The life industry has welcomed the new regulations on commission and early termination values gazetted by government about a week ago.
The new regulations, which will come into effect from the beginning of next year, form part of the Long-term Insurance Act.
The regulations are expected to strike a balance between consumer protection, the provision of excellent products and the encouragement of a vibrant advice industry.
Old Mutual, which had participated fully in industry body discussions with the Financial Services Board and National Treasury, says the process will align the interests of consumers with those of financial advisers and the industry.
The financial services giant said it was finalising changes to its commission and benefit structures on its savings products to be compliant with the new regulations by the implementation date.
It cautioned consumers to bear in mind that though early termination values have been improved, investing over the long-term brings the best results.
The Life Offices Association (LOA) believes that the new regulations will go far in achieving a fair balance between upfront and as-and-when commission.
In terms of the new regulations only half of the commission due to the intermediary will be paid upfront, while the other half will be paid over the term of the policy to encourage ongoing service.
Currently all commission is paid to intermediaries at the beginning of the first and second policy years.
Intermediaries will receive maximum commission of 5 percent on endowment and retirement annuity (RA) fund policy premiums, split into a 2,5 percent upfront component and a 2,5 percent ongoing service commission, payable monthly.
The upfront commission portion will be discounted at 6 percent a year.
Commission only applies to savings policies such as endowments and RA fund policies.
For risk policies such as life and disability, the current commission structure will continue to apply.
Regulations on early termination values provide for a maximum reduction in fund values of 15 percent for both endowment policies that are made paid-up or surrendered and RA fund policies that are made paid-up or transferred to another fund.
This percentage must be reduced with every year the policy is in force until no early termination charge applies.
The regulations state that in the case of policies with a term of five to 10 years, fund values might not be reduced once a policy has been in force for five years.
Where a policy term is longer than 10 years, the fund values may only be reduced if an early termination takes place within the first 10 years. The same maximum termination charge rules apply to term reductions.
In the case of premium reductions a proportion of the early termination charge may be applied.
For example, if a policy's premium is reduced by a third, the maximum charge is a third of what would have been applied to a paid-up.
In addition to the termination charge, insurers may levy an administration charge of not more than R300.
This means that as from January 1 next year, policyholders will always receive at least 85 percent of their policy fund value on early termination or if other contractual changes are made, less the R300 administration charge.
At present RA fund policies and endowments that are made paid-up, or where the premiums or term of the policy are reduced, receive at least 70 percent of the fund value.
A RA fund member who decides to retire early receives at least 70 percent of the fund value. Endowments that are surrendered receive at least 60 percent of the fund value.
Gerhard Joubert, chief executive of the LOA, says: "We believe that the new commission model is fair to the intermediary, while at the same time ensuring the sustainability of the life industry and, above all, ensuring that policyholders receive a fair deal."