA) was passed in March 2011. The LTIA and STIA were

subsequently aligned with its requirements in 2012. Section 13 of the CPA is particularly

relevant to the Bancassurance model and to the sale of linked products (described in the next

Section). Through granting consumers the right to select suppliers it places a specific

responsibility on insurers not to mandate the purchase of „in-house‟ product offerings and to

23

Board Notice 58 of 2010 governing Amendment of the General Code of Conduct for AFPS and Representatives.

39

allow consumers to cede their own life policy when entering into a credit agreement. The CPA

also governs the linking of products and places an obligation on product suppliers to display to

customers that the convenience associated with linking products outweighs the limitation of the

customer‟s right to choice.

4.1.5. Protection of Personal Information

The Protection of Personal Information Act (POPI) (4 of 2013) sets out specific requirements

on the processing and protection of personal information. POPI has a fundamental impact on

the manner in which personal information is handled amongst both insurers and

intermediaries. As the management of customer information and the transferal of leads

between the bank, the insurer and the intermediary is an important part of the Bancassurance

sales process POPI guides the protection of the customer database and access as well as the

lead generation activities within Bancassurance model.

At its core, POPI outlines conditions which must be adhered to by intermediaries, referred to in

the Act as the „responsible party‟. It is mandated that the intermediary obtains the consent of

the data subject (in other words, the customer) in order to process their personal information.

At all times, the customer has the right to withdraw consent and to object to processing. In line

with the previous requirement, an intermediary is prohibited from processing personal

information for direct marketing purposes unless the data subject has given explicit consent.

Lastly, the customer is entitled to request a record of personal information, as well as request

that the personal information is corrected, destroyed or deleted.

4.1.6. Binder Regulations

The current Binder Regulations provide guidance to insurers on activities that constitute binder

activities in line with LTIA and STIA. This guidance is provided to ensure the consistent

application and implementation of the Binder Regulations in the interest of policyholders.

In the Bancassurance model, a binder agreement would govern the range of permissible

activities performed by the intermediary and associated remuneration per activity paid by the

product supplier (the insurer or other product suppliers). Binder functions refer to the authority

granted to an underwriting manager or non-mandated intermediary to enter into, vary or renew

a policy, determine the wording, value of policy benefits on behalf of an insurer, or to settle

claims on behalf of the insurer.

A standardised activity-based remuneration model and reporting format is highlighted in the

Binder Regulations. The requirement is that the agreed fees paid to intermediaries for

performing various binder functions are recorded and reported to the Registrar. The aim of this

is to enable comparability and facilitate the monitoring of binder fees to ensure that fees are

reasonably commensurate with the actual costs of performing the functions.

The binder fees may be expressed as a percentage of the gross premium, a fixed Rand

amount, or an alternative measure, under the stipulation that the binder fee is commensurate

with the actual costs of the intermediary associated with rendering the service under the binder

agreement, with the allowance for a reasonable rate of return for the binder holder.

4.1.7. Outsourcing Directive

The Outsourcing Directive under Sections 4(4) of the LTIA and STIA has clear implications for

the manner in which the activities are outsourced and remunerated in the Bancassurance

40

model. When outsourcing activity, any conflicts of interests must be removed to ensure that

customer outcomes are not compromised. This Directive applies to all aspects of the insurance

business of insurers that are or may not be outsourced to another person, but does not apply

to intermediary services. The Directive also provides guidance on the applicable remuneration

for outsourced activities.

An overarching remuneration guideline is that the fee payable must be reasonable and

commensurate with the actual activity or function outsourced. This is akin to the

regulatory guidelines applicable to the activities performed under a binder agreement.

The outsourced activity and the respective remuneration must not result in any activity

or function being remunerated more than once. Moreover, the remuneration must not

be structured in a manner that may increase the risk of unfair treatment of

policyholders and not be linked to the monetary value of insurance claims repudiated,

paid, not paid or partially paid.

4.1.8. The Banks Act

The Banks Act (1990) provides guidelines for the regulation and supervision of the business of

public companies that take deposits from the public. With reference to the vertically integrated

Bancassurance model, guidance is provided around the shareholding in, and registration of

controlling companies. In addition, prudential requirements and provisions relating to aspects

of the conduct of the business of a bank are presented.24

Prudential requirements outlined in

the Act cover: I) Minimum share capital and unimpaired reserve funds; II) minimum capital and

reserve funds in respect of a banking group; and III) minimum liquid assets. Restrictions

imposed on the conduct of bank included in the Act are: i) Restrictions on investments in

immovable property and shares and on loans and advances to certain subsidiaries; ii)

restriction on investments with, and loans and advances to, certain associates; and iii)

undesirable practices such as holding shares in any company of which the bank is a

subsidiary.

One pertinent limitation placed on banks that has a direct implication on the vertically

integrated Bancassurance model is that a bank, without prior written approval by the Registrar,

may not own or acquire or hold shares in an registered long term insurer or in any short term

insurer25

to the extent to which the nominal value of the share exceeds 49% of the nominal

value of all the issued shares of such long term or short term insurer. Banks that have such

shareholding in place at present have done so under approval from the regulator.

The Banks Amendment Act, No 22 of 2013 came into force on 10 December 2013, and

amends the Banks Act (No 94 of 1990) in some substantial respects. The primary aim is to

transition the South African banking regulation in line with the latest recommendations of the

Basel Committee of Banking Supervision (Basel III). Specifically, the Amendment Act deals

with the new capital requirements and classes of share capital required to be in issue by

banks, as per Basel III. Given the realisation that the concept of bonus payments to bank

officials can lead to the proliferation of conflicts of interest, the Amendment Act outlines a

statutory requirement for banks to have remuneration committees which are independent of

executive directors. What this means is that dividends will need to be determined

independently and that incentives to encourage detrimental risk taking which undermine

customer outcomes will need to be mitigated.

24

The Banks Act, 1990 (Including all amendments up to and including, the Banks Amendment Act, 2007) 25

As defined Long Term Insurance Act, (Act 52 of 1998) and the Short Term Insurance Act, 1998 (Act No. 53 of 1998)

41

In summary, the Banks Act provides comprehensive prudential guidance on the activities of

banks and sets well-articulated standards on the manner in which the shares and other equity

interests in the model are apportioned.

4.2. UPCOMING REGULATORY REQUIREMENTS

In addition to the range of regulatory requirements that are already in place to govern the

provision of insurance and investment products and the provision of financial services and

advice, further regulatory requirements are expected through Treating Customers Fairly (TCF),

Solvency Assessment and Management (SAM) as well as the outcomes of the FSDB‟s Retail

Distribution Review (RDR) and Review of Third Party Cell Captives and Similar Arrangements

and the National Treasury‟s Technical Review of Consumer Credit Insurance.

4.2.1. Treating Customers Fairly

TCF is a regulatory approach that seeks to ensure that focused and well-articulated fairness

outcomes for financial service customers are delivered by regulated financial institutions. TCF

is centered on achieving fair customer outcomes from the inceptions stage of the product life

cycle, through to sales, service and customer management. When implemented, it will serve

as the framework for the regulation and supervision of market conduct. TCF sets out six

overarching fairness outcomes that all financial services providers need to demonstrate

through their conduct, governance and operation, all of which are relevant to the

Bancassurance model:

Outcome 1: Customers are confident that they are dealing with firms where the fair

treatment of customers is central to the culture of the firm.

Outcome 2: Products and services marketed and sold in the retail market are designed

to meet the needs of the identified customer groups and are targeted accordingly.

Outcome 3: Customers are given clear information and are kept appropriately

informed before, during and after the time of contracting.

Outcome 4: Where customers are given advice, the advice is suitable and takes

account of their circumstances.

Outcome 5: Customers are provided with products that perform as firms have

portrayed it, and the associated service is both of an acceptable standard and deliver

according to the expectations of customers.

Outcome 6: Customers do not face unreasonable post-sale barriers to switch product

or service providers, submit a claim or report a complaint.

TCF is expected to fundamentally change the nature of accountability in the provision of

financial advice through holding product suppliers accountable for their and their

intermediaries‟ treatment of customers at all times. Going forward, TCF is expected to be a

blue print for broader supervision of consumer outcomes across all levels of an organisation. In

other words, as Twin Peaks provides for the supervision of financial conglomerates TCF will

provide a framework for conduct conglomerate conduct supervision. This level of supervision is

expected to apply to all conglomerates, including Bancassurers and will ultimately seek to test

whether observed customer outcomes, both good and bad, arise specifically from the broader

structure of the entire conglomerate.

42

4.2.2. Solvency Assessment and Management

Four years ago the FSB initiated the Solvency Assessment and Management (SAM) project to

establish a „Solvency II equivalent‟ risk-based supervisory approach for the prudential

regulation of South African long term and short term insurers. Phase 1, dating from 2011,

prescribed the interim measures for the valuation of assets and technical provisions and the

calculation of capital requirements for short term insurers. Phase 2 prescribes further interim

measures relating to governance and risk management, and to group supervision.

The minimum standards set out for governance and risk management in particular under Pillar

II will apply to the entire insurance sector, including insurer‟s incorporated into a

Bancassurance model. The implication for insurers incorporated within a Bancassurance

model is that they will be required to adopt and implement, as well as evidence, an effective

governance framework that enables prudent management and oversight of their insurance

business, in a manner which preserves and protects the interests of policyholders.

4.2.3. Review of Third Party Cell Captives Insurance and Similar Arrangements

In mid-2013 the FSB issued the findings of a review of third-party cell captive insurance and

similar arrangements conducted in 2012. The regulator‟s principal concern in doing so was that

certain aspects of third-party cell captive insurance business models, as well as business

models that approach third-party cell captive arrangements in nature (similar arrangements);

create risks for insurers, policyholders and effective supervision.

This discussion paper focuses on the existing regulatory framework and explores how this can

be enhanced to best achieve the objectives of insurance supervision. With specific reference

to the Bancassurance model, the definition of an affinity scheme closely resembles that of the

legal relationship between certain intermediaries and product suppliers in the model. To

expand on this, for an arrangement to qualify as an affinity scheme, an existing customer

relationship outside of the insurance relationship must be in place, and the risk cover must be

primarily provided to protect the reputation and brand of the primary business activity of the

cell owner (the intermediary). In addition, the intermediary associated with the affinity scheme

must be tied agent of the cell captive insurer.

