Ruan Jooste’s Rants and Cents: Is incentive-driven churn rearing its ugly head again?

Act against those brokers and companies who give poor advice to customers based on their own pockets and not the customer’s needs or interests. Photo:

Act against those brokers and companies who give poor advice to customers based on their own pockets and not the customer’s needs or interests. Photo:

Published Aug 20, 2023


Upfront bonuses being offered by insurance companies to financial advisers to entice them to leave their current employer and join the competition were prohibited by the former Financial Services Board (FSB), which is now the Financial Sector Conduct Authority (FSCA), way back in 2014.

Section 3A of the General Code of Conduct currently decrees that “… No person may offer or provide a sign-on bonus to any person, other than a new entrant, as an incentive to become a Category I provider that is authorised or appointed to give advice.”

Two transgressions linked to one product provider came to light in introducing the enforcement action. One was with Discovery Life, which engaged with four persons with the view to employing them as representatives, and the other was Regal Financial Services, which was a juristic representative of Discovery Life under its FSP license.

Regal offered a sign-on bonus of R100 000 to an adviser as an incentive to become a representative of Discovery Life. During that time, Bayport Financial Services also allowed its agents to render financial services in respect of assistance policies for and on its behalf without properly appointing these agents as representatives and satisfying itself that these agents complied with the prescribed fit and proper requirements in contravention of certain sections of the Financial Advisory and Intermediary Services (FAIS) Act.

The FSB said at the time that the reason for the enforcement decision was that “these bonuses were invariably linked to how much business the adviser brought in for the new company, and the adviser risked having to pay the bonus back if they did not perform. While some product suppliers have argued that the sign-on bonuses were not performance linked, the outcome of this practice in almost every case was that the adviser churned clients to the new company by convincing the client that the new company’s policy or investment was a better option.”

While a replacement policy could sometimes be a better option for a client, it might be difficult for the consumer to determine whether the adviser is really acting in their best interest and not in the best interest of his/her own pocket. So this is an important rule. It removes the mud from the water, clears the air, whatever way you want to look at it.

But it seems this practice has reared its ugly head again. This time with Momentum Consult, as Personal Finance has been informed by some of its readers. When I enquired from the regulator whether they were aware of lump sum payments being made to some intermediaries to entice them to leave one Financial Services Providers (FSPs) and join Momentum Consult or other FSPs, the FSCA said that they were not.

But they did confirm that a special compliance report for monitoring was developed in terms of section 17 of the FAIS Act for the FSPs who are registered as insurers under the Long-term Insurance Act,

“The compliance report was to establish if the FSPs had offered and/or paid sign-on bonuses to any recipient during the period between September 2012 to 31 August 2014,” it said. “Afterwards, the FSCA drafted Equivalence of Rewards (EoR) Paper in 2019 with the main objectives to analyse industry practices, that is, if any remuneration practices are deemed inconsistent with the principle of EoR, assess the impact of these practices, and recommend changes to the regulatory and supervisory framework governing the EoR system, to the extent deemed necessary.”

So it is clear that the authorities aren’t investigating any matters of misconduct in this regard. Consult by Momentum, however, told Personal Finance that they were aware of such claims being made, and those claims were false. They also stated that they had taken legal action against some of the claimants based on the unfounded information they were sharing with the aim of damaging their reputation.

Hannes van den Berg, CEO of Consult by Momentum, said that Consult is a network, owned by Momentum, where the advisers can advise on solutions/products from multiple product providers.

“In exchange for the client- and adviser value proposition of Consult, the advisers sacrifice a percentage of their gross regulated commission and/or advice fees to Consult. We do not pay any sign-on bonuses. When advisers join Consult, we purchase a percentage of their expected future regulated commission and/or fees upfront, based on a set valuation model. This model has been in place for almost nine years, during which time the FSCA has been satisfied.”

He added that Consult agreed that (in most cases) it doesn’t benefit the client if their policies are churned from one product provider to another. ‘’In no form or fashion are our advisers encouraged or forced to churn any policy after joining Consult. In addition, Consult is not Momentum’s “agency force” (Product Provider Agent). A Consult adviser does not provide advice with only Momentum policies as the solution to the client’s needs, nor are they incentivised in any way to sell Momentum policies. Instead, they are encouraged to stay objective and recommend the most appropriate product to their clients without restriction – regardless of whether the product is from competitors of Momentum. They can support any of the 125 contracted providers of financial products as they have done before joining Consult.”

Whether these allegations are true is difficult to determine, as they are being denied on the one side, and no investigations are pending by the watchdogs. Also, the few individuals who claimed to be involved did not respond to Personal Finance’s questions on the matter.

But the most important learning that should be taken from the current status quo and the matter loosely referred to as incentive-driven churn is that people should always be aware of their surroundings, especially when it comes to their own money, and constantly test that the trust relationship between client and adviser remains rock solid.

There is plenty of literature available to be able to do so, and the regulators and the FAIS ombudsman are free to approach if any dispute or suspicion arises to act against those brokers and companies who give poor advice to customers based on their own pockets and not the customer’s needs or interests. Be safe out there!