People often do not like change because it means that they are taken out of their comfort zone and put into a position where they have to adapt or they will fail. Individuals who have a clear vision of how it will affect them thrive with change, despite their apprehension towards it. However, if there is a lack of clarity associated with this change, individuals will find themselves on the precipice of disaster.
This is the response FAnews is getting regarding the Financial Services Board’s (FSB) Christmas gift to the industry, the Retail Distribution Review (RDR) White Paper. While the FSB says that the feedback given to them has largely been positive, the feedback FAnews has been getting, and hearing, suggests otherwise.
Murky waters bad for the industry
South Africa is going through its regulatory reform off the back of regulatory reform which has taken place in the UK and Australia. These countries have already been through their RDR and Treating Customers Fairly (TCF) reforms. And while we have heard that their regulatory reform has been nothing short of challenging, we are now getting first-hand accounts of the magnitude of those challenges.
Speaking at the Future of Life Insurance in Africa conference, David Punter, Principal Consultant at Oracle, painted a rather interesting picture on the events which have led to the challenging landscape.
“When the UK was going through its TCF reforms, it asked the market to rate the honesty and ethical standards of professionals in a number of sectors. The banking profession received a medium rating while the insurance industry received a low rating. This prompted the Financial Conduct Authority (FCA) to start implementing TCF reforms. However the FCA did not lay down any standard way in which TCF is to be implemented. Therefore, companies are continually finding that they are infringing on TCF outcomes,” said Punter.
A turgid document
When it comes to insurance, some of the industry’s top legal minds have been working through the RDR document, and their feedback is that it will be somewhat difficult for brokers to understand the document.
Patrick Bracher, Director of Insurance Solutions at Norton Rose Fulbright, says that the document is written with a distinct legal preamble which will be difficult to digest if one does not have a legal mindset. “The RDR document is turgid and makes for very difficult reading. Yet, brokers need to give their feedback to the FSB,” continued Bracher.
The time has come for the industry to stand up for itself. There have been a lot of fines and penalties imposed on the industry for infringing on proposed laws which have not been officially passed yet. “There is a statute in the South African Common Law which states that you may not suffer a penalty unless it is an infringement of a clear law,” said Bracher.
He added that it is time for product suppliers and intermediaries to also be treated fairly. “However, regulators are not any good at changing their minds once they have committed their thoughts to paper,” said Bracher. He even went as far as to say that RDR is tantamount to micro managing the insurance industry.
The return of a legendary foe
In 1215, the political landscape in England was balanced on a knifes edge. King John wanted artery powers, especially when it came to the taxation of private property, and the infamous Sheriff of Nottingham was his collector in chief. However, there was significant opposition to this and the King found himself and his army facing a possible civil war against the barons and their armies.
To avoid this, King John was forced to sign the Magna Carta, a document which became the corner stone of the constitution in England. Some of the highlights of the document state that the Crown shall not be held by the sheriffs’ constables, coroners or other bailiffs. It goes on to say that no freeman shall be punished or fined except by the lawful judgement of his peers or by the law of the land.
What this means is that the sheriff could not make his own laws. Violations were determined by a court and the sheriff could not impose fines. The fines also needed to be in proportion with the crime.
Professor Robert Vivian, Professor of Finance and Insurance at the University of the Witwatersrand, drew a perfect comparison between the current insurance landscape and the 1215 English political landscape.
“Some of the legislative proposals are tantamount to micromanagement. Regulators want to impose 10% fines to the industry, they all want their own enforcement and appeal committees and they are all demanding a confession to the violation of laws and demanding payments of fines. This is exactly what the Sheriff of Nottingham was famous for,” said Vivian.
However, the industry must not expect Robin Hood and his band of Merry Men to champion the cause of the advisers. “We need to be our own heroes. Companies need to speak up and say that they will not stand for these fines any longer. Unfortunately, independent advisers will get nailed. A similar situation happened in Australia,” said Vivian.
Editor’s Thoughts:
As Bracher pointed out, once the regulator sets their mind to something, they are adamant to carry it out. Regulatory reform is not going away and as turgid as the RDR White Paper may be, advisers need to read through it and send their thoughts through to the FSB, it is the only way they may get their voice heard. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.
