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FSB learn from mistakes made overseas

07 October 2013 Jonathan Faurie
Jonathan Faurie, FAnews Journalist

Jonathan Faurie, FAnews Journalist

Regulation is defined as a principle, rule, or law designed to control or govern conduct in an industry or country. It provides order to an industry and forms the foundation upon which conduct is based and disputes are settled. The purpose of regulation is to provide order as opposed to chaos.

However, over-regulation robs an industry of the necessary freedom that it needs in order to deal with specific cases on a daily basis. This is the consensus among many brokers and advisers who feel that the Financial Services Board (FSB) may be overstepping the boundaries of effective regulation and over regulation.

Jonathan Dixon, Deputy Executive Officer of Insurance at the FSB, disagrees with some of this sentiment and assures the industry that the regulation which it is putting in place will bring South Africa on par with its international counterparts.

"There is a lot of regulatory reforms happening in the industry at the moment. But this is being driven by a number of factors. Firstly, there has been a wave of international regulatory reform after the 2009 global financial crisis. And while South Africa came through the crisis relatively unscathed, it isn’t to say that the international lessons are not applicable to us. We are also playing a bit of catch up as we were slightly behind the curb when it comes to regulation. It is important for the industry to meet international benchmarks, while also taking account of local circumstances” says Dixon.

RDR worries

The piece of new regulation which is giving many brokers and advisers sleepless nights is the Retail Distribution Review (RDR) which aims to clarify certain aspects of the industry as well as redefine the manner in which brokers and advisers are paid.

"There are specific objectives that the FSB wants to meet by implementing RDR. We want to make sure that there is fair and appropriate advice to clients of financial services. This will ensure that clients fully understand the advice that they are getting. It is also important that this advice is free of any conflict of interest. Finally, we need to balance this by ensuring that there is a sustainable future for the financial advice and intermediary services industry by establishing a fair remuneration model,” says Dixon.

The way in which this new remuneration model presents itself is what has got many industry participants up in arms.

This is not to say that the FSB is structuring this model without consulting the industry. Dixon points out that in November 2011, the FSB wrote a letter to the industry pointing out what is currently happening in the industry and what the FSB hopes to achieve through RDR. The industry was then invited to provide their feedback on the letter.

"What needs to be pointed out is that through our engagement with the industry, there is no firm consensus on what the model needs to look like and there are a lot of differing views. However, there is a feeling of overall support for the objectives that the FSB wants to achieve,” says Dixon.

He adds that there is also a general consensus that a fee based approach needs to be adopted in the investment space. The risk sector, both short-term and long-term, will most likely include a combination of a fee plus commission approach.

Simplified rollout

South Africa is in the fortunate position that it is rolling out RDR after a number of international markets have already rolled out RDR in their markets. And the general feeling is that the rollout of RDR in the UK and Australia was far from a prefect process.

Dixon points out that the FSB has learned valuable lessons from the challenges which faced the rollout of these programmes.

"The common denominator in the challenging rollout of RDR is the fact that the UK and Australia were implementing RDR from a starting point that was behind where we currently are in South Africa. The Financial Advisory and Intermediary Services (FAIS) Act in South Africa has already achieved a great deal in terms of the professionalisation of the sector. Even now, the UK and Australia are in the process of establishing regulation which is similar to FAIS,” says Dixon.

He adds that there are other factors which the FSB has given particular attention to.

"One of the factors we are giving specific attention to is making financial advice available to the lower income sectors. If we move to a purely fees based model, this will be difficult to sustain in the low-income market. We are specifically looking at options that will support a sustainable model in this market,” concludes Dixon.

Editor’s thoughts:
The FSB believe that by implementing this regulation they will bring South Africa in line with international markets which can only benefit the industry. The FSB also believe that they have taken cognisance of the mistakes made in other international markets so that the rollout of RDR will be uninhibited. However, how much consultation has been conducted between the FSB, broker bodies and the advisers? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughtsjonathan@fanews.co.za.