It is noted that affinity scheme arrangements can be beneficial in terms of policyholder

protection since the shareholder (the intermediary) has the reputation of the primary business

to protect, and as such will ensure that policyholders are treated fairly. The report also

mentions that affinity schemes can allow for the delivery of efficient cost-effective solutions to

customers, and creates a conducive platform for innovation in product design, costing and

distribution. However for these benefits to be realised, certain conditions must be met:

There should be a clear and direct relationship between the sale of insurance and the

protection of the underlying brand.

There should also be an expectation in the customer‟s mind that they are not being

provided with independent advice in the purchase of the insurance. What this means

is that no illusion of the independence of advice must be created.

The exact nature of the relationship with the insurer and the remuneration

arrangements in place must be disclosed.

43

The non-mandated intermediary that forms part of an affinity scheme must be a

binder holder, and as a result, is subject to the restrictions that apply to a binder

holder with limited authority.

The precise implication on the Bancassurance model of this review of third-party cell captives

and other similar arrangements is currently unclear. Both are regarded by the regulator as

ownership models where there is a potential for conflict of interest to arise. The intention in

reviewing third party cell captive arrangements is to limit conflicts arising from a shareholding

between an intermediary and a product supplier; shareholding which entitles the intermediary

to a share of underwriting profits from performing certain services for the product supplier.

Where this is the case the cell owner has a shareholding relationship as well as a business

relationship with the insurer and the two are inextricably linked.26

As regulatory provisions

around third-party cell captive insurers are tightened the regulator is concerned that

intermediaries may attempt to derive additional profits through cross-ownership provisions.27

For these reasons, a review of broader ownership structures has been identified as a topic for

future regulatory review by the FSB, with particular focus on potential conflicts of interest.

Presumably this review would also account for the business relationship and (indirect)

shareholding relationship that exists between intermediaries and insurers in a Bancassurance

model.

4.2.4. Twin Peaks

Under the shift to a Twin Peaks model of financial sector supervision two regulators will be

established: i) a prudential regulator established within the South African Reserve Bank; and,

ii) a market conduct regulator which will be established from a restructured Financial Services

Board (FSB). The overarching aim of the proposed reforms is to enhance financial stability in

the market, enhance consumer protection and market conduct, expand access through

financial inclusion and combat financial crime. The prudential regulator will be responsible for

the prudential supervision of banks and insurers, including both micro and macro prudential

aspects. Specific tasks the prudential regulator will be given include maintaining and creating

an effective legal and regulatory environment, supervising registered or approved institutions,

proactively identifying and mitigating systemic problems as well as contributing to financial

policy objectives. On the other hand, the market conduct regulator will be tasked with

protecting customers of financial services and promoting confidence in the South African

financial system. This will entail promoting customers‟ financial awareness and literacy,

protecting and enhancing financial markets‟ efficiency and integrity, contributing to the policy

objective of financial stability and contributing to financial inclusion.

The market conduct regulator will rely on a mix of traditional supervisory tools, as well as more

innovative tools to fulfill its mandate. Traditional supervisory tools will include ad hoc site visits,

regular compliance reporting, ad hoc information requests, and reviews and analysis of

independent reports and other information, whereas new supervisory tools include „mystery

shopper‟ techniques, sourcing information from third parties (i.e.: intermediaries, suppliers, the

media, ombudsman schemes and customer bodies) and enhanced regulatory reporting.

The suitability of products marketed and sold to customers will also be covered as part of the

market conduct arm of twin peaks. Proposed interventions range from regulatory pre-approval

of financial products before they are launched, which is seen as the most intrusive intervention.

Other less intrusive measures considered is the disclosure of key product features. It is noted

26

FSB (2013) Review of Third Party Cell Captive Insurance and Similar Arrangements 27

FSB (2014) Retail Distribution Review

44

that there are current product-design regulations governing the demarcation between health

and medical schemes, collective investment schemes mandate approval requirements, early

termination charge levels in long term insurance investments, and insurance commission

regulations.

Both the market conduct and the prudential peaks of Twin Peaks will be relevant for vertically

integrated Bancassurers in the industry. Perhaps more important however is the ultimate

framework adopted for conglomerate supervision – a framework which is expected to address

many of the issues have been raised in relation to conflicts of interest, ownership interests and

customer outcomes from complex ownership structures such as Bancassurance.

4.2.5. Technical Review of Consumer Credit Insurance

The National Treasury and the FSB initiated a review of business practices in the Consumer

Credit Insurance (CCI) sector in South Africa. The review was conducted against the backdrop

of increasing concerns about poor market practices and fair market outcomes especially

among the low income customer segment from the purchase of CCI products.

One of the fundamental concerns that the regulator has with the sale of CCI products, and one

which is especially relevant for Bancassurance, is that it is sold on a linked basis, meaning that

the insurance product is sold together with another banking product, in this case credit.

Products sold on a linked basis, according to the regulator, reduce competition at the point of

sale, tend to be opaque for customers, expensive and make price comparisons of the total cost

of credit difficult. The interconnected value chain associated with the sale of insurance and

credit products by entities within the same group affiliated with one another also contributes to

a lack of competition in the market according to the regulator. The combined effect of these is

that the value proposition of CCI is called into question by the regulator, particularly where CCI

is ancillary the customers‟ primary aim of obtaining an asset through credit.

To address this, proposals have been made to:28

De-link the insurance and credit offerings and require credit providers to explicitly offer

a „panel‟ of at three CCI cover providers, with clear disclosure of the differences

between the options to enable an informed decision.

Apply a sufficiently intrusive conglomerate supervision approach to the market conduct

supervision of financial services groups offering both credit and CCI – that would apply

TCF at an enterprise-wide level, with the group as a whole required to demonstrate

that the entire linked product offering delivers TCF outcomes.

Require entities providing advice to consumers in relation to credit to be subject to

appropriate elements of the FAIS Act. Currently, advice and intermediary services in

relation to CCI are subject to FAIS, but advice in relation to credit is not. In view of the

linked nature of the credit and CCI offering, this gives rise to anomalies.

The CCI report has particular relevance to the sale of linked products in the Bancassurance

model, where insurance cover is mandatory requirement as part of the credit extension for

certain products. According to the regulator Bancassurance products are very similar to CCI

where combinations of different types of financial products offered by different product

28

National Treasury & FSB (2014) Technical Report on the Consumer Credit Insurance Market in South Africa

45

suppliers (who may or may not form part of the same group) are marketed as a combined

offering.29

4.2.6. Retail Distribution Review

In spite of the range of regulations, codes and guidelines put in place to govern the conduct of

intermediaries and product suppliers (whether investment or insurance products), the FSB has

identified a range of lingering concerns related to poor customer outcomes and mis-selling of

financial products. These concerns prompted a review of intermediary services and related

remuneration in 2011, a process which culminated in the release of the Retail Distribution

Review (RDR) at the end of 2014. This paper put forward for consultation a number of

proposals that would collectively change incentives, relationships and business models in the

market in a way that supports the following customer outcomes:

Delivery of suitable products for financial customers;

Provision of fair access to suitable advice;

Improvements to the disclosure and comparability of intermediary services;

Higher standards of professionalism in advice and intermediary services; and,

Promotion of fair competition for advice and intermediary services.

In proposing structural changes to the distribution of retail financial products, RDR places a lot

of emphasis on so-called complex distribution models. These models, according to the FSB:

“run the risk of being opaque to customers and introducing conflicts of interest and layers of

cost into the distribution of [financial] products”.30

They are also seen as creating scope for

regulatory arbitrage by enabling entities to operate in multiple capacities, creating the risk of

significant consumer confusion regarding the extent and status of services provided, and

enabling product suppliers or intermediaries to structure relationships in such a way that they

escape regulatory requirements.

Bancassurance is among the complex distribution models identified in the RDR paper. Though

little clarity was provided on the extent of the regulator‟s concerns with the Bancassurance

model, they seem to stem from two sources:

The provision of linked product offerings where combinations of different types of

financial products offered by different product suppliers (who may or may not form part

of the same group) are marketed as a combined offering run the risk of being opaque

to customers and introducing conflicts of interest and layers of cost into the distribution

of products sold.

Where there may be an adviser business (described as an „independent intermediary‟)

in the same group as an insurer or other product supplier, an inherent conflict of

interest arises because of the various indirect incentives that may be in place to direct

business towards the product supplier/s in the group.

Reading through the RDR paper, therefore, the principal concerns with the Bancassurance

model can be summarised as: opaqueness, conflict of interest, and layers of cost. These

29

FSB (2014) Retail Distribution Review 2014 30

FSB (2014) Retail Distribution Review 2014

46

issues, are suggested to pervade numerous parts of the model, including: the structuring and

disclosure of advice, management of leads provided to intermediaries as well as the ownership

of intermediaries and product suppliers within the same corporate structure. A review of

international literature suggests that in general regulators view the potential for such concerns

to be greatest where the bank owns the insurer. This is the model that is most prevalent in

South Africa; where a bank or a bank holding company owns both the manufacturing and

underwriting capability (in a separate legal entity registered as an insurer or as a financial

services provider) as well as the distribution capacity (in a separate legal entity that is

registered as a juristic representative and which acts as an intermediary).

There are several proposals that have direct implications on the Bancassurance model:

The structuring of advisory models (IFA, tied or multi-tied) and the disclosure of advice

has been flagged as an area of concern (Proposal K). The primary focus is on the

criteria used to determine the different types of relationships between the product

suppliers and financial advisors.

The current juristic representative model is often used to enable the same legal entity

to provide advice or other services in varying capacities. What this means is that the

same legal entity can operate as a FAIS licensed FSP in its own capacity, as a juristic

representative of another FSP and as a product suppliers. In light of this, RDR notes

that “Juristic representatives” will be disallowed from providing financial advice

(Proposal W). The regulator perceives these multi-layered roles and responsibilities

and proposes that the juristic representative structure in providing advice should be

disallowed. The ultimate outcome of this is to abolish the concept of providing advice

in the capacity of a “representative of a representative.”

