Industry to plan its future following the RDR White Paper
After months of anticipation and keeping the industry on the edge of its seat, the Financial Services Board (FSB) has finally released its Retail Distribution Review (RDR) White Paper. The paper, which was released on Friday 7 November, is open for public comment until 2 March 2015.
However, not everyone shares this excitement. The FSB is putting its foot down in certain sectors, which may have far reaching implications if the proposals in the paper are published in their current form.
More regulatory reform imminent
Jonathan Dixon, FSB Deputy Executive Officer (DEO) of Insurance, points out that the RDR Paper proposes a number of far reaching reforms to the regulatory framework for distributing retail financial products to customers.
“The review was undertaken in response to concerns that despite comprehensive regulatory requirements dealing with financial advice and distribution, poor customer outcomes and wrongful selling persist. The review outlines a more proactive and interventionist regulatory approach to addressing these risks. It proposes the introduction of a set of structural interventions designed to change incentives, relationships and business models in the market in a way that supports the consistent delivery of fair outcomes to customers,” says Dixon.
From the beginning of the RDR consultation process, the FSB has been vocal in the view that the establishment of RDR reforms will provide the public with more clarity on the financial services industry and will give them more confidence in their intermediary.
Dixon adds that RDR will, according to him, also enhance the standards of professionalism in financial advice and intermediary services to build consumer confidence and trust. It will enable customers and distributors to benefit from fair competition for quality advice and intermediary services at a price more closely aligned with the nature and quality of the service.
Getting to the heart of the issue
“A total of 55 specific proposals are put forward for discussion and comment. The proposals cover the types of services provided by intermediaries, the relationships between product suppliers and intermediaries as well as intermediary remuneration,” says Dixon.
These proposals contain key principles which provide that intermediary remuneration should not contribute to conflicts of interest that may undermine suitable product advice and fair outcomes for customers.
All remuneration must be reasonable and commensurate with the actual services rendered. Remuneration structures should strike a balance between supporting ongoing service and adequately compensating intermediaries for upfront advice and intermediary services. Ongoing fees and/or commission may only be paid if ongoing advice and services are rendered. All fees paid by customers must be motivated, disclosed and explicitly agreed to by the customer.
“The payment of commission by product suppliers to intermediaries will be banned in respect of investment products. This will be replaced by an advice fee that must be explicitly agreed upfront with the customer. Commission for selling and servicing life risk policies will comprise a mix of upfront commission and as-and-when service fees. Fifty percent of the remuneration payable by long-term insurers in respect of life risk policies may be paid up-front as a sales commission, with the remaining 50% being payable on an as-and-when basis to provide for ongoing servicing and maintenance of the risk policy,” says Dixon.
He adds that further technical work and consultation will be undertaken to determine what the new maximum commission and service fee levels should be. Product supplier commission will be prohibited on replacement life risk policies, to address conflicts of interest and misselling risks.
Leaving key clients high and dry
While many of the proposals made by the FSB are appropriate and understandable, the banning of commission on investment products is a bold move. Advisers need to earn a living. When a similar stance was taken in the UK, clients who did not earn over a certain annual income were deserted by advisers as it was deemed that they would not be able to pay a fee for advice.
In essence, advisers only targeted high net worth individuals as they were the ones who could afford to pay a fee. This may very well also happen in South Africa.
The only way to avoid this is for the FSB to formulate a strategy that will help insurers target middle to lower income earning sectors. “Additional consultation and technical work will be undertaken to determine an appropriate remuneration dispensation for product suppliers and intermediaries serving middle and lower income customers, in respect of life insurance risk products and investment products, so as to support access to financial advice, linked to products that meet certain standards of simplicity and value,” says Dixon.
The as-and-when remuneration model for short-term insurance will be retained. “The current provision allowing for additional fees over and above commission (through section 8(5) of the Short-term Insurance Act) will be replaced by an advice fee that must be explicitly agreed with the customer upfront. Linked Investment Services Provider’s (LISPs) will only be permitted to be remunerated by means of a platform administration fee disclosed, agreed to, and paid for by the customer. “Payments from product suppliers to LISPs, including any rebates, will be prohibited. A general standard will be set to confirm that no financial interests of any kind may be provided by product suppliers to intermediaries unless specifically provided for in the regulatory framework,” says Dixon.
The way forward
As pointed out earlier in the newsletter, the White Paper is open for public comment until 2 March 2015. The FSB also intends to establish stakeholder feedback workshops before the comment period closes.
Once the comment period has closed, key stakeholders will be invited to participate in specific consultation structures that will be put in place to develop final legislative and regulatory changes.
Editor’s Thoughts:
The paper is extensive and far reaching, but will it address all of the issues in the industry? And is it being fair to intermediaries? At the end of the day, they need to earn a living too. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.
Comments
The Same happened with commission regulations on RA's in 2009- While I do agree with parts of it.
In my opinion the consumer will be left high and dry if you dont meet a certain demographic for the adviser, and will be left with out dated and incorrect policies as no one will work for free, with the process that are involved in setting up a new policy.
The UK industry has been killed by the very process that has been implemented- Do yourself a favour and try and request a quote for a million pounds life, disability, and 10k income protection with an adviser there, and you will see the over regulation that has killed that industry and is slowly going to be killing ours.
