A nine-year grind to commission and fee uncertainty

It has been nine-years since the 2014 Retail Distribution Review (RDR) saw the light of day, promising to clearly define categories or types of adviser and introduce significant changes to the commissions and fees that brokers, financial advisers and intermediaries could earn. Alas, the final decision on these key issues has been repeatedly kicked down the road, leaving industry stakeholders to plod along under the broad guidance of treating customers fairly (TCF) principles.

Latest thinking on advice and adviser remuneration

Adviser remuneration and advice practice remuneration models featured on the first day of the Financial Planning Institute of Southern Africa (FPI) 2023 Convention, held November 2023. FPI CEO, Lelané Bezuidenhout CFP® led a panel discussion that included an independent financial adviser (IFA); a compliance expert; and an industry stalwart with a thorough understanding of the tied agency landscape. “The RDR promised to ensure that intermediary remuneration was fair; [and contained] some key proposals for setting standards for financial planning fees,” said Bezuidenhout, as she introduced the discussion points. 

As most FAnews readers will be ware, some of the proposals contained in the original RDR included to separate advice fees from commission and to prohibit product suppliers from paying remuneration to independent intermediaries. But the regulators have since been unable to progress any of these ideas from proposal stage into the final regulation. “Many of the RDR proposals were introduced through changes to the General Code of Conduct and other legislation,” Bezuidenhout said, before asking Billy Seyffert CFP® and COO at Moonstone Compliance, what the Financial Sector Conduct Authority (FSCA) intended in respect to intermediary remuneration. 

Seyffert said it was important to distinguish between commission, which he described as regulated remuneration for a regulated activity as defined in the Long-term and Short-term Insurance Acts, Medical Schemes Act or other legislation versus the commission that is paid to a representative by a Financial Services Provider (FSP). The latter, he said is better-described as employee remuneration. As for what the regulator wants… “The FSCA wants a fair deal for the customer; they want value for money for the customer; and they want advice, product and services that constitute good value and give effect to fair outcomes for customers,” Seyffert said. 

The financial inclusion trade-off

Furthermore, both the Financial Sector Regulation (FSR) Act and pending Conduct of Financial Institutions (COFI) Bill intend promoting access to financial advice, product and services. According to Seyffert, the RDR focused on activities performed by intermediaries for their customers including administration, advice, planning and services, to name a few. RDR thus started by considering every activity performed by the intermediary, the remuneration for that activity and the potential conflicts that arose from the remuneration with a view to introducing limitations or standardisation of said remuneration at levels that would mitigate conflicts and ensure fair outcomes for consumers. “The difficulty comes in where you have an intermediary between a customer and a product supplier and it is not clear who does what for whom; fundamentally, the one that you are doing the work for should be paying you,” he said. 

There are risks in tampering with the current commission model. Speaking with his compliance hat on, Seyffert said that “by and large” financial services customers in South Africa were well-serviced and able to buy the financial products that they needed. He added that the current commission models still enable this level of services and warned about the potential negative consequences of introducing more remuneration ‘hurdles’. It became clear, early during the discussion, that standardisation of fees would prove challenging. Johan Minnie, Liberty Group Sales Director led his opening remarks with a question: Should you standardise fees in a free market? 

“It is not possible to go out and say one financial plan will cost you x and another y because every client brings a different set of needs and a different risk profile,” Minnie said. At first glance, RDR Proposal 2 appears to accept this reality, advocating for standards in financial and risk planning that include obtaining explicit customer consent for both the type and quantum of the financial advice fee. However, until such time as COFI is finalised, advisers and planners remain uncertain of how this interaction will be regulated. Bezuidenhout asked whether there was a chance the local regulator would attempt an outright ban on financial product-related commission. 

Is commission the root of all evil?

“It would be a terrible idea,” said Seyffert. “Commission is not the root of all evil …  if you are going to put an upfront advice fee hurdle in front of South Africa’s already under-insured, under-saved society you are going to be in a lot of trouble”. Minnie was also sceptical, though he admitted that a commission ban may be possible because there was a perception among regulators that it was the driving force behind poor advice and, of course, poor consumer outcomes. “However, the moment you start to ban commission, you find the advice gap getting bigger; some of the people in some of the more advanced countries are starting to relook at certain commission-related decisions,” he said. 

The panel was in broad agreement that outcomes in South Africa’s insurance and retirement sectors were declining despite the introduction countless sensible regulatory protections. Better and higher standards were necessary, but the trade-off of higher regulatory standards versus coverage and financial inclusion must always be considered. Thomas Brukman, CFP®, who represented the