Specific conduct standards will be set for forms of referrals and leads that are deemed

to be a form of financial intermediation (Proposal I). These standards range from

disclosure of and limitations on the nature and source of remuneration derived by the

lead product supplier, to measures that ensure customer consent and the protection of

customer information. Since the operation of the Bancassurance model centres on the

bank‟s database and the transferal of leads to intermediaries, this proposal is of direct

relevance to the model.

General product supplier responsibilities will be set in relation to receiving and

providing customer related data (Proposal FF). This is premised on setting conduct

standards to clarify products supplier responsibilities in relation to ensuring ongoing

access to and monitoring of customer related data held by intermediaries. The

overarching aim is to ensure that the TCF objectives and customer outcomes are not

undermined as a result of inadequate product supplier responsibility in this regard.

Moreover, standards will be set to guide the appropriate level of information

transferred from products supplier to intermediaries, when authorised to do so by

customers.

Conducts standards will be set in relation to remuneration for referrals, leads and

product aggregation services (Proposal XX). The regulator‟s aim is to set adequate

conduct standards to diminish the perceived conflicts of interests inherent in the

provision of varying forms of leads and referrals between product supplier and

intermediaries. Since the management of leads between the bank and the

intermediary is a key part of the Bancassurance value proposition, this proposal too is

directly relevant to Bancassurance.

47

The regulator has noted that certain ownership structures may lead to the proliferation

of conflicts of interests and although various proposals in RDR relate to addressing

conflicts of interests, a review has been prompted to assess how certain ownership

structures perpetuate these conflicts (Proposal GG).

The regulator has pointed out that no financial interests may be provided by product

suppliers to intermediaries unless specifically provided for in the regulatory framework

(Proposal CCC). In other words, any form of remuneration, incentive or any other

financial interest is prohibited unless there is strict allowance for such payment in the

current legislation.

Read together, these proposals would entail extensive, and potentially detrimental, impacts on

the structure of the Bancassurance model in place at present. Before describing this impact

however it is useful to identify how the regulations surveyed in this Section apply to the

Bancassurance model.

4.3. REGULATION AND THE BANCASSURANCE VALUE CHAIN

Irrespective of underlying ownership structure, all Bancassurance models in South Africa share

a similar operating model that incorporates: manufacturing, distribution, fulfillment (sales and

service) and customer management:

Manufacturing encompasses all functions performed by the integrated product

supplier in the process of developing insurance and investment products for sale to

customers through intermediaries.

Distribution is the intermediated part of the model and encompasses channels used

by product suppliers to sell insurance and investment products to the bank‟s

customers. These channels include bank branches, call centres (both internal to the

bank or insurer and third party external ones), online channels (specific online portals

set up by the integrated insurer or the bank‟s internet banking platform), as well as

advisers working on a tied and/or open-architecture basis.

Fulfillment (also known as sales and servicing) marks the conclusion of the sales

process and the beginning of the ongoing process of servicing and maintaining

customer policies, as well as administrating policyholder claims and benefits.

Fulfillment can be conducted by either the intermediary or the product supplier.

Finally, customer management is the last component of the Bancassurance value

chain. By and large it is a background function conducted by the integrated product

supplier to manage the debtors‟ book and the relationship with the bank‟s customer.

These four components of the model are depicted in the Figure below alongside a view of

where the existing regulation and proposed reforms discussed in the previous Section impact

the operating model or value chain.

48

Figure 8: Locating current and anticipated regulation across the Bancassurance model

Source: Genesis Analytics Team Analysis 2015

As shown, there is already extensive regulation in place that covers the Bancassurance value

chain. A number of key parts of the value chain are subject to additional reform. These include:

Product design and pricing is currently governed at a high-level by the STIA and

LTIA but also by certain requirements contained in the CPA. Product standards and

remuneration structures proposed in Twin Peaks, TCF and RDR (and the CCI review)

are expected to affect the pricing and design of insurance and investment product in

the near future.

Lead generation and database management is currently governed by both the CPA

and POPI as well as by customer treatment provisions contained in the LTIA, STIA

and FAIS. Twin Peaks, TCF and RDR however are expected to introduce additional

standards on the use of customer data within a Bancassurance model.

Sales type, or the way in which products are allocated to sales channels is currently

implicitly covered under FAIS, the STIA and the LTIA. RDR and, to a lesser degree,

Twin Peaks and TCF, however, have questioned the adequacy of specific sales types

within a Bancassurance, or more generally, a vertically integrated structure.

The intermediary sales process itself – the channel used to provide customers

access to financial products is currently governed by conduct provisions contained in

the LTIA, STIA and FAIS Acts. The status of intermediary channels, particularly

advisory channels and non-advice execution channels are being reviewed by RDR

CPA

FAIS

POPI

LTIA / STIA

Binder Regulations and Outsourcing Directive

TCF / Twin Peaks / The Banks Act

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49

with a view to ensuring better customer outcomes as proposed by Twin Peaks and

TCF.

In addition to specific parts of the value chain that are affected, there are other

broader, structural arrangements within the model that are covered by existing

regulation. Remuneration structures for example are governed in terms of the

requirements of the LTIA, STIA as well as FAIS Conflicts of Interest provisions. The

appropriateness of remuneration for providing intermediary services as well as

services to product suppliers within a Bancassurance structure in terms of Binder

Regulations and Outsourcing Directive are also being reviewed through a combination

for regulatory reviews; including RDR, the review of Third Party Cell Captives and the

Technical Review of CCI.

There are also current and upcoming regulatory measures, in the form of the Banks Act and

Twin Peaks respectively, to monitor and mitigate prudential risks associated with the model.

In particular, The Banks Act provides guidance in terms of minimum capital and reserve funds

as well as minimum liquid assets in respect of a banking group. There are also provisions in

the Act which govern undesirable shareholding practices. The upcoming supervision model in

Twin Peaks, aimed at financial conglomerate supervision, will focus on capital relationships

between parts of groups as well as conflicts of interest and flows of incentives that drive

customer outcomes. In other words, the supervisory model will encompass both conglomerate

prudential supervision as well as conglomerate market conduct supervision of holding entities.

50

5. REGULATORY CONCERNS WITH THE

BANCASSURANCE MODEL

The previous Section highlighted how Bancassurance is already subject to much regulation

across the value chain. Recent regulatory reforms, however, have indirectly suggested a need

for additional regulation to address perceived weaknesses inherent in the model and in

complex ownership structures in general. These weaknesses include the potential for conflicts

of interest to arise, the opaqueness of ownership arrangements to customers and the potential

high costs of integration that filter down to customers.

This Section will argue that the level of regulation that is currently applied to each part of the

value chain is sufficient to ensuring appropriate customer outcomes. In addition, where

regulatory requirements do not apply, sufficient competitive pressures are applied to parts of

the value chain (like product provision) to ensure appropriate customer outcomes.

Overarching summary

The tables below summarise three apparent regulatory issues with the vertically integrated

Bancassurance model. For each concern three pertinent issues are addressed: i) high-level

regulatory concerns; ii) the Bancassurance rationale; and, iii) the current and proposed

regulatory treatment. Finally, key findings and recommendations are drawn out relating to the

anticipated regulation treatment of vertically integrated Bancassurance models in South Africa.

Linking of bank and insurance products

High-level concerns Bancassurance rationale Regulatory treatment

- Opacity in the sale of linked products and the total cost of credit

- Conflicts of interests and layers of costs into the distribution of insurance products

- Group policies are opaque and do not offer customers freedom of choice

- Linked products are simple products that do not require a financial needs analysis to be undertaken to establish appropriateness

- Where products are linked to the sale of core bank products, the option of ceding an existing policy is fully disclosed to customers

- Basic funeral cover is offered as a value added feature to a transactional account which customers can opt-out of in certain circumstances

Current

- Section 106 of the NCA entitles credit providers to insist on insurance cover as a precondition for granting credit

- Section 13 of the Consumer Protection Act provides for competition in the sale of credit products and the possibility that customers may cede their own policy

Proposed

- CCI – Regulating market conduct activities such as requiring credit providers to offer a panel of insurance providers

- CCI – Regulating the pricing or placing a limit on the total cost of credit

- CCI – Protecting customers through insurance cover for credit providers

Key findings and recommendations:

Where insurance products are linked to the sale of core bank products, the CPA and NCA provide

sufficient customer protection and disclosure guidelines. More broadly, market conduct regulation,

as outlined in the National Treasury‟s Review of the Consumer Credit Insurance Market, is not

exclusive to the activities of vertically integrated Bancassurers.

In the vertically integrated Bancassurance model, the sale of simple products such as credit life and

funeral cover typically entails an exclusive relationship whereby customers are only sold the

products of the bank‟s integrated product supplier. For relatively simplistic products, offering the

products of more than one product supplier will not necessarily enhance the level of

51

competitiveness and pricing in the presence of capped fees. Whereas in theory, there will be some

element of competition between both integrated and independent product suppliers by charging

rates below the capped amounts, the National Treasury‟s review suggests that most product

suppliers will simply adopt the maximum possible rate.

It would seem reasonable to permit vertically integrated Bancassurers to adopt a tied sales model

for the sale of these products, so long as no misperception of independence is portrayed and

customers are fully aware of the option to cede an existing policy.

Since the regulator aims to directly regulate the customer credit market including both market

conduct and maximum pricing and interest rates, as outlined in the National Treasury Review of the

Consumer Credit Market, vertically integrated Bancassurance models do not introduce any further

conflicts of interest.

