Pension Fund's Adjudicator Vuyani Ngalwana has delivered another hard-hitting ruling against an assurer – and has referred the matter to the authorities in connection with “an undesirable business practice” in the industry.
A practice, widespread among Retirement Annuity (RA) funds administered by life companies and which pay commissions in advance, is to “create for itself a profit centre by rendering what is in effect an unsolicited banking service”, said Ngalwana in the ruling issued on Tuesday.
This ruling has a major implication for the life industry, as Momentum has been ordered to repay – with interest – a cost that is quietly deducted from many RA investments.
In addition, the case has also been referred to National Treasury, the Registrar of Pension Funds and the Registrar of Long-Term Insurance for further action in connection with what he has called “an undesirable business practice”.
Life assurance companies, meanwhile, have so far ignored a public call earlier this month by finance minister Finance Trevor Manuel to distance themselves from the industry's Life Offices' Association (LOA), which accused Ngalwana of being ignorant about industry practices.
These organisations are also being scrutinised by the Competition Commission to determine whether there are anti-competitive business practices in operation in the industry, Moneyweb reported last week.
He said the approach of paying commission upfront and deducting this, and associated costs, from an investment policy is done because “experience has shown people will not pay for advice”.
In this latest case, Ngalwana says this is the first time an insurer “in effect admits to rendering banking services to members of a retirement annuity fund by granting unsolicited loans for purposes of repayment of commissions”.
Brent Walters stopped making recurring contributions into a RA as a result of cash flow problems in his business. He contributed about R24 000 over about two years and found that the value of his investment had been halved as a result of various fees.
These commissions are “paid by the insurer in advance as remuneration to brokers who managed to prevail upon the member to join the retirement annuity fund administered by that insurer”, commented the Adjudicator.
This practice, said Ngalwana, “appears to be widespread among RA funds administered by life insurance companies that pay commissions in advance and capitalise other future profits”.
The Adjudicator's ruling makes it clear he finds it unacceptable that a loan account is opened for an RA member, without seeking that person's permission first.
The individual is also not given the option of paying the commission first as and when it arises on a monthly basis or in a lump sum from their own private funds.
The life assurer will say there is no deduction from a client's contributions because the loan is recouped by cancelling units in the investment. However, these units are purchased by a client's monthly contributions “and so such a submission is really six of the one and half-a-dozen of the other”, noted Ngalwana.
Ngalwana also drew attention to Momentum's response to the complaint. “Momentum says the projected total commission loan amount that would be recouped at the end of the 18-year period is R22 820 – and this on an unsolicited loan of R8 640 some 18 years previously.
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