RDR process on track – considerable consultation and analysis still taking place

Significant progress has been made with the Retail Distribution Review (RDR) that has been initiated by the Financial Services Board (FSB). However, there will still be considerable consultation with the financial advisory industry before major aspects of the review come into force.

According to Jonathan Dixon, Deputy Executive Officer, FSB Insurance Division, implementation following the findings will be phased in, with completion only expected towards the end of 2017.

“We look forward to working with you towards building a model that is fair for customers and that sustains the financialadvisory industry,” he told delegates at the second annual Discovery Financial Planning Summit held in Sandton. The annual Discovery Financial Planning Summit brings together thought leaders in the field of financial planning and financial services.

Dixon presented the current status of the RDR, which is focused on the distribution and compensation practices within the retail financial services industry. He said there are 55 specific proposals which were put out for comment until the beginning of March.

Dixon confirmed the FSB’s specialist RDR implementation teams and Steering Committee would be engaging with the industry about technical aspects and other issues.

“Between now and the end of 2015, we will continue to analyse comments that have been received from the industry, focus on prioritising proposals, and prepare the roadmap for remaining proposals to be implemented in line with the Twin Peaks approach,which is informed by Treating Customers Fairly (TCF) legislation.”

These proposals focus around three core issues: proposals relating to types of services provided by intermediaries; proposals relating to relationships between product suppliers and intermediaries; and proposals relating to intermediary remuneration.

Dixon said that South Africa could learn some lessons from the RDR process in the UK, although “the jury is still out” on the overall impact. He said it appeared that the financial advisory industry in the UK had increased average revenues and profitability, and the quality of advice had improved. The aim of reducing product bias by removing certain commission structures was on course to be achieved.

However, Dixon said the sharp increase in transparency had led some people in the UK to seek alternatives to traditional financial advisory avenues – such as switching to automated and online service providers.

“The impact of RDR in South Africa is likely to be different to the UK, but there will be some similarities,” said Dixon, adding that a special commission-based dispensation has been granted locally to advisers servicing the lower end of the market.

“In the UK, consumer understanding of charges is still limited. It is important that wework on disclosure standards.”

Focusing on reactions to local RDR proposals, Dixon said there has been “strong general support” but also some concerns over certain proposals such as those relating to financial advisory categories (Independent Financial Adviser, Tied and Multi-tied), the scale of and timelines relating to proposed changes, and the prohibition of outsourcing.

Some in the investment advisory community have called for a phased-in approach to changes being considered and Dixon said, “We are looking at transition measures to support the sustainability of the industry.”

Dixon said further analysis and research will be conducted over the next few months todeal with comments received from the industry, including aspects such as treatment of investment policies as opposed to life risk policies.

According to Dixon, a major emphasis of the RDR process is to move towards an activity-based services model for financial advisers, featuring upfront financial planning, upfront advice on product selection and ongoing advice as customers’ circumstances change.

He stressed that there may be a need for some financial advisers to review their business models and align them with the RDR goal of reducing conflicts of interest between product suppliers, intermediaries and consumers.

“The delivery of professional advice and services will provide opportunities for smart businesses to sustainably add value for their customers,” added Dixon as he emphasised the purpose of the RDR was to ensure a “stronger more sustainable model for financial advice”.