Comments

Added by Andre, 07 Oct 2013
On one side the Govt is talking about creating jobs, on the other the FSB is eliminating jobs. We are a third world country, the FSB is hell bent on creating laws which destroys any possibility of brokers creating jobs in this industry.
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Added by Paul K, 07 Oct 2013
I fully endorse all comments above - bottomline if the FSB was remotely concerned about the consumer then aside from all the massive fraudulent practices that have scammed millions which somehow they counld not prevent even when Personal Finance warns them - on bread and butter issues when the FSB sorts out the bad business practices of the call -centres including the frighteningly shoddy disability & dreaded disease policies they "offer " - then we might hold them in a somewhat higher regard - Treat the customer fairly ?? - ask one of these direct sellers for a quotation and technical definition of what they offer and the tel call will in most cases end abruptly when they realise they cant ramrod you into their product straight away !
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Added by Marc, 07 Oct 2013
The unfortunate reality is that the average person, who (desperately) needs the services of an independent financial adviser will not willingly pay (separately) for financial advice, unless it is somehow included/covered by the product or product provider (currently via commission), and is likely to act without independent advice. The eventual losers will be the average Joe acting on the hair-brained advice of a friend or family member, or the single-minded (not-so-independent) advice from a product company employee. The cost and regulation of 'independence' (what the consumer and the industry really needs) is soon becoming unbearable, and it leaves room for an environment where advice is either non-existent, or not independent. The wealthy will pay for advice, and reap the benefits, while the average and lower income consumer will suffer.
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Added by Skylimit, 07 Oct 2013
Where does it stop? A broker cannot earn an honest living nowdays...if anything we need to be renumerated more.In a normal job, if you abide by company policy, upskill yourself and earn more experience you can expect promotions and increases.But with Brokers it is the other way round.We are expected to abide by FAIS, FICA, upskill ourselves,accept more risk,take on more overheads and give the client a more comprehensive service at a lesser price.This does not make sense.I am tired of attacks from the Direct Insurance market,National Treasury,FSB,Personal Finance,Council for Medical Schemes.Perhaps they need to put themselves in the shoes of a Broker just for one day before judging.If anything, they should be questioning their fat cat salaries (which is not exposed to claw backs by the way) to see if they are offering any value.As per an old Proverb "Before you look at the speck of dust in my eyes, look at the log in yours".After nearly 20 years in the industry I am tired,disinterested and disgruntled and for one am not looking to grow my business or employ more staff.Government is wanting to stimulate small business and create jobs.All the above mentioned want to stifle growth and cause job losses.I don't get it, really I don't.I am already looking at an exit strategy....well done all you have done your jobs admirably.Its only a matter of time until yours are threatened.
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Added by Mervyn Sacks, 07 Oct 2013
No young people are coming into the Industry and this over-reuglation is going to excarbate the problem
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Added by Thomas, 07 Oct 2013
RDR..Another word added to the list.
I wish to ask the following: Is it possible that the FSB realize that every single cent that they receive as Fees come out of our clients pockets?. The FSB are paid by our clients and to cover our costs we must in some way retaliate. More commission maybe?
This whole debate is about one issue and one issue only: In the strive to offer clients a good reasonably deal for advise the consequence is that something must give--this give is that the financial advisor/intermediary must earn less so that the client can receive more value. The big and only question: Can the majority of financial advisors afford to stay alive while implementing the new proposed fee model???.If yes..there are nothing to talk about ,if no..we have a huge problem. Should we simply resign disappear if answer is no?
As said before we are all very aware that the most insurance companies have introduced direct access for clients to be able to continue business without independent advisors. I doubt if they will admit this but it is true. I see this as a indication that they also believe that it is only a question of time. It is ironic that the whole industry and insurance companies was created "fuelled" by independent fin advisors. I still believe that if anything positive to be done it should be to rather regulate the different investment /insurance companies then the advisors. The big companies can get away with murder but we the independents are easy to manipulate. The FSB should create a standard fee and cost structure for all products /investments and that should create a level playing field and there will be no benefit for any advisor to suggest one product above another because of more or better commissions. Performance and costs will be the rule. The current product ranges with fancy names are littered with beautiful invitations and unfortunately hidden costs. Start there!.

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Added by Cynical Simon, 07 Oct 2013
Consultation or no consultation. Intermediaries are very undesirable species .
Whosoever escapes the sword of the TRE Exams,
He shall be killed by the sword of the solvency requirements,
And whosoever escapes the sword of the solvency requirements,
He shall be killed by the sword of RDR.
The FSB will never let go until the very last one is dead.
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Added by Ben Holtzhausen, 07 Oct 2013
The solution is probably not much more complicated than legalised trading in Rhino Horn.

Unfortunately commission on financial products will always be a perverse incentive and a conflict of interest in itself. Perhaps we should simply ban all commission on financial products and impose some rules to protect consumers against their own stupidity (e.g. preservation of retirement funds), and then completely de-regulate intermediary remuneration.

We would probably see a large part of FAIS regulations become obsolete, as and when the consumer become more educated and empowered.


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Added by Ayanda, 07 Oct 2013
Firstly, it is very unlikely that the FSB has ever learned ANY lessons from anywhere - whether from its SA experience or from the "international best practice". They learn only what new ideas there are for yet more self-aggrandising bureaucratic powers.
Secondly, neither the insurance industry nor its new business acquisition models had anything whatsoever to do with the so called "global financial crisis". This is the eyewash they keep feeding Parliament as justification for yet more draconian powers to allow inexperienced and wholly unsuitable jumped up civil servants to interfere with impunity with the workings of private enterprise and a market mechanism they simply cannot understand. The banking "crisis" was everywhere caused by one factor alone - government intervention - in the mortgage markets by the US government and in spending like drunken sailors by European governments. Neither the private sector as a whole, nor the insurance industry as part of it, was remotely connected with its cause. New business distribution costs were certainly not the cause of the "crisis" and they certainly cannot make any contribution to preventing another.
This is thus clearly and simply yet another power-grab by our beloved brethren at the FSB.
We insist on following the UK over the cliff like lemmings. Their TCF system is now under review, as is their "twin peaks" disaster. But we are pressing on regardless in SA.
Like much of FAIS, TCF, "twin peaks", binder regulations, etc, etc, etc, RDR will simply be more nonsense that a future regulator will have to undo to save the sector.

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