Getting to the heart of the RDR debate may not be an easy issue
31 March 2014 | Compliance - Regulatory | General | Jonathan Faurie
One of the most important pieces of legislation that the Financial Services Board (FSB) wants to introduce is the Retail Distribution Review (RDR). The purpose of RDR is to provide a framework that redefines what constitutes advice, and how advisers are paid to offer this advice.
One of the objectives that the FSB hopes to create with the introduction of RDR is industry accountability. Advisers must be able to give the best advice to suit the client's needs all of the time and product providers must be held accountable for the actions of advisors whether they are independent or tied.
These were some of the issues which were discussed at a recent RDR round table which included input from the FSB, the Financial Intermediaries Association of South Africa (FIA), and various other industry stakeholders.
Independent or tied?
The objective of the FSB implies that there is a certain amount of adherent practices which are taking place in the industry, and it is assumed that RDR will force product providers and advisers to think twice before participating in these practices.
Michael Blain, MD of Altrisk, questioned if product providers and advisers truly value the concept of independence within the industry?
"We have to have sympathy for independent advisers; they wake up every morning unemployed and are forced to go out and make sales. The waiting period for clarity on RDR has created a significant period of uncertainty in the market. Product providers then dangle the incentive of high commissions, which become attractive to advisers," said Blain.
He added that during this time, product providers have also gone out and have bought capacity by offering cash incentives to independent advisers to become tied agents. And there is no problem with this, provided that they remain tied agents.
"But a number of these so-called tied agents are misrepresenting themselves as independent advisers. If we are going to adapt as an industry, we need to change our way of thinking," said Blain.
Are independent advisers being forced to perform Seppuku?
In feudal Japan, if a family member lost the honor of the family, this could be restored by committing Seppuku, or ritual suicide. Is the FSB unintentionally forcing independent advisers into a similar situation? Not in a literal sense, but in a professional sense. The whole purpose of being independent is that the adviser can offer his/her client the best product from a range of products from different companies.
Chris Benfield, CEO of Hollard Investments, said that the purpose of regulation is always done with good intentions, but it often creates some unintended challenges within the market.
"Complying with all of the objectives and guidelines of RDR will take a significant investment in resources. This is unintentionally increasing costs within the industry and will become unsustainable for certain independent advisers. These advisers will be forced to become tied agents, so we may very well see the death of independent advisers," said Benfield.
This raises another issue in the industry; that of entrepreneurship. Is the FSB creating an enabling environment for new companies to enter into the industry? Smaller companies are often a safe haven for independent advisers and they rely on these advisers to create sustainability for their businesses.
Don't look at the industry with rose tinted glasses
The South African financial services industry, is often compared with industries such as the UK and Australia. Both of these markets have introduced their version of RDR, to significant industry outcry.
Professor Robert Vivian, Professor of Finance and Insurance at the University of the Witwatersrand, says that it would be completely silly to ignore the UK model and the challenges that it experienced in implementing this. He says that the South African industry needs to take necessary steps in order to avoid a similar situation.
"While South Africa is benchmarked against international industries, we cannot take a one-size-fits-all approach to resolving our unique issues. We are still a third world country, with third world challenges. RDR needs to be adapted to resolve the challenges unique to us," said Prof Vivian.
He may have been alluding to the fact that there is a significant class disparity in South Africa. While there is a growing middle class, there still is the challenge of how to design and sell products to lower income earners.
"Perhaps one of the biggest messages that can be given to advisers and intermediaries during this period of uncertainty is Carpe Diem. Seize the day. Don't wait for the FSB or large corporates to define your terrain, define it yourself," said Prof Vivian.
The voice of reason from the regulator
The issues raised by Blain, Benfield and Prof Vivian are all valid concerns in the industry and need to be addressed by the FSB when it solidifies its RDR model. However, there is still the issue of an industry operating within an environment of shifting sands which needs to be addressed.
Justus van Pletzen, CEO of the FIA, pointed out that the issue of RDR has been ten years in the making. But instead of it being ten years of peace, it has been ten years of companies developing and implementing mitigation strategies on hearsay and assumptions as the FSB is not in a position to finalise its RDR framework.
