Reining in unethical insurance
practices
Eye on the
Economy
By MAGDALEN NG
SINGAPORE'S commission-based system for insurance agents has
often been cited as the main cause of unethical selling of
insurance products.
The criticism goes that agents push particular
products to land higher commissions for themselves, rather than
recommend those suitable for the consumer.
This longstanding problem was one reason behind the
Monetary Authority of Singapore's (MAS) launch of a comprehensive
review of the industry last year.
MAS managing director Ravi Menon gave the framework
for the review at the Life Insurance Association's 50th Gala Dinner
last March.
He outlined five key areas of review: to protect
and benefit the consumer; raise the competence of financial
advisory representatives; raise the quality of advisory firms; make
financial advice a dedicated service; lower distribution costs; and
promote a culture of fair dealing.
As part of the review, he proposed a switch from
the existing commission-based system to a fee-based one. Agents
would be paid a fee for the advice they give, not by commissions
for selling particular products. Consumers would pay this fee
regardless of which product they bought, or even if they bought
none. Agents then wouldn't push products which earned them higher
commissions, but would recommend products that are genuinely in
consumers' interests.
A review committee comprising regulators, industry
practitioners, academics and consumer associations was convened, to
come up with suggestions on how to improve the industry.
During the eight months of deliberation by the
panel, financial advisers waited with bated breath, especially on
the issue of whether their remuneration structure would be shifted
to a fee-based one - a shift that most believed would affect their
rice bowls.
Many must have been relieved when the panel
revealed their recommendations a week and a half ago. The panel
concluded that Singapore is not ready for a fee-based advisory
now.
The panel essentially suggested retaining the
status quo. However it proposed improvements to the
commission-based system, such as tweaks to limit the amount of
commission received in the first year, and spreading the remaining
commission over a longer period of time.
Those who support the move towards a fee-based
scheme for the agents attribute the backtracking on this issue to
the huge resistance put up by the big boys in the industry.
Almost every major insurer - Great Eastern,
Manulife, Prudential and AIA - stated their views opposing the
fee-based structure.
Financial advisers were also up in arms, meeting
regulators behind closed doors to state their cases, and even
holding a media event to get their point across.
Has the opportunity to reform the industry been
lost?
Well, the answer is yes and no.
The reasons why the system needs to be fixed have
been highlighted many times.
A 2002 study on the effect of commission-based
remuneration on financial advice in Britain, submitted to the UK
Financial Services Authority, found that financial advisers did
exhibit significant commission bias - recommending products or
providers that pay them the largest commissions, for a small number
of single-premium products.
Commission bias is bad for consumers, since
unsuitable products are recommended.
But a fee-based system is not a cure-all either.
Bias can also occur with a fee-based remuneration system. For
example, advisers could take more time in delivering their advice
if they are being paid on an hourly rate. Or, if they are paid
based on the size of the portfolio, clients with less money may be
underserved.
Currently, Britain and Australia are two key
jurisdictions that have gone ahead with a remuneration model, but
they have retained the commission structure for selected
protection-based products.
In Britain, it is also too early to tell how
successful the change is as the system came into effect only this
month.
One difference between the two jurisdictions and
Singapore is that Britain and Australia offer free basic health
care, meaning that there is very limited demand for basic health
insurance there.
In fact, one of the proposals by the panel is
similar to introducing a fee-based system but for only a limited
range of products.
The proposals involve setting up a "direct channel"
through which a customer can buy certain products like health and
term insurance.
These customers will not have to pay commissions.
They can approach the insurer at a customer service centre and pay
a nominal fee on top of the cost of the plan.
Mr Lee Chuan Teck, chairman of the review panel and
assistant managing director at the MAS, said that could be one way
to gauge the public's response to such a model.
In addressing the issue of unethical selling, the
solution should not perhaps be seen as a stark choice between fees
and commission.
It could be addressed, for example, through
changing the commission-based structure.
Imposing a flat commission rate on all products, be
it investment or insurance, will remove any incentive to favour one
product over the other.
Another option is to pay financial advisers based
not only on their sales, but also on the quality of advice and the
suitability of products that they recommend.
Banks have employed this "balanced scorecard"
approach mostly since 2009, to cut down on misselling.
The problem with this approach is the challenge
facing insurers and financial advisory firms to put in place robust
ways of conducting these post-sales checks on their advisers.
But in the end, while regulators can put in place
many measures to police the financial advisory industry, the
consumer too has to share the responsibility when it comes to
protecting his own interest. After all, no matter what the adviser
does, he cannot force the consumer to sign his name on the dotted
line.
Consumers can guard against errant financial
advisers by equipping themselves with the relevant knowledge and
background information before accepting financial advice.
It is also vital for consumers to understand their
own needs and objectives, so they can evaluate a product's
suitability.
Before committing to any product, the consumer may
seek out a second opinion, or discuss with family and trusted
friends. Even after taking up a policy, there are now free-look
periods, during which they can back out.
The onerous burden of consumer protection should
not fall on regulator or financial advisers alone, especially if
consumers cannot care less.
Opinion, The Straits Times, January 29 2013, Pg A18
