The Financial Services Board (FSB) has signalled that it plans to prevent life assurance companies from applying the maximum penalties more than once when endowment policyholders or retirement annuity (RA) fund members reduce or stop their contributions or cash in their policies before the contract ends.
This week, the FSB published a draft directive, which, if implemented, will place further limits on the confiscatory penalties that life companies may levy for “causal events”. A “causal event” occurs when you reduce or stop paying your contributions or premiums or withdraw your savings from an endowment policy before the policy matures. The “causal event” can arise through no fault of your own, such as losing your job and being unable to afford the payments.
In the draft directive, the FSB says that recent determinations by the Deputy Pension Funds Adjudicator, Muvhango Lukhaimane, have “highlighted the unfair and unreasonable practice by certain assurers, where multiple causal events occur in respect of the same policy, to deduct the maximum regulatory causal event charge for each causal event”.
The FSB reminds the life industry that limits were first placed on the confiscatory penalties in December 2005 by then Minister of Finance Trevor Manuel in terms of an agreement with the industry.
The reason was that “the lack of transparency of charge structures resulted in the reasonable expectations of policyholders in respect of net returns from contractual savings products (particularly in the context of early premium reduction and cessation) not being met”.
Before Manuel intervened, the penalties could be as much as 100 percent of your accumulated savings. The penalties were reduced again in January 2009 to their current levels of a maximum of 15 percent on RAs and 30 percent on endowment policies.
In its draft directive, the FSB says the practice of applying the maximum penalty for each “causal event” is inconsistent with the “spirit, intent and purpose” of the agreement reached with Manuel and the subsequent regulation of the penalties.
The FSB says a policyholder who has a number of “causal events” – for example, he or she reduces the premiums on an endowment policy or the contributions on an RA and then stops paying completely – could be penalised far more heavily by some life companies than a policyholder who has one “event”, such as stopping the payments. This, the FSB says, defeats the objectives of the agreement and the regulations.
The FSB says that although a life company may take into account more than one “causal event”, the penalties must not exceed the maximum possible for one “event”.
The FSB also reminds the industry that it is “not obliged to charge the maximum charges (penalties)”.
The life assurance industry has until the end of July to comment on the draft directive.