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An informed decision doesn’t mean that it is the right decision

22 November 2016 Jonathan Faurie
Jonathan Faurie, FAnews Journalist

Jonathan Faurie, FAnews Journalist

In terms of regulatory developments, next year promises to be a big one for the financial services industry as the Financial Services Board (FSB) gears up for the adoption of the Twin Peaks model of regulation.

When this will take place is again becoming a matter of conjecture. The FSB has been promising the change for a while now and has said that it will take place in early 2017. However, at the recent SRP Africa Structured & Alternative Investments Conference, the regulator hinted that probably nothing will take place until March 2017.

Unsteady foundations

These vague timelines are having serious effects on the business of advisers as they are unsure where they stand when it comes to the current advice that they provide clients. Regulation such as Treating Customers Fairly (TCF) and the Retail Distribution Review (RDR) cannot be passed into law without an overarching piece of legislation.

Judging by the information at the conference, perhaps this is not a bad thing. It gives the regulator the time to assess all of its options in order to make the best decision based on our unique challenges.

When looking at the UK experience when it comes to RDR, which the FSB has often said is a good guideline; Mats Halvorsen – CEO of SIP Nordic Fondkommission – said that there has been a mixed bag of reactions when it comes to the implementation of RDR by the Financial Conduct Authority of the UK.

“Initially there were good reports regarding RDR; however, recent studies show a different picture. There was definitely more money made in mass transactions; since there was a move away from this, there is definitely an advice gap where middle to lower income earners are not getting existing levels of advice simply because they currently cannot afford it,” said Halvorsen.

The experience in Europe

The picture is significantly different when one looks at the greater European landscape where Halvorsen pointed out that there hasn’t been a ban on commissions. However, in these markets, there are very explicit disclosures that need to be made by the advisers.

Halvorsen’s sentiments were echoed by Keith Mukami, Director at Norton Rose Fulbright. He said that there definitely were a few problems with the implementation of RDR in the UK. “This was particularly the case when it came to structured products where despite the presence of increased disclosures, there was little understanding when it came to these products. Product providers and advisers found that they needed to go back to the drawing board when it came to how they structure advice to clients,” said Mukami.

The baby and the bathwater

Halvorsen, coming from the European market outside of the UK, implored the FSB to study all of the available literature when it comes to experiences relating to RDR and not to throw the baby out with the bathwater. Don't throw the baby out with the bathwater is an idiomatic expression and a concept used to suggest an avoidable error in which something good is eliminated when trying to get rid of something bad; in other words, rejecting the essential along with the inessential.

However, when the FSB took to the stage at the conference, a visible line was drawn in the sand. Marius de Jongh, Senior Specialist within the Collective Investment Scheme team at the FSB, said that commission will be banned and that performance fees will be brought in. He added that the FSB feels very strongly about this.

Is the baby being thrown out?

The issue of commissions has been a sensitive issue with our readers since the FSB announced its banning. If there was a chance that a revitalised industry can be built with the presence of commissions, surely it is worth looking into?

I pressed the issue with the FSB and De Jongh stood his ground. “We cannot build an industry where commission is banned in some cases and not in other cases. We will not regulate by exception. The stance taken by the FSB is an informed decision; however, this doesn’t mean that it is the right decision,” said De Jongh.

De Jongh did try and extrapolate this stance further by saying that most people think that when regulation is passed, it must be perfect from the first letter to the last grammatical point because it is cast in stone as it were.

However, the FSB doesn’t believe that this is the case because regulation can be updated and changed to suit needs. “It’s more about getting a car on the road then getting the perfect car on the road,” said De Jongh.

Editor’s Thoughts:
At the end of the day, it comes back to the unintended circumstances when it comes to regulation. Piece the comments made by the FSB together as you will and make up your own mind when it comes to De Jongh’s comments. Who will bear the costs of changing regulation if they discover that what they put out is inappropriate? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

Comments

Added by Paul Reed, 28 Nov 2016
RDR in the UK was was pretty disastrous ,this is fact. Implementation of our own RDR,based on these results in the UK is atypical of beaurocracy at its worst.
I have far more explicit terminology than 'baby with the bathwater should it so please the court..

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Added by Stan Miller, 22 Nov 2016
FSB - Tunnel Vision. Who is going to service the man in the street.
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Added by Pierre van Blommestein, 22 Nov 2016
The point has been made over and over. Who will service the "small man". Currently commissions from larger accounts allow a broker to service unprofitable accounts. This will fall away and the people the Govt. want to help (and generate savings from) will fall away from the advice loop. Stop the madness.
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Added by MervynSacks, 22 Nov 2016
We are about to repeat the disaster in the UK with the approval and uuderwriting of the FSB
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