Management of leads between the bank, intermediary and product supplier

High-level concerns Bancassurance rationale Regulatory treatment

- The transfer of leads has the potential to expose customers to inappropriate marketing tactics

- The provision and remuneration of referrals and leads and remuneration is not regulated under FAIS

- It would be a competitive concern if an integrated product supplier bares a lower cost than independent product suppliers for access to the bank‟s database

- Outbound leads are not channeled from the bank‟s database to integrated or independent product suppliers but to the integrated intermediary

- Outbound leads are subject to strict confidentiality restrictions and require obtaining customer consent

- Inbound leads are self-directed and are triggered from multiple sources – for which it would seem appropriate to offer only the product of an integrated supplier

- Lead providers are not compensated by product suppliers which mitigate conflicts of interests between the bank and the intermediary

Current

- Access to the customer database is managed in line with POPI guidelines

- FAIS also imposes a duty on intermediaries to act in the best interest of customers and not product suppliers

Proposed

- Disclosure obligations and limitations on the nature and the source of remuneration derived by the lead product provider will be set as a part of RDR (under Proposal I)

- A general responsibility will be set for product suppliers in relation to ensuring ongoing access to and monitoring of customer related data held by intermediaries (Proposal FF)

Key findings and recommendations:

POPI provides adequate protection for customers to opt out of direct marketing and solicitation by

intermediaries of the bank and hence safeguards the information and identity of bank customers.

Where the bank transfers outbound leads to its integrated intermediary for the sale of tied products,

and the customer is informed of the limitation it would seem that no further conflict of interest arises.

A competition issue could arise if integrated product suppliers were charged a lower fee for

accessing the bank‟s „leads engine‟ than non-integrated product suppliers. If this were the case,

integrated product suppliers would have a price advantage over non-integrated suppliers –

which, by making them more competitive, could allow them to „win‟ a greater share of business

from integrated intermediaries. The flow of revenue in the model however precludes such a conflict.

In the first place, the integrated intermediary is not charged for leads by the bank. It has however a

profit-share agreement with the bank that compensates the bank for providing the intermediary

access to its customers. Critically, this revenue is not passed onto the integrated product supplier by

the bank. The integrated product supplier meanwhile still has to compensate the intermediary for

services rendered in the same way a non-integrated intermediary would. This compensation arises

in the form of regulated commission or regulated fees for providing certain binder functions or

outsourced services. In other words the intermediary‟s source of revenue is from product suppliers,

whether these are integrated or not, and not from the bank.

52

Relationships between product suppliers and intermediaries

High-level concerns Bancassurance Rationale Regulatory treatment

- The status of advice and the disclosure of intermediary services to customers at the point of sale is perceived to be inadequate

- Ownership structures are seen to propagate conflicts of interests, where the distribution of profits to the bank and the payment from integrated product suppliers to the intermediary is seen to be a source of conflict

- The Bancassurance model is premised on exclusive arrangements between product suppliers and the bank for access to the bank‟s intermediary entities or channels and its customers

- All integrated intermediaries are fully licensed FSPs and share the branding of the parent brand or group holding

- Both integrated and independent product suppliers remunerate intermediaries for the provision of binder activities and intermediary services in as per FAIS guidelines

- Profits or losses generated from distribution by the integrated intermediary or from manufacturing from integrated product suppliers are passed onto the parent bank or holding company as a compensation for access to the bank‟s customers and brand

Current

- A General Code of Conduct for AFSPs is outlined in FAIS which governs the capacity in which representatives act

- The remuneration of independent intermediaries for providing services to customers is governed by the provisions of the LTIA and STIA respectively

- Remuneration for providing services to product suppliers is extensively governed in the Binder Regulations and Outsourcing Directive

- The Bank‟s Amendment Act sets a statutory requirement for banks to have remuneration committees which are independent of executive directors to govern the transferal of preference share dividends and profit shares

Proposed

- Types of advisors defined: Independent (IFA), multi-tied or tied (Proposal K in RDR)

- Standards for juristic intermediaries (X in RDR)

- Reviewing how ownership structures perpetuate conflicts of interest (GG in RDR)

- Restrictions of financial interest provided by product suppliers to intermediaries unless specifically provided for in the regulatory framework (CCC in RDR)

- Setting remuneration guidelines for the sales and servicing of investment, life risk, short term insurance policies (MM, NN and UU in RDR)

- Setting standards for remuneration arrangements between advisor firms and their individual advisors (SS in RDR)

Key Findings and recommendations:

There are extensive regulatory measures in place to govern the disclosure of the status in which

adviser businesses act. These disclosures are taken seriously by intermediaries and subject to

internal audit and compliance checks – which can be accessed by the regulator.

Where products are sold on a tied basis and there is no pretense of independence, the transfer of

manufacturing or distribution profits between the integrated intermediary or product supplier to the

bank are by nature not conflicted. Strict application of Proposal CCC would therefore restrict the

commercial viability of the Bancassurance model for the sale of certain products. Consideration

should instead be given to a fee provision between integrated product suppliers and integrated

intermediaries for access to the bank‟s database and brand and for using bank infrastructure.

Where products are sold through multi-tied or independent intermediaries the problem is different.

Here the shift from commission to customer-agreed advice fees impacts both vertically integrated

intermediaries as it does independent intermediaries. The key difference is that in a vertically

integrated Bancassurance model, the integrated product provider still has to transfer a proportion of

underwriting profits to the parent or group holding, This transfer of revenue ensures that the

integrated provider does not have a pricing advantage over independent product suppliers

Structural separation of intermediary businesses to reflect the three kinds of advice proposed would

not improve customer outcomes any more than the current range of existing regulatory

requirements around disclosure, independence and conflict of interest. Existing conflict of interest

requirements already insulate the remuneration of intermediaries from product suppliers as well as

from the transfer of distribution manufacturing profits to the principal in a Bancassurance model.

53

5.1. THE INSUFFICIENCY OF EXISTING REGULATION

Section 4 identified that extensive legislation and regulation is already in place to govern the

manufacturing and distribution of insurance and investment products in a Bancassurance

model. It also documented what regulatory developments are upcoming and likely to affect the

model. The regulator has however indicated that these measures may not be sufficient to deal

with conflicts of interest arising in more complex ownership structures.

As the Box below shows, the three reviews initiated by the FSB all argue that ownership or

similar relationships between intermediaries and product suppliers (as would exist in a

Bancassurance model) compromise customers‟ ability to assess the status of advice and

introduce conflicts that could bring bias in the advice provided to customers. The reviews also

imply that this conflict – which is seen to arise from ownership interests or relationships – is

distinct from the conflict that arises from the remuneration of intermediaries by product

suppliers. In other words, there is a concern that the upcoming provisions governing

intermediary services and related remuneration may not be enough to address all possible

conflicts of interest, and that those that may arise from complex ownership arrangements may

need special attention because ownership relationships and business relationships are

inextricably linked. The regulator has articulated that even if the mechanistic proposals

suggested in RDR and CCI are implemented, they would not capture the subtleties that can be

achieved when there is a group ownership arrangement in place.

Box 2: Convergence of regulatory focus on complex ownership structures

Review of Third-Party Cell Captive Insurance and Similar Arrangements (2013)

“Third-party cell captive arrangements and similar arrangements are generally designed as a means of

sharing profits arising from underwriting activities – as such, the principle of avoidance of conflicts of

interest by intermediaries must be similarly observed. It is also recognised that there are broader

ownership structures that may give rise to conflicts of interest. As regulatory provisions around third-party

cell captive insurers are tightened, there is the risk that intermediaries may attempt to derive additional

profits through cross-ownership provisions. For these reasons, a review of broader ownership structures

has been identified as a topic for future regulatory review by the FSB, with particular focus on potential

conflicts of interest.”

Technical Report on the Consumer Credit Insurance Market in South Africa (2014)

“The FSB has commenced a holistic review of distribution practices in respect of financial services

products, including the respective legal responsibilities and relationships between different types of

financial advisers, other intermediaries and product suppliers, as well as intermediary remuneration

practices. In addition to traditional direct and intermediated distribution models, the review will focus on

models using group schemes, cell captives, “cell captive like structures” and ownership relationships

between manufacturers and distributors.”

Retail Distribution Review (2014)

“Proposal GG: Ownership structures to be reviewed to assess conflicts of interest. Although the various

proposals in this RDR relating to the relationships between product suppliers and intermediaries are

aimed at reducing conflicts in these relationships, certain ownership structures may nonetheless

perpetuate conflicts. The FSB will fast-track engagement on these issues to understand how ownership

structures may compromise customers‟ ability to assess the status of advice and whether any additional

prohibitions or controls are required to further mitigate any potential advice bias.”

54

5.2. SPECIFIC CONCERNS WITH BANCASSURANCE

While it is clear the regulator is concerned with complex ownership models, it is unclear what

specific concerns relate to the integration of product suppliers, a bank and intermediaries as in

a Bancassurance model. Of the three reviews RDR is perhaps the most explicit in this regard.

It broadly argues that complex ownership models are opaque to customers, introduce conflicts

of interest and layers of cost into the distribution of products, create scope for regulatory

arbitrage by enabling entities to operate in multiple capacities and create significant consumer

confusion regarding the extent and status of services provided. While these concerns are

general, they can apply to a Bancassurance model where there is vertical integration between

a bank, an insurer or other product supplier.

The RDR paper also describes two other, more specific, concerns with Bancassurance: i) the

linking of the sale of products by different suppliers that form part of the same group; and, ii)

the ownership of intermediaries (specifically adviser businesses), in the same group as an

insurer or other product supplier. Both these features of Bancassurance models are seen to be

opaque to customers, conflicted and introduce layers of cost into the distribution of products.

Because it is an integral part of the Bancassurance model, a third concern is relevant. This

relates to the management of leads between the bank, the insurer and the intermediary – a

process which the regulator interprets as a form of financial intermediation with potential to

expose customers to conflict or inappropriate marketing tactics.

The next part describes these concerns in more detail in reference to the model.

5.3. LOCATING CONCERNS ON THE MODEL

It is important to reiterate that Bancassurance is at its core a sales technique. There is nothing

intrinsic within the term that necessarily implies linkage in ownership terms between a bank

and an insurer or between a bank and another product supplier. Almost always the bank and

the insurer will be different legal entities. Sometimes the bank will own the insurer and, rarely,

the insurer may own a bank. In other cases there is no ownership relation at all, and the bank

and the insurer simply agree to a commercial partnership. The prevailing model in South Africa

is for a bank, or bank holding company, to own an insurer, either directly or indirectly through

group holding relationships. While the two entities share a common group owner, the bank and

the insurer are completely separate legal entities.

