What can we expect from the RDR crystal ball?

One of the major talking points in the industry over the past two years has been regulatory reform. And while a number of key pieces of legislation have been discussed and are in the process of being implemented, the particular piece of legislation that threatens to influence the industry the most is the Retail Distribution Review (RDR).

The industry spent the majority of 2014 waiting for the Financial Services Board (FSB) to release its RDR White Paper which would provide more insight into the regulators thoughts of the future remuneration model for the industry. This was released towards the end of last year, and intermediaries need to be cautioned that the comment period for their input on the proposals ends on 6 March.

Now that the document is out, the main question is whether the proposals will impact the industry in a positive or in a negative way. James Alt, Senior Manager in Risk Advisory at auditing firm Deloitte feels that the FSB has presented a very balanced document.

“The FSB has engaged with the industry over a protracted period and has been consistent with outlining its objectives over this period. This has allowed for preparation in responding to the RDR paper and the likely eventualities well in advance,” said Alt.

Mind the payment gap

While Alt feels that the FSB has presented a balanced document, it does not mean that it is without potential fault. One of the biggest problems the current proposals present is the changing income structure that intermediaries will have to come to terms with.

“This means that in some cases the intermediary’s income will now have to be paid by the customer and not paid by the product provider in the form of commissions. The intermediary now needs to charge their customer an advice fee on sale of the product, something that not all customers are typically used to. This poses a risk to intermediaries should their customers not be willing to pay such fees,” said Alt.

This would leave a significant gap in the market as intermediaries may feel that targeting the market segment that can afford to pay an additional fee for advice is the only way to sustain their business.

The UK has already been through this process. Andrew Power, Partner at Deloitte in the UK, said that South Africa can learn a lot from the UK example. “We would expect innovation to be required in serving the lower income segments, whether that be around self service offerings or some form of simplified advice. From experience some consumers, when faced with paying for advice that they previously felt was free, feel able to manage their financial affairs themselves. Others may be satisfied to get guidance or simplified advice given that their needs are not complex,” said Power.

Improving the industry

One of the major goals that the FSB hopes to achieve with RDR is to improve the industry and to create a more sustainable business model for intermediaries. If the current proposals were to be introduced into the industry now, as is, without any comment, would there be a positive or a negative impact on the industry?

“The changes will impact the industry, but depending on intermediaries this could be seen as positive or negative. Given that the proposals are underpinned by objectives centred on customer fairness and an empowerment of customers, this has to be seen as a positive impact. By decreasing inherent conflicts of interest, improving fee disclosures and improving customer awareness, the customer stands to benefit. Learning from the experience in the UK, the FSB has put in mitigations to avoid the creation of the advice gap that leaves the less affluent customer vulnerable to being left behind. This success remains to be seen. From a practical point of view, the White Paper in its current form contains concepts and definitions that require further clarification before consistent application can be expected,” said Alt.

While there are concerns regarding remuneration, intermediaries need to bear in mind that at the heart of their businesses is the best interest of their clients. So a transparent business model may not be a bad thing.

“A market that is seen as fair and transparent by consumers is more likely to be sustainable. In addition, it may be better safeguarded against regulatory shocks that may arise from consumers purchasing products which they do not understand or receive value from,” said Power.

Can theory be put into practice?

One of the major criticisms of the RDR White Paper is that it is very technical. One industry professional has even described the document as very heavy reading. There is no doubt that the FSB approached the formulation of the White Paper from a legal point of view in order to cover all of their bases. But can the theory from the White Paper be put into practice?

“The White Paper does have instances where practical rules have not yet been determined; however, the desired outcome or risk posed to customers has been articulated. This approach is in line with the outcome based approach that was followed with other market conduct related regulation such as Treating Customers Fairly (TCF), and allows for the industry to query the practicalities of the objective and also to pose options and solutions to achieve these. Therefore, an adequate balance has been achieved,” said Alt.

Editor’s Thoughts:
Intermediaries need to submit their comments to the FSB so that their voices can be heard. If intermediaries are unhappy with certain proposals, how can the FSB change them if they do not know what the concerns are? We need to take the same approach as with elections, if you do not comment, you cannot complain. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.