"We need to understand why we are talking about and engaging with industry role players about RDR. What is the role of the intermediary in all aspects of the business? Hopefully this will be clarified during the engagement process," said Van Pletzen. He added that there are a lot of issues in the industry which needs to be resolved. Some product providers are unfairly pushing administrative responsibilities onto advisers and there is still not clarity on the role of the broker in the medical scheme industry
If anything, it is assumed that RDR will eliminate some of the adherent practices which are currently happening in the industry. But role players need to be patient and not pre-empt the FSB.
Leanne Jackson, Head Treating Customers Fairly at the FSB says that RDR goes beyond remuneration and hopes to eliminate opaque business models which are creating uncertainty in the market. However, the FSB is not yet in a position to finalise its RDR framework and part of the problem of creating opaque business models is that they are being done on assumptions.
Editor's Thoughts:
One of the biggest themes coming out of the round table discussion was the fact that there is a significant amount of uncertainty in the market, and while industry does have patience, this is wearing thin and they are pleading with the FSB to move the process along quicker. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
Comments
We all know that up-front commission is a highly perverse sales incentive, and the big assurers desperately need to sustain that ancient model to support their HUGE cost structures feeding their unsaturable corporate greed. "New" assurers like Brightrock and Altrisk already offer as and when commission structures.
Why is it so difficult to do all life business on a remuneration model similar to short term, health care and employee benefits? Applying the standard reg 28 retirement fund commission structure, to individual policies will ensure great long term sustainability for any independent financial advisor.
In fact, the most important purpose of the products we sell, is to ensure sustainable repeating income to our clients.I fail to understand why so many financial advisors don't have the insight to see how the benefits of a growing income stream far outweigh that of large up-front commissions.
The survival and eventually lucrative, short term, unit trust, medical scheme or other EB brokerages is clear proof thereof. Yes, the assurers don't like that so much, since we're not bringing them enough NEW money. A clear sign that caring for existing clients is not all that important to them. Report Abuse
The Regulator always take issues too far;the point in fact being your quote of Leanne Jackson's conviction that RDR goes beyond remuneration. Report Abuse
I might go off topic but this is my view:
Surely the financial industry is fast becoming the most regulated industry and I foresee that only people with law degrees will be allowed to practice in the near future.
I am of opinion that the existing rules are not implemented and monitored and then they still want to make more rules, which simply makes it more and more difficult to stay in the industry.
Instead of protecting the independent intermediary, there is a total onslaught of getting them under the control of the big brothers of the industry, to the detriment of the clients.
Unfortunately the only people that gains by people leaving the industry, will be the Assurance companies, who must receive billions of commission which cannot be paid out to the ex-intermediaries because of present legislation.
I am seriously suspicious of who the real powers to be are in the industry, it seems like it is the Big money that controls the industry, with their legislative partners
Careers are wrecked, people loose initiative, retirement plans go for a loop, become disillusioned in an industry that were carrying this country for many years.
And yet its members are absolutely free game for legislators regardless of the consequences all under the pretences of being fair to the customer…..what the hell about the intermediary?
I am also disillusioned with the apparent ease with which FIA and other organizations bend backwards to accommodate these salaried employees to determine the future of those working for commission. What use will it then be to belong to such an organisation if they are not fighting for our rights as intermediaries under the constitution of this country, or is that not applicable to intermediaries? ( Yes, I might not be informed of what they do, but it seems that every idea the legislator has come up with, has been implemented regardless of what they say…money again?
The legislators obviously has NO idea what it is like to work for 33 years without a salary, the pains that goes with it, the effort that has gone into building a business and the day to day challenges that goes with it. How helpless you are when you see that by means of legislation, all you have worked for, falls by the wayside, and nobody cares, as long as they get their salaries…sic these buggers are acting unconstitutional and nobody seems to take them on.
The only plea I have is to allow entrepreneurs to carry on with their business and to apply existing rules regardless of who is involved....rules will always be broken and as long as people get away with it by not enforcing it, it will just lead to more rules and legislation…it has to stop somewhere, somebody have to draw a line and stop this wrecking of the industry.
Thanks for the opportunity, but these things have to be said…
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