The typical relationship between the bank (or bank holding company), the product supplier and

an intermediary integrated into a Bancassurance model is depicted below. Also shown are the

most important flows of revenue arising from the provision of services between these three

entities. Note that these flows exclude flows arising from ownership interests that may exist

between product suppliers and the bank, or bank holding company in some cases. Shown

against these relationships are the three concerns identified above.

55

Figure 9: Regulatory concerns and the Bancassurance model

As the Figure shows, the operation of the Bancassurance model is governed by a number of

key agreements: i) between the bank and an insurer or other product supplier to sell products

into the bank‟s customer base; ii) between the bank and an intermediary (or intermediaries) to

provide intermediary services; and, iii) between a product supplier and an intermediary to

perform services covered by binder and/or outsourcing agreements. Key aspects include:

I. The arrangement between the bank and the product supplier can be exclusive or

competitive, depending on the product sold. For the sale of simple products (like credit

life, funeral cover, home owners cover, wills or basic investment products) the

arrangement is generally exclusive and the bank‟s customers are only sold products

from the bank‟s integrated product supplier. For more complex products (typically life

and investment) the bank forms relationships with multiple product suppliers to offer its

customers greater choice. As part of this agreement the bank receives a share of the

manufacturing or underwriting profits/losses made by the integrated product supplier.

This flow of income can take the shape of a preference share, dividend or annual

distribution of cash from the product supplier to the bank or holding company. This

flow of revenue is separate from the ownership interest the bank may derive from

owning the product supplier through a group structure relationship. The typical share

of manufacturing or underwriting profits the bank receives is calculated on an

allocation of activities between the bank and integrated product supplier. So where the

bulk of manufacturing capability vests within the product supplier, for example, the

bank‟s profit share is limited. Where the bank plays a bigger part in the product

development process, the reverse may be true. Critically the bank does not receive a

share of manufacturing or underwriting profits from external product suppliers.

II. The arrangement between the bank and the intermediary is a second key part of the

model. Typical descriptions of Bancassurance assume the bank and the intermediary

Bank or Group

Product

Provider

Intermediary

Customer

− Servicing & outsourcing

− Administration

(intermediary services)

Products

Leads

Bancassurance

agreement

Intermediary

agreement

Product bundling

Leads management

Relationships

between providers

and intermediaries

Contractual agreements and commercial arrangements

Locus of regulatory concerns

Key:

Flows of income

56

are the same legal entity. This is not the case in South Africa. All intermediaries are

incorporated as separate legal entities and with separate AFSP licenses from their

parent bank or holding company. This arrangement allows the intermediary to act as a

service provider to the bank, to the integrated product supplier but also to any external

product supplier that the bank may partner with. In doing so the intermediary entity

treats the integrated product supplier no differently to any other product supplier. By

agreement with the bank the intermediary is allowed exclusive access to two key

assets; the bank‟s distribution network and its customer database. Granting the

intermediary this access entitles the bank to a share of the distribution profits made by

the intermediary entity. This distribution of profits occurs independently of products

sold by the intermediary (more on this later) and takes the shape of an annual transfer

of revenue/losses from the intermediary to the bank or holding company.

III. The third contractual arrangement is between the intermediary and the product

supplier. This agreement is no different in a Bancassurance model than what it is

between an unrelated intermediary and an unrelated or independent product supplier.

In other words the business relationship between the two entities is independent of

ownership ties – and the two entities work together to create and distribute products

that meet the needs of customers in the same way as would occur in a distribution-

only model. The intermediary‟s independence from the bank‟s integrated product

supplier is necessary to sustain partnerships with multiple, external product suppliers

and hence to offer the bank‟s customers choice for more complex products.

Remuneration in the current model is fairly straightforward. The intermediary collects

premiums from customers and passes these onto the product supplier responsible for

the sale (typically net of a commission for the sale of the product). The intermediary

can also receive compensation from the product supplier for performing binder

functions or certain outsourced services on behalf of the product supplier.

5.4. UNPACKING REGULATORY ISSUES

Having described the operation of the Bancassurance model in some more detail, this next

part discusses the three regulatory concerns as they apply to the model. For each concern the

discussion is structured to address four points:

The regulator‟s concern;

The rationale for the activity or feature within Bancassurance model;

The current or proposed regulatory treatment of that concern; and,

The relevance of the concern to a vertically integrated Bancassurance model.

As the last point suggests, the outcome of the discussion is to uncover whether the concern

that has been identified is truly unique to a Bancassurance model or whether the outcomes for

customers are unique to a vertically integrated structure. An analysis of this kind contributes to

the ongoing discussion between the regulator and the industry in two ways: i) in forming a

common understanding of certain observed outcomes in the Bancassurance model, and ii) in

suggesting a future approach to the regulation of Bancassurers.

57

5.4.1. Linking of bank products and insurance products

The concern

In reviewing the RDR paper and the review of consumer credit insurance, the regulator seems

deeply concerned about poor market practices and the customer outcomes arising from the

linking of insurance products with bank products especially to lower income (mass market and

middle market) customers. The main concerns that the regulator has identified with this

practice is that it is opaque to customers and that it introduces conflicts of interest and layers of

cost into the distribution of products to customers. The regulator has also highlighted a

concern with Group policies in which the bank is the policyholder and covers the risk of

customers on an „umbrella basis‟.

Rationale

Product linkages are created by linking the sale of an insurance product to a core banking

product and distributing these through a low advice or „features and benefits‟ sales model. The

simplistic nature of these insurance products enables Bancassurers to adopt this sales

process where facts and features relating to the product are presented to the customer

alongside a description of the standardised nature of the cover. In other words, customers

make a decision on the policy based solely on factual information provided by a representative

of the intermediary.

Products sold on a linked basis include home owners insurance (covering a fixed property from

the risk of structural damage), credit life insurance (covering mortgage, vehicle, credit card or

personal loan facility) and funeral cover. Linked products are sold through call centres

operated by the insurer31

, by third party call centres contracted to the insurer or in the bank by

qualifying staff. Leads for the sale of linked products do not arise for the insurance product but

for the bank product. These leads can arise from the branch infrastructure, from mortgage

originators, from the bank‟s internet banking website or from the bank‟s customer database.

The insurance component of linked products can be compulsory or voluntary. Section 106 of

the NCA entitles credit providers to insist on insurance cover as a pre-condition for granting

credit. Hence homeowners insurance is mandatory for customers that have a home loan and

credit life is mandatory for loans disbursed to lower income customers. In both cases, the

insurance policy facilitates the credit sale and, by ensuring that appropriate life or short term

cover is in place, reduces risks to the insurer and the insured.

Basic funeral cover is offered as a value-added addition to a transactional account, in the form

of a group scheme for all bank customers. Customers are notified of the cover, and in some

instances, may opt-out of the cover if, for example, this cover duplicates a similar policy

obtained from another, pre-existing product supplier.

Regulatory treatment

As the purchase of the insurance product is intrinsically linked to the purchase of the asset or

transactional account, the question is to ensure that customers are given the appropriate

choices (and can practically exercise that right to choice) with respect to the product supplier

and that there is „competition‟ between product suppliers during the sales process.

31

The insurer that is integrated into a Bancassurance model

58

The National Treasury‟s review of consumer credit insurance has already identified how

customers are „captive‟ at the point of sale of the banking product, regardless of whether the

insurance component is compulsory or voluntary. Where the customer is captive the integrated

insurer is seen to have a monopoly on the sale of insurance products at the point of sale. To

safeguard against this Section 13 of the CPA provides for competition on the sale of credit

products and the possibility that customers may cede their own policy. In practice that freedom

of choice is often not exercised for a variety of reasons, including: customer apathy, limited

financial literacy and inconsistent disclosure across the industry.

To create choice for customers at the point of sale and to increase competition between

product suppliers, the regulator has already put forward proposals to:

Require credit providers to explicitly offer a „panel‟ of insurance product suppliers;

Regulating the premium rate through a „band‟ of recommended reasonable risk

premium rates for different types of credit life insurance; and, to

Remove the provision in the LTIA for an additional maximum commission level of

22.5% for credit life insurance with administrative work so that the cap for all credit life

group schemes is reduced to 7.5%.

Whilst significant work has already been conducted to review the provision of credit insurance,

there is no evidence to suggest that the sale of linked funeral cover is being considered by

Government. As an important microinsurance product, discussions about customer outcomes

with funeral policies were included in the 2011 National Treasury Policy Document “The South

African Microinsurance Regulatory Framework” – since then no further mention of the linked

distribution of funeral cover by Bancassurers has been made. However as such products are

offered as „free‟ value addition to bank products, few regulatory concerns arise.

Relevance to vertically integrated Bancassurers

The introduction of a range of alternative product suppliers for the sale of credit insurance

would certainly increase customer choice but it may not necessarily improve competitiveness

in the presence of capped fees. As the Government is already planning to introduce direct

regulation of the consumer credit market, including the fees that may be charged, vertical

integration between the bank and the insurer does not introduce any conflict of interest as the

maximum rate charged and market conduct is defined in regulation. Whereas in theory

institutions (both those that are integrated and those are not) could compete to provide

insurance below this rate, the findings from the National Treasury‟s review suggest that most

product suppliers will simply adopt the maximum possible rate.

5.4.2. Management of leads between the bank, intermediary and insurer

The concern

Depending on the relationship between the lead provider, the intermediary, the product

supplier and the potential customer concerned, the regulator is concerned there is potential to

expose customers to conflicted or inappropriate marketing tactics.

Of concern the current FAIS regulatory framework does not regulate the provision of referrals

and leads or their remuneration, unless the relationship between the intermediary and the lead

provider is such that the remuneration would fall within the scope of the Conflicts of Interest

59

provisions contained in FAIS. Related to this the regulator is also concerned that the provision

of a customer‟s contact details to an intermediary or product supplier by another person (who

is not a regulated financial institution or intermediary) should not be treated as an intermediary

service, and hence should be governed by different standards and remunerated differently

than true intermediary functions.

Aside from the appropriateness of remuneration for lead providers, the matter is at its core a

competitive one. That is whether by virtue of being integrated with a bank, an integrated

product supplier bares a lower cost than an independent product supplier arising from sales

where a lead was obtained from the bank.