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Comments
Added by Jonathan Faurie, 04 Dec 2014We really cannot afford and don't need people to serve in our finance sectors of society if they are dishonest. In fact many of this legislation has been an answer to prayer, seriously it is! Report Abuse
I clearly remember the same hype and concerns raised when RPAR and the FAIS act started to rear its head and implementation started around 2001. Change is inevitable and if not embraced will have consequences. So let’s not be negative and rather let’s see this as just another stepping stone to achieve real professionalism within our beloved financial services industry and let's stay calm within our debates. I strongly believe there is a place for all financial intermediaries who are serious about financial planning within the industry and considering our working population ratio to financial intermediaries there is at least 295 working individuals for every intermediary in the country and as we all know the optimum level of clients to advisors is around 250 clients. We just need to have an industry which gives potential clients to our industry confidence to use financial advisors which will boost the percentage of the 295 average prospects using our services.
On the whole where the RDR has been implemented to date in the world, it seems that the RDR has had a positive spin off on clients in general even although not always on some intermediaries and in such cases it could be worthwhile to analyse why it did not work for such intermediaries. The principles of the RDR is that it should ensure clients receive an agreed level of service, know what they are paying for and how they will be paying it and long term have the opportunity to work with better qualified and experience intermediaries while having a better understanding what "type" of intermediary they working with and knowing if such person is working with or without restrictions on product choice or service providers. The question however I believe should not always be with regards to product restrictions but rather if the advisor is restricted to do long term financial life planning which will become more important within the RDR environment than flogging policies only.
There is no doubt that one of the RDR intentions is to clean up the industry as the FAIS Act has been trying to do as well since implementation and this will have a subsequent consequence that not everybody is going to be a winner within the RDR regulations. We have clear proof of this in the UK where many financial advisors have already left the industry because they have not been able to comply with the RDR criteria and many has also struggled to sustain a living income stream as they cannot substantiate a real value proposition to clients.
On the other side of the coin it is also a certainty that not all clients will benefit from the RDR either. Many will find it difficult to access good quality financial professionals and advice in the future as there will definitely be less advisors of any "type" in the industry and the advisors who do make it will focus their activities on wealthier clients in many cases possibly.
The real win-win situations will come to those financial professionals who offer a holistic value proposition and for which the clients are willing to pay for and therefore a win-win recipe for both client and advisor. Very affluent clients who can afford to pay for good-quality financial advice and real financial planning would be able to do so with confidence that their financial professional is suitably qualified and acting in their best interests at all times and will also be winners. If we want our industry to be perceived with the same status as our counterpart professionals like CA’s, Medical Professionals, the legal fraternity etc, we will certainly not come out shining beyond this process on the other side through badgering and being negative when the inevitable is a given either way.
So the bottom line would be that organisations and affiliations to whom we all can belong like FPI and FIA to name just a couple will do battle to the best interest of us as financial professionals and the industry and it is up to all of us to support them and work with them rather and to stay positive instead of negative to ensure our clients will still respect us and our industry going forward. Remember they are watching all this from the side-line with much more concern than us most probably.
It is therefore clear that it is up to us to make the best of the upcoming situation through education, credentials, continuous professional development, quality of business, relationship building, practice building, bedding down cost effective system and structures, building assets under management and phasing out upfront commissions and similar out of our income streams long before regulatory bodies does so. This should result in you being able to put a value proposition on the table through shared services and specialisation teams to your clients and prospects and maintain a sustainable business.
Your energy and focus should rather go into achieving above than fighting RDR. Lastly but most crucial we need to do away as financial professionals and other stakeholders in the industry with playing the man but rather let’s play the ball to win the game over the long term.
PS: Our comments to publications and articles within the open and social media will reflect either positively or negatively to our clients and prospects going forward and we all have a duty to each other’s to remember this.
Kobus Kleyn CFP
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Pity we as tax payers do not receive the same protection against the State wasting our hard earned tax money.
In my humble opinion we get a better return on our expenditure from the financial services industry than from the Goverment (no power, water problems, inadequate protection from criminals, poor educational facilities, potholes - especially after they sabotaged the pothole brigate from the Financial services industry that did this for free, excessive taxes being wasted left right and centre, healthcare system in a mess, economy in a mess etc. etc.) but what better way to try and shift the attention away from ones own short comings. Report Abuse
As John says below, this on-going intrusion by ill-experienced wards of the state in sheltered employment will decimate the industry and go on until the entire edifice comes tumbling down. We shall then return to the rule of law instead of the current and proposed rule of man. Report Abuse