Regulatory change based on treating customers fairly
Jonathan Faurie, FAnews Journalist
The Financial Services Board (FSB) regularly comes under fire for the amount of regulation they want to impose on the industry, as well as the pace at which they want this regulation to be adhered to. Norton Rose Fulbright recently held an Insurance Management Forum with Jonathan Dixon, Deputy Executive Officer: Insurance at the FSB as the key note speaker.
Insurers and intermediaries are bracing themselves for rapid, far-reaching regulatory changes through to 2016. These changes are necessary to address the combination of factors behind the “far too many examples of poor customer outcomes” still being encountered in the industry, says Dixon.
Dixon stated that to address these inadequacies, regulation and supervision must become “more forward looking, pre-emptive, risk based and outcomes focused. There is no doubt that the current period is seeing the most fundamental and fast-paced change to financial regulation in a generation.”
True customer centricity or lip service?
Dixon outlined the implications of the coming changes for insurers, intermediaries, clients and the FSB itself. “I believe we will see real evidence of a customer-centric approach as opposed to mere lip service from insurers,” says Dixon.
Insurers will also have to enhance their risk management, to include conduct risks and not just financial risks. “This will raise the bar for industry players but it will also promote competition and a level playing field.”
For financial advisers, the FSB envisaged a “simpler, cleaner system where they do not have to try and negotiate elaborate schemes with product providers to bypass regulation and earn extra income”, he said. Instead, financial advisers would be able to build value into their businesses and demonstrate their expertise and the value they bring to customers.
As for the industry’s customers, they stand to gain “a real sense that they can have confidence and trust that they are dealing with firms that will treat them fairly. Ultimately, this is the key to a sustainable future for the financial services industry and all its role players.”
Providers accountable for product development
A critical aspect of Treating Customers Fairly (TCF) will be the increased scrutiny of the way firms develop products. The emphasis will be on products that offer value to customers and meet their reasonable expectations.
“Product providers will also have the primary responsibility for ensuring that their products are marketed and distributed in a way that does not undermine fair outcomes, including much more rigorous oversight over their chosen distribution channel,” Dixon said.
“It has been far too easy in the past for product providers to blame poor outcomes on intermediaries. It must now be clear that delivery of fair outcomes is a shared responsibility.”
He said the FSB is busy developing the new regulatory and supervisory framework for the TCF model, which will outline what requirements firms need to meet and how their implementation will be monitored.
“Insurers are already expected to have started embedding TCF into their culture and governance framework, and we are already using the TCF framework in our engagement with insurers to strengthen the pre-emptive approach to supervision.”
Dixon warned that the FSB will be applying “increasingly harsh” financial sanctions against firms who do not proactively address poor practices.
Fundamental flaws in commission model
During his presentation, Dixon commented extensively on concerns about incentives and business models that failed to deliver fair outcomes for customers. Among these are conflicts of interest in adviser remuneration and low levels of understanding among customers about the service they can expect from financial advisers.
These concerns are driving the Retail Distribution Review (RDR) that is under way, to promote financial advice that is fair, appropriate and affordable, and to ensure a framework that supports a sustainable business model for financial advice.
“We believe the current, complex distribution landscape is fundamentally flawed. It creates risks not only to fair customer outcomes and effective supervision, but also to the sustainability of intermediaries and advisers; and in fact the whole intermediated business model,” said Dixon.
Through RDR, two main remuneration-related risks to TCF have been Identified, one being the current model that product providers use to pay commission and fees. “This can lead to incentive-driven advice rather than advice that is in the best interests of the client.”
Secondly, the current commission system is opaque in commission charges as built in and intermediation and advice costs are hidden. This may lead customers to believe they are not paying for financial advice, weaken accountability for advice given, and undermine product value because hidden costs tend to be less competitively priced.
The current commission model also poses risks to effective supervision, as well as to the sustainability of intermediaries. Among other problems, intermediaries often receive no remuneration for time spent on financial planning or product advice unless they make a sale.
Activity-based definitions address anomalies
To address these challenges, the insurance industry will be moving to an activity-based definition of advice and intermediary services, consisting of three categories: services to the customer (such as financial advice), outsourced services to the product provider, and true intermediary services (when an intermediary acts as the go-between in selling or servicing a product).
“The aim is to clarify which services are provided to which party and what capacity an intermediary acts in when performing these activities,” Dixon says.
When interacting with customers, intermediaries will be expected to disclose the nature of their relationship with product providers and clearly describe the services they are offering. They will also have to charge separately for each component of advice and intermediary services. In the case of an advice fee, the adviser should negotiate the advice fee with the client and the product provider should facilitate collection of the fee.
The FSB envisages limiting commission to life risk products, Dixon says. “In other words, commission and other product provider fees will be prohibited in the investment product space.” Replacing commission with an advice fee will ensure a level playing field across investment products. For instance, no commission is currently paid for collective investment schemes.
However, the FSB is considering introducing a special remuneration dispensation, on a commission or salary basis, for investment and risk products for low-income markets, where there could be an advice gap.
Conflicted remuneration, which occurs when incentives introduce bias in product advice or interfere with the duty of an adviser to act in the best interests of the customer will also be investigated.
Dixon said he expects the RDR discussion document to appear during August 2014.
Editor’s Thoughts:
This is a move in the right direction of creating clarity in an industry which is operating in a uncertain environment because they do not know what the effects of regulation compliance will be. It will be interesting to see if the goals set out by Dixon are achievable and if it ultimately benefits the industry. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
Comments
Wonder if intermediaries will also be treated as customers by insurers or does that only count for the man in the street? That would create an interesting scenario which will lead to the abondonment of one side contracts with intermediaries....and a more level plyaing field for intermediarieswhich is OVER REGULATED and there is no proof of success of the regulations!! except for a smaller intermediary field than previously, companies escalating there cost to the intermediary.
Same old story for the last 32 years, just a different verse....no wonder savings as a nation is at its lowest levels ever!! Report Abuse
Commission for sales made is well recorded in the literature over several hundred years as by far the most effective and cheapest method of product distribution, to the benefit of both clients and insurers alike.
Why are we trying to re-invent the wheel just because the British authorities also do not know or have forgotten this critical lesson?
A full disclosure of amounts earned is all that is required. Thereafter commission regulation should be scrapped as the 4-decade old failure that it is, having served only to increase costs for consumers. Report Abuse