Rationale

The Bancassurance model is premised on providing an integrated insurer exclusive access to

the bank‟s customers – and hence the bank‟s customer database. Critically, leads arising from

the bank‟s customers are not channeled directly to the integrated product supplier. This would

not be in the interests of customers that demand greater choice and would also jeopardise any

relationship the bank has built-up with an external product supplier. Instead, leads are

channeled directly to the intermediary entity and its representatives.

The process of channeling leads to intermediaries occurs in a variety of ways. The critical

distinction to make from a customer treatment perspective is between inbound and outbound

leads. Outbound leads are passed from the bank to the intermediary based upon an identified

customer need. This process is managed on the principle of customer consent – and only if the

customer has expressed a preference to be contacted by the bank or its representatives the

lead is passed onto the intermediary. Inbound leads meanwhile are triggered from multiple

sources; from marketing campaigns initiated by the bank or the insurer, from branch staff that

have been approached directly by customers and from online channels set up by the insurer or

managed by third party aggregators. The various sources of leads and their channel of

destination are depicted below.

Figure 10: Channeling leads in a Bancassurance model

Website/

Aggregators

Branch

Marketing

Campaigns

Bank

Database

Bancassurance

intermediaries

External

call centre

Internal call

centre

Lead

sources

Sales

channels

Outbound

Inbound

Inbound

Inbound

60


The use of the customer database for outbound calls is strictly managed in terms of the

requirements of POPI. By opting-in to receiving communication from the bank, customers

therefore should reasonably expect to be contacted by one of the bank‟s intermediary entities

or representatives. When they do, it is reasonable to expect they will be offered only a bank-

branded product from the integrated product supplier. The presence of a regulatory

mechanism for customers to opt-out thus acts as a safeguard against aggressive outbound

selling by intermediaries and implicitly manages conflicts of interest through promoting a tied

sale.

The treatment of potential conflicts arising from inbound leads is different. FAIS imposes a duty

on the intermediary to act in the interest of the customer. Hence, upon receiving a lead the

intermediary has a duty to determine what products are suitable to the client‟s needs. Complex

needs will be channeled to intermediaries that are qualified to give advice; advice that will lead

to a recommendation across a choice of product suppliers, both integrated and independent.

Leads in relation to simpler needs will be channeled to lower advice channels like call centres

where the intermediary will offer the customer a policy or product manufactured by the

integrated insurer on a „features and benefits‟ basis.

A second potential conflict could arise from the remuneration structure of lead providers.

Because lead providers are not typically compensated directly by product suppliers, conflicts of

interest do not arise from the integration of the insurer and the bank. Conflicts could arise,

however, if the integrated product supplier was remunerated differently than external product

suppliers by virtue of operating in an integrated model. In other words, irrespective of the form

of charge by the product suppliers or its principal (whether fixed or volume based, or whether it

takes the shape of commission sharing or a cash payment), if the vertically integrated product

provider was charged a lower amount for access to the bank‟s „lead engine‟ then competition

issues could be raised by external/independent product suppliers. Here it is important to

highlight that under RDR any financial interest provided by product suppliers to the

intermediary as compensation for the sale would be ultimately be governed by the same

remuneration structure. Hence the structure of remuneration for the intermediary will be similar

irrespective of whether it channels the sale to an integrated insurer or an external product

supplier. The final leg of compensation is then to the bank. Here the commercial principle that

applies is that there should be some compensation to the bank from the intermediary

leveraging its asset. This compensation however flows to the bank on an annualized basis as

a share of distribution profits earned by the intermediary. In this way the remuneration of the

bank is not influenced by the conversion of the lead by the integrated insurer.

Relevance to vertically integrated Bancassurance

The bank receives appropriate compensation from the intermediary for the usage of its

customer database and its distribution network. This payment typically takes the shape of a

profit share payment to the bank by the intermediary. This flow of revenue is not passed onto

the integrated insurer – which still has to compensate the intermediary for services rendered in

the same way as an external product supplier would. Integrated product suppliers thus

compete on a level playing field as external product suppliers and the bank is compensated for

providing leads to its intermediary through a share of the intermediary‟s profit.

61

5.4.3. Relationships between product suppliers and intermediaries

The concern

In an effort to improve customers‟ understanding of the nature in which advice is provided the

regulator has proposed a series of structural changes to the nature and disclosure of

intermediary services. Furthermore, to mitigate any incentive that an intermediary (described

as an independent intermediary or an adviser business in RDR) in the same group as an

insurer or other product supplier may have to direct business towards the product suppliers in

the group, the regulator is also considering fundamental changes to the structure of

intermediary remuneration. There is also the concern that the current disclosure practices

adopted by vertically integrated Bancassurers do not adequately alert customers of the true

underwriter of the policy. The regulator has articulated that integrated intermediaries are

branded as independent but are exposed to commercial pressures by virtue of operating in the

same group such that they cannot operate independently and hence biases their advice.

Finally, the regulator is also concerned that conflicts of interests could arise as a result of the

profit share or other fees between legal entities. In other words, the regulators‟ view is that

Bancassurance arrangements have been established outside of cell captive structures, with

profit-sharing and preference share arrangements, which are not covered in the existing FAIS

framework. With this in mind, the regulator has alluded to the consideration of a fee provision,

between product suppliers and intermediaries, for access to the customer database, the bank‟s

brand and leveraging the banking infrastructure.

The relevant provisions in RDR include:

Concern RDR proposal RDR proposal

Customers are unsure of the nature in which an adviser business acts

Proposal K Types of adviser defined: Independent (IFA), multi-tied or tied

Proposal X Standards for juristic intermediaries

Adviser businesses have an incentive to place business with their own product supplier

Proposal CCC No financial interest may be provided by product suppliers to intermediaries unless specifically provided for in the regulatory framework

Proposal MM Remuneration for selling and servicing investment products

Proposal NN Remuneration for selling and servicing life risk policies

Proposal UU Remuneration of selling and servicing short term insurance policies

Proposal SS Standards for remuneration arrangements between adviser firms and their individual advisers

Read together, it would seem that these proposals could compromise the structure of the

Bancassurance model. Proposals K, X and SS in particular could drive a separation within

existing adviser businesses that currently sell either life insurance and investment or short term

insurance products through a combination of tied and open-architecture representatives

incorporated into the same structure. Proposals CCC, MM, NN and UU changing the

remuneration of intermediaries meanwhile are proposed in reference to conflicts of interest

which are not unique to vertically integrated adviser businesses and which does not

adequately consider the independence of remuneration for activities from compensation to

principals in a Bancassurance model. In particular, if implemented in its most severe form,

62

Proposal CCC would compromise such transfers and hence the commercial viability of the

Bancassurance model, even in its tied form.

Rationale

All Bancassurers in South Africa operate through incorporated advisory businesses. The

prevailing model is to have two such intermediary entities; one licensed to sell short term

insurance products, and another to sell life insurance and investment products. Both are

licensed FSPs in their own right and share the branding of their parent bank or holding

company. Their representatives operate out of bank channels; principally branches or call

centres, and act in different capacities depending on the product they provide. „Tied‟ bank

representatives for example principally serve the retail market where customer needs are

simple enough that they can be suitably met by a product of the integrated product supplier.

Where customer needs are more complex, among retail affluent or private client customers, for

example, the intermediaries operate on an open architecture model that gives bank customers

access to a choice of alternative suppliers.

Representatives (and the intermediary entity) are currently remunerated from product suppliers

for the provision of intermediary services as well as for performing certain binder or outsourced

functions. The structure and level of this remuneration is already regulated (discussed below).

As described earlier, a portion of the total profit (or loss) that the advisory business then earns

at the end of each year is then transferred to the parent bank or holding company – under the

terms of a Bancassurance agreement between the two entities. This arrangement effectively

transfers distribution revenue from the sale of all products offered by the advisory business;

i.e.: including revenue from the integrated product suppler and external product suppliers. In its

most basic form, what the advisory business earns from the activities it conducts (whether

providing intermediary services or binder and outsourcing functions) is paid back to its

principal. By virtue of this agreement, most advisory businesses in a Bancassurance model

tend to be break-even businesses.

The transfer of distribution profits to the bank and the payment from an integrated product

supplier to the intermediary are seen to be a source of conflict in the Bancassurance model.

The potential for this conflict, however, needs to be considered against what existing

regulatory provisions already govern the conduct and remuneration of intermediaries.


The capacity in which representatives act is governed within FAIS by the General Code of

Conduct for Authorised Financial Services Providers and Representatives (under Board Notice

80 of 2003). This imposes a general requirement on the representative of the intermediary (a

„provider‟ for the purposes of the Code) entity to disclose:

- The provider’s status (under Part IV Information on providers): The provider must

furnish the client with full particulars of information relating to, among others, the

provider, its legal and contractual status with the product supplier, the financial

services which it is authorised to provide and any restrictions applicable thereto.

- What products the provider offers (under Part III Information on product suppliers): The

provider must furnish the client with full particulars of the details of the product

supplier/s, the contractual relationship with the product supplier and whether the

provider has relationships with other product suppliers as well as any ownership

interest by the provider in the product supplier. Under this Part a provider also has a

63

responsibility to provide clients with financial service in respect of a choice of product

suppliers, exercise judgment objectively in the interest of the client concerned. A

provider may not compare different the products of different suppliers unless the

differing characteristics of each are made clear, and may not make inaccurate, unfair

or unsubstantiated criticisms of any product supplier.

- How the provider is remunerated (under Part VI Information about financial service):

The provider must furnish the client with information on the nature and extent of

monetary obligations assumed by the client, directly or indirectly, towards the product

supplier, toward the provider as well as any incentive, remuneration, consideration,

commission or fee which is payable to the provider by the product supplier.

- Once the provider discloses to the client the status in which the representative acts,

the range of products it offers, the relationship it has with product suppliers and how it

is remunerated for providing financial services, the provider then has to determine the

suitability of the client for receiving advice. Once this suitability has been determined

(in line with the requirements set out in Part VII Furnishing of Advice), the provider

then has to maintain a record of the advice furnished to the client for inspection by the

Registrar if necessary.

