Encouraging transparency: Full steam ahead for Phase I of RDR

The current wave of regulatory reform is going to have an impact on the industry. The fear of the unknown is a legitimate fear and some may be questioning the necessity of introducing this fear into the market, particularly considering the current economic condition the country finds itself in.

Despite these concerns, the Financial Services Board (FSB) is confident that the regulatory reform will bring positive change into the market. July will see the implementation of Phase I of the regulators Retail Distribution Review (RDR) Programme which will be the first wave in this positive change.

Short-term worries
“RDR will affect the short-term industry quite specifically in Phase I and again in Phase II. If we look at the South African insurance industry, and this is a concern raised by brokers within the industry, international RDR programmes did not pay enough attention to short-term risk,” says Caroline da Silva, Deputy Registrar of Financial Advisory and Intermediary Services (FAIS) at the FSB.

The South African version of RDR is not a cut-and-paste programme from international markets; our RDR will be specific to South Africa and will be unique to local risk.

The actual impact
“One of the things unique to South Africa is the amount of outsourcing of both administration and binding that happens in the short-term sector. So the binding and outsourcing in this sector will be dealt with under RDR,” says Da Silva.

The basic principle that has been approved by the short-term industry is that the outsourcing of administration or binding should happen in a properly governed manner; it should happen in a way that the insurer has oversight over its business, and that there is better integration to allow the insurer to understand who its customers are and what its risks are. 

“We have also identified that where binder fees are paid, there is sometimes a conflict in terms of placement of business. Therefore there is a proposal to introduce caps on binder fees. Phase II will deal with how short-term commissions should be adapted for the fact that the FSB is taking advise out of the commission portion and putting it into advise fees,” says Da Silva.

Industry categorisation

When the FSB released its initial RDR proposals in November 2015, the regulator proposed that brokers, advisers and intermediaries be classified into three categories: tied, multi-tied and independent.

This caused a lot of concern in the industry and the regulator has been forced to relook at this stance. “We realise that the language that we were using when we proposed the three tier system was problematic. It caused a lot of confusion not only in the industry, but for clients. To a client that is not regularly interacting with the financial services industry, the term multi-tied broker means nothing to them,” says Da Silva. She adds that clarity also needed to be given on how brokers, advisers or intermediaries would be placed in these categories.

The FSB first looked at the influence that would place someone in a specific category. Da Silva points out that this will be based on supplier influence only and not on product influence. After clarity was achieved on this, the FSB then came up with a two tier system; one would be a tied individual and the other would be independent.

It will work on a licence basis. So if for instance an adviser is only allowed to sell product under one licence, then he is a tied adviser. An independent adviser would operate off a separate licence and is regarded by the FSB as an independently licenced service provider.

Conflict of interest

Eliminating conflict of interest is difficult, and Da Silva concedes that the total elimination of this conflict is impossible; so don’t expect RDR to do that. However, Da Silva says that the market is expected to manage conflicts of interest where they can be managed.

She adds that the FSB will still look at conflict of interest in industry categorisation. If conflict exists on the basis of product supplier ownership, product supplier contracting and binder regulation, then that person cannot use the word independent in its communication with clients when it comes to the description of its services.

To view the full interview with Da Silva, click here.

Editor’s Thoughts:
If these objectives are carried out, there is no doubt that the industry will benefit from the RDR process. Da Silva points out that RDR does not exist to restrict the income of brokers, advisers or intermediaries; rather, it exists to provide them with a sustainable income. Whether this will be the case remains to be seen. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.