Mr Dixon unfortunately has missed the mark, and instead of making advice available to everyone, has just Killed an Industry that was a world leader.
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Shooting the consumer in the foot?
The FSB is still to justify the high salaries paid to an ever expanding workforce who add no value to the economy. Report Abuse
We really need to let go of the emotions and see the great opportunities to build a practice with consistent recurring revenue.
There is a very strong possibility that the removal of the perverse sales incentives will lead to the redundancy of some crippling FAIS regulations.
The fact that the as & when structure of the short term industry was unchanged, is a clear sign of what is expected of the life and investment industry. Report Abuse
Most of us will have retired, or gone into something less stressful that pays better and more consistently.
We will all then gleefully watch the demise of the FSB who will serve no purpose.
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FAIS was sold to Parliament on the ruse that it would "professionalise" the intermediary fraternity, stop "mis-selling" and greatly improve persistency. We now read in the RDR document that 12 years later "SIGNIFICANT concerns about poor customer outcomes and MIS-SELLING remain"! Now we are told that a "more proactive and INTERVENTIONIST approach" is needed. Why? Because FAIS has failed (as many predicted it would) and no one will admit it.
We also have the forthcoming "Twin Peaks" soap opera to look forward to. Apparently dividing the FSB in half and then doubling each piece will magically restore FAIS and its ever-vague objectives.
Commission regulation, introduced nearly 4 decades ago, failed in its stated objective of reducing costs to consumers. It merely increased costs and exacerbated conflicts of interest. RDR is another failed attempt in the making, only this time more determined, many times more costly and very much more certain to fail.
Sanlam's Johan v Zyl, Old Mutual's CEO and Liberty's chief, along with ASISA and SAIA need to put their collective foot down and say so far and no further! (Or are we right to suspect that they are missing their collective spine?)
Commission regulation in all its forms has failed everywhere it has been tried, even in the UK where RDR is now under review and in OZ where the PM has thrown it out with the dishwater. Moreover, price control of any sort is well known to be anathema to any good economy.
Why do we persist with it here? Are we really Hell-bent on yet another failure? Report Abuse
Once again you are reaping the benefits of following yet another failed model(if you still don't get it look at New Zealand,Uk,Europe,Australia etc.
We need to stop pussyfooting around cut and paste legislation...)cos we are so scared of not being up other countries asses and not being one of the herd etc)and actually design our own set of rules that make sense to us NOT them.
Anyway enough said cos we won't will we! As we will so often loose against the All Blacks cos its traditional to do so??
Yeah right,look at old OZ the PM is in the process of chucking out the RDR section about commissions because it aint gonna fly.
Bully for them,the pennies dropped, anyway once we have screwed up this industry properly...and WE Will ,at some point we will experience something called DEREGULATION(which is politically correct terminology for sorry we were wrong but we did somehow,OURSELVES manage to earn money out of it)
Bah bloody ratpiss beaurocrats,to hell with all of you!
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Over the last 10 years very strict laws and regulations has succeeded in bringing the IFA corps to a relative high standard of compliance and education. This is a good thing but:
*It will and has already became impossible for new and or young advisors to get into the industry..it is simply too expensive to comply on the one side and abide by the rules and regulations and the associated costs.
*Without doubt the turnover of insurance companies will decline and of course the billions in taxes paid over to SARS never mind the increase in unemployment. These new remuneration models will also mean a huge decline in public savings as very few just save out of their own accord.(We all know that only a very small percentage of the public actually save as it is.
*Insurance companies know this and have extensively created direct channels to be able to do business without the involvement of intermediaries. A feeling is created that the insurers and investment houses do not really care as they have a double sided buttered slice of bread (backdoor).
* As noted in FA news article the poor and uneducated will suffer the most..It is simply not worth it to do small individual business and the accompanied education that are so important and not get paid for it.
Eventually there will be but a few independent IFA's left, doing exclusively business with the top 5% of the country ,90% of all broker consultants, management and admin staff of the insurers will be gone and the in house or tied agent model will flourish and the huge irony will be that only 5% of all SA customers will have access to real truly independent advise and products. Comparisons of different products will be a thing of the past and those insurers with the best paid agents and or advertising campaigns will make the money. All the IFA remuneration saved will go directors and shareholders and profits and dividends and the clients will be worse of as they have few choices.
As and when commission are absolute wonderful principle for the insurers/investment houses. Billions in commission will not be paid over as lump sums but lie cozy in their own bank accounts and draw interest while the IFA"s are financing it. I wonder..will this interest at least be paid to the client??
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Not only will that experience hamper the relationship but will tarnish the industry with the end result being that clients won't seek help from Brokers. Report Abuse
What interests me, is are we going to see striking advisors?
What other industry in SA would allow their earnings to be cut in half.
Just look at how the pension reforms have been sabotaged. And yes, that is due to an education and "reality" of the situation in SA.
Throw on Nklandagate from the head of the country, e tolls and so on and lets see who respects decisions made on their behalf by regulators.
Change is always difficult. considering that I remember reading a survey that the average SA advisor earns R18 000, lets half that and see what happens?
If anything, this is definitely going to be interesting.
Life companies already champing at the bit to explain it to their pawns (sorry advisors). Report Abuse
All they need to do is include a fee invoice amongst the wad of documents prospects are required to sign, with an agreement that this will be deducted in installments from premiums paid. Report Abuse