Adviser businesses provide two main services for which they are remunerated: services to

customers and services to product suppliers.

- Services to customers: The remuneration of independent intermediaries

(representatives) is governed by the provisions of the LTIA and STIA respectively. The

LTIA prescribes maximum commission rates across all possible single premium and

multiple premium policies, including: individual policies, fund member policies, life

policies providing term cover only and fund policies. Remuneration by an insurer to its

(tied) representatives meanwhile takes place on the basis of equivalence of reward.

The STIA meanwhile restricts maximum commission to 12.5% of the premium payable

under the policy for a motor policy and 20% for any other short term policy.

- Services to product suppliers: The remuneration of intermediaries for providing

services to product suppliers are also governed in the LTIA and STIA (as well as the

Binder Regulations and Outsourcing Directive). Accordingly, intermediaries are entitled

to receive a binder fee for services rendered under a binder agreement that is

commensurate with the actual costs associated with rendering those services, with

allowance for a reasonable rate of return for the binder holder. Where intermediaries

conduct outsourced functions (i.e. functions that are not covered by binder fees) their

remuneration must be commensurate to the actual outsourced function.

Relevance to vertically integrated Bancassurance

Though regulations are already in place to govern disclosure of the status in which adviser

businesses and their representatives act, the regulator is concerned that this is still a source of

confusion among customers. Furthermore, while the remuneration structure of adviser

businesses is already subject to maximum thresholds depending on the policy sold, the

regulator is concerned that the payment of commission by product suppliers to adviser

businesses distorts their incentive to act with integrity when providing advice to customers.

According to the regulator this is could be exacerbated where the adviser business and the

product supplier are related through a common bank owner.

64

What is of concern in this interpretation is not necessarily the remuneration structure per se.

The ability of product suppliers to pay maximum commission (or fees for binder or outsourced

functions) to an adviser business to incentivise sales of their particular product, whether in

competition with other product suppliers on a panel or whether their product is the only one

offered to customers, is not unique to vertically integrated Bancassurers. The substitution of

commission with customer-agreed advice and ongoing fees would therefore affect vertically

integrated adviser businesses and product suppliers in the same way that it affects other

intermediaries and suppliers. Critically, however, it may alter the competitiveness of vertically

integrated product suppliers, which, unlike external product suppliers, still have a cost

obligation to their parent (through a distribution of underwriting or manufacturing profits) for

having access to the integrated adviser business. In a world without commission, the

integrated supplier may even be at a disadvantage to external/independent product suppliers

which can be more price-competitive.

When viewing the tied relationship between the integrated product provider and the

intermediary in the vertically integrated Bancassurance model, it is apparent that any transfer

of revenue between the legal entities does not induce conflicts of interests. Since customers

are only offered a product from the integrated product supplier and this relationship is suitably

disclosed to the customer, along with the option to cede an existing policy, there is no

misconception of independence and hence no conflict. Any measure which restricts the flow of

revenue between legal entities in the Bancassurance model operating on a tied basis would

therefore compromise the commercial viability of the model. This is particularly applicable to

proposal CCC in RDR.

Structural separation of the adviser business as is proposed by the regulator would not change

this outcome. Even if adviser businesses established by Bancassurers „break-up‟ into separate

„tied‟ and „multi-tied‟ entities to reflect the status of their respective representatives, the

integrated product supplier would still have to bare a charge for accessing the bank‟s „multi-

tied‟ intermediary. Hence in a vertically integrated structure where the product supplier has to

make an indirect payment to its principal for access to the bank intermediary, the incentive to

do so on a multi-tied basis without being able to earn commission is greatly diminished. This

outcome would seem at odds with the regulator‟s drive to promote customer choice and

access.

Therefore it is unclear how structural separation of the three kinds of advice proposed within

the same corporate structure would improve customer outcomes any more than the current

range of existing regulatory requirements around disclosure, independence and conflict of

interest would. Collectively, these requirements already insulate payments from product

suppliers to intermediaries from the transfer of distribution profits and manufacturing profits to

the principal in a vertically integrated structure.

65

6. THE IMPORTANCE OF VERTICALLY

INTEGRATED BANCASSURANCE MODELS

This Section draws on findings from the EY Global Customer Banking Survey (2014), from

literature on the subject as well as Genesis‟ engagement with various components of the

Bancassurance model (intermediaries, product suppliers and support functions) to describe the

positive outcomes for customers that arise from vertically integrated Bancassurance models. It

is important to note that this discussion is not based on any direct market research on product

pricing and features that would provide further validation of these findings, but which would

need to form part of a subsequent investigation.

Many of these outcomes are related to the bank brand, particularly arising from the trust that

customers place in the bank brand and the (commercial) incentive banks have to ensure that

that trust is not diminished by other (non-bank) product suppliers. What this Section finds is

that banks are generally able to deliver on the attributes that are most important to customers;

a positive indication of the ability of integrated Bancassurers to achieve satisfactory customer

outcomes in spite of the concerns that are being raised by the regulator. The other key findings

from this review are described in the Box below and described in more detail in the remainder

of the Section.

Box 3: Importance of vertically integrated Bancassurance models in South Africa

Since 2012, the level of trust and confidence in the banking industry has been on this rise.

Customers are largely satisfied with the products and services provided by their primary service

provider (typically their bank).

The key drivers of trust between a banks and its customer are the experience, pricing,

convenience and accessibility provided by the bank; with experience ranking more highly than

any other factor.

There are significant customer benefits that arise as a consequence of the vertically integrated

Bancassurance model, which is underscored by the finding that banks deliver well on attributes

that are most highly valued by customers.

Customers have diverse needs for financial products and services, and given the synergies

inherent in the model, vertically integrated Bancassurers are well positioned to deliver multiple

distribution channels to satisfy these needs.

With the integration of a bank, insurer and investment product provider, a commercially viable

proposition is created through economies of scale and scope in infrastructure, administration,

information technology and marketing. This places vertically integrated Bancassurers in a prime

position to satisfy the diverse financial needs of customers.

In the absence of vertical integration, the synergies created though vertical integration in the

Bancassurance model and the distributive capacity of banks will be lost, hampering efforts to

increase access to financial services particularly to lower income and middle income customers.

66

The relationship between a bank and its customer is anchored on five key

dimensions: experience, pricing, convenience, accessibility and location. Banks

that meet the expectations of customers across each are most trusted

As shown in the Figure below among those customers that report having complete trust in their

banks, the most important drivers of trust include the stability of the institution, the experience

provided to customers, and pricing. Another resounding observation is that overall „experience‟

is important to customers and ranked more highly than other factors such as rates and fees

and ease of access to banking bank branches. In other words, the overall banking „experience‟

is a key driver of trust. Surprisingly, pricing is not a core determinant of trust in banks, which

might allude to the fact that bank customers are willing to trade-off charges for an enhanced

experience, greater levels of stability and more convenience.

Figure 11: Reasons for having complete trust

Source: EY Customer Banking Survey, 2014

Certain attributes are of high importance to bank customers. These include the protection of

information, simplicity and ease of access to distribution channels and speed of handling

requests. The findings of the EY survey suggest that banks generally deliver positively to these

requirements through:

A good track record in protecting the personal information of customers. As

shown in the previous Section, several legislative requirements govern the protection

of the customer‟s personal and financial information by banks. To ensure adherence to

these requirements Bancassurers have in place internal governance, audit and

compliance mechanisms that ensure that customer information is used by legal

entities incorporated within the model in line with the manner prescribed. Failure by

these entities to do so would pose a reputational risk to the bank and hence

compliance at a bank-level acts as a natural check against the abuse of the bank

customer information by other entities integrated into the model.

Providing easy access to branches, ATMs and points of representation. A key

feature of any Bancassurance model, whether vertically integrated or not, is the ability

to leverage multiple distribution channels and to approach customers in a variety of

The fees I pay

38%

19%

24%

26%

41%

44%

51%

How they communicate with me

54%

Quality of advice provided

Interest rates I pay on my loans

Interest rates I earn on my accounts

60%Financial stability

The size of the company

The way I am treated

The security procedures

56%

Ability to withdraw money

42%

My relationship with certain employees

Problem resolution/complaint handling

20%

Ins

titu

tio

na

l sta

bilit

y

Cu

sto

me

r e

xp

eri

en

ce

Ra

tes

an

d fe

es

67

ways. The importance of this is clear – not all customers want the same type of

interaction or service level. Multiple channels and multiple delivery mechanisms can

ensure that the majority of customers receive the financial products and service they

require through a channel that suits them best. This optionality in distribution also

allows integrated product suppliers to design products according to the specific

features of each channel; achieving a balance between the customers‟ needs and the

cost to service the customer for the bank.

Simplicity when conducting transactions and providing banking access at

places other than branches such as innovative online banking services. In the

vertically integrated Bancassurance model, this is achieved by providing a one-stop-

shop experience. By integrating all the financial affairs of bank customers in one

centralised platform, customers are given a comprehensive view of the basket of

financial products they hold. Online solutions such as these therefore combine

features of transactional bank accounts, insurance and investment products into one

easily accessible platform. These wrap solutions are created by the bank to provide

customers with easy access to other non-bank products and as a way of enhancing

control over their finances. In the absence of integration between the bank and these

product suppliers, such solutions would be difficult to create and provide less

information than is otherwise available to customers.

Handling customer requests quickly and efficiently. Integration of the value chain

is such that the product provider in the vertically integrated Bancassurance model has

sight over the customer‟s policy performance as well as the customers‟ transactional

bank account. In the case of life policies, this information allows integrated product

suppliers to initiate a claim on the customer‟s behalf in the event of death or to notify

the customer in the event of a lapse. Doing so is clearly in the commercial interest of

the bank to recover or protect its asset (in most cases the credit) but also provides a

valuable and efficient service to the customer, or the customer‟s beneficiaries, who

may not know of the existence of such a policy.

Where banks seem to do less well according to the survey findings is in communication of

information and disclosure of fees. Fortunately, these two attributes are the subject of a

number of regulatory reforms, including RDR, CCI and TCF. The outcome of these reviews will

likely be greater requirements to disclose the nature of their relationships that exist within

vertically integrated Bancassurance models as well as the level of fees that are charged by

each legal entity for each activity conducted along the value chain. Such disclosure is welcome

and should help raise awareness among customers of the nature in which each legal entity

acts as well as the benefits that each entity provides. In the case of relatively standard

products it may also improve competition in the market by allowing customers to „shop around‟

to a greater extent than is currently possible.

Since the experience delivered to customers is a core driver of trust in the bank

brand, there is alignment between the bank and integrated product suppliers and

intermediaries to deliver a positive customer experience

Since the bank branch is the most prevalent way of accessing financial products, customers

expect to have access to a full suite of financial products from their bank. This suite should

comprise saving and investment products, secured and unsecured credit facilities, protection

facilities like insurance, as well as fiduciary services such as wills drafting or estate planning.

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Because the customer experience is so important to trust in the brand, all products and all

channels that draw on the same bank brand are designed to address a specific customer need

and to provide a certain experience to customers. This is true regardless of whether the

product is a bank one or an insurance or investment product. In light of this, the bank has a

significant (and commercial) incentive to ensure that integrated non-bank product suppliers

(such as short term or long term insurers) do not compromise the customer experience. By

virtue of the close linkages between entities in the vertically integrated Bancassurance model,

the bank is able to closely monitor the activities of product suppliers and ensure that the

delivery of these activities aligns with prescribed standards or regulatory requirements. Doing

so also ensures the needs of customers are met and the trust in the bank brand is maintained.

This process of self-regulation within the Bancassurance model in protection of the banking

brand may seem trivial to the regulator but is taken very seriously at a compliance level within

the bank. It would seem to the regulator that the brand is such a strong anchor to customer‟s

decision making that it places customers in a vulnerable position – the bank can leverage the

inherent „trust‟ that customers have in the brand to miss-sell certain products in pursuit of

profit. While these pressures may certainly exist at a micro-level, that is within individual

businesses integrated into a single brand (whether these are product houses or individual

distribution channels), the broader interest in protecting the brand acts as an inherent check on

the conduct of these business over and above the presence of market conduct regulation

applicable to that entity. The extent of this „self-regulation‟ within the model is likely to be

explored in more detail as part of the forthcoming process of conglomerate conduct

supervision by the regulator.

The integration of a bank, insurer and investment product provider creates

economies of scale and scope in infrastructure and administration, information

technology and marketing, which benefits Bancassurers and customers alike

Customer value management is perhaps the clearest advantage that integrated companies

have over standalone counterparts – that is the ability to offer services and products over the

course of a customers‟ entire lifetime through access to critical customer insights and data

analytics. The key to realising the benefits and potential efficiencies of a long term relationship

between banks and customers is tied to customer value management, a process adopted by

Bancassurers that uses available customer data to anticipate the needs of bank customers

and to retain business that is already in force. The pooling of resources between legal entities

in a Bancassurance model also provides the following distributional efficiencies:

Economies of scope in distribution arise where banks can leverage their customer

database, based on an underlying demand for non-banks financial products such as

insurance, investment and asset management products. The sale of multiple products,

whether bank, insurance or investment products helps maintain the profitability of bank

branches whose business case may otherwise be very different in the absence of

vertical integration.

Economies of scale in distribution result from the potential reduction in costs, from

combining banking, insurance and investment operations. A symbiotic relationship is

created through shared services for technology, accounting and human resources,

which frees-up resources to develop products more efficiently in collaboration with the

bank.

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Finally, the vertically integrated Bancassurance model also serves as a mechanism for

increasing shareholder value through:

More stable earnings for shareholders since the embedded value of insurers acts as

a store of future value and counteracts more volatile banking earnings during times of

economic uncertainty.

Ability to diversify risk through better identifying, measuring, pricing and controlling

risks. Integrated companies are well positioned to make substantial gains through in-

depth risk management capability that traditionally resides in banking as well as the

longer term perspective of insurance risk managers. This kind of information can be

used to determine the right balance and required levels of economic capital within

each business unit and at a group level. The ability to offset interest rate risk is a

particularly important example as the maturity mismatch that banks face is the inverse

to that faced by insurers.

In the absence of vertical integration the synergies achieved and the expansive

distributive capacity of Bancassurance would be significantly diminished,

potentially compromising access to financial products and services

As a thought experiment the prohibition of vertical integration is worth considering to explore

how customer outcomes would be affected. Such a prohibition represents an extreme, and

unlikely, case of regulatory intervention where restrictions would be placed on the cross-

ownership between legal entities currently incorporated within Bancassurance models. If this

were to occur however the following may be observed:

The informational benefits that Bancassurers leverage to the benefit of integrated

product suppliers and customers alike would be lost. Specifically, the ability of

integrated insurers to trigger claims on behalf of customers or to identify and meet

specific customer needs would be eliminated without having access to the bank‟s

customer database. It is unlikely that the same level of access to bank customer

information would be given by the bank to an external entity (whether product supplier

or intermediary). Even if such a flow of information would be permissible under POPI

or TCF the fee that would be charged by the bank may substantially increase the cost

to the customer of the ultimate product or service provided by the external entity.

The profitability of branches would be affected and bank shareholders may

ultimately experience a reduction in shareholder value. The sale of wealth products

(investment, insurance and fiduciary products) within a branch environment provides

an important source of non-interest revenue to sustain the profitability of individual

branches. Bank-wide, the capability to manufacture and distribute wealth products with

large scale offers a compelling proposition for the bank‟s shareholders. Through

compromising a bank‟s ability to cross sell non-bank products a prohibition on vertical

integration would therefore destroy significant shareholder value in the country and

compromise many channels for accessing bank products.

Banks would have a much lower incentive to ensure the performance of non-bank

products. The protection of the common brand aligns interests between the bank and

integrated product suppliers to ensure a positive customer experience. The level of

trust that is created between banks and their customers, particularly arising from the

perceived stability of the institution and track record in protecting personal information,

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is not transferable to legal entities not affiliated with a bank. What this means is that in

the absence of vertical integration customers may be more skeptical of the

performance of products offered by non-bank product suppliers. Similarly, the bank

would have a reduced incentive to ensure the performance of non-bank products and

the satisfaction of customers without a common brand association and common

ownership interest.

The „one-stop-shop‟ experience provided by banks as financial conglomerates is

eliminated and customers will no longer have the convenience and flexibility of having

all their financial affairs catered for by any single provider.

The supply of bank products, particularly credit, would be compromised. Where insurance

cover is a pre-condition for the extension of credit or a loan as a form of risk mitigation and

banks are unable to provide this cover through an integrated product provider, in the most

extreme circumstance, customers will be precluded from access to the product. In addition, if

customers have to source the required insurance product from an external product provider,

the efficiency gain inherent in embedding risk cover in the sale of bank product is lost.

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7. CONCLUDING OBSERVATIONS

This paper has argued that Bancassurance is an increasingly important part of the distribution

of insurance products across the world, especially in emerging markets. The growth of

Bancassurance reflects the natural role that banks can play as financial advisers given their

network, their knowledge of their customer‟s financial circumstances, and that they are also

uniquely well placed (and have a legitimate interest) to ensure that customers have certain

insurance policies in place to cover credit facilities. Such product-linkages are in the interest of

the bank (by lowering credit risk), the consumer (providing protection from adverse events) and

society (ensuring that consumers are protected and reducing their financial vulnerability).

Nonetheless the sale of linked products and cross holdings between insurers and banks has

not always resulted in optimal customer outcomes; with the result that regulations worldwide

have developed to address conflicts of interest and any undue expression of market power that

may result from Bancassurance relationships.

The review has highlighted that in South Africa the relationships between different entities in

the Bancassurance model are already highly regulated. It has identified the regulations that

govern each stage of the Bancassurance value chain, and the impact these have on customer

outcomes. In particular it has sought to identify how the single most important differentiator

between a Bancassurance model and a traditional brokerage agreement is the profit transfer to

the bank or bank holding company as compensation by the integrated product supplier and the

intermediary for access to the bank‟s brand, network and customer base; all of which are

assets which should earn an appropriate rate of return.

In considering a future regulatory approach toward Bancassurers, it is important then to

differentiate cross-ownership and structuring issues from issues related to the conduct of

individual businesses incorporated into a Bancassurance model. The principle should be that

product suppliers and intermediaries should be free to determine their commercial viability

through a corporate structure that makes sense to them and to their ultimate shareholders,

provided that the structure does not treat customers unfairly or unduly restricts competition.

It would seem that the content of upcoming regulation looks to attribute observed customer

outcomes on the structure of the Bancassurance model. In doing so it would seem the

regulator views the symbiotic relationship between the bank and an integrated product supplier

as fundamentally conflicted, regardless of how compliant the integrated intermediary or the

product supplier is to existing regulation.

This review has found that there are sufficient requirements placed on the Bancassurance

model to ensure that the interests of customers are protected through existing regulatory

requirements. Beyond these requirements a further series of reforms are forthcoming to

address perceived weaknesses relating to information asymmetry, conflicts of interest in the

provision of advice, and the fair treatment of customers. Provided they do not alter the

incentive for vertical integration between banks and insurers, these reforms should strengthen

the Bancassurance model and improve outcomes for customers.

The review has also found that Bancassurers do have a genuine interest in serving the

customer and working together with insurance or investment product suppliers. This

relationship makes commercial sense – as the cross sale of other non-bank products creates

stickiness and entrenches affinity with the brand – and critically can also be justified by

compliance with regulatory requirements at each stage of the process or value chain. The

model is also subject to sufficient competitive pressures at the point where customers are

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provided choice in the purchase of insurance or investment products to mitigate any potential

expression of market power.

Finding a balance between a regulatory framework that does not compromise the structure of

the industry and that improves outcomes for customers is the key challenge of conglomerate

supervision. The findings from this review would suggest a cautious approach to the

expression of both prudential and particularly market conduct regulation of financial

conglomerates that builds on existing regulations to preserve the synergies that are inherent in

vertically integrated Bancassurance models and the level of access to insurance and

investment products that the model supports.

Bancassurance, vertical integration and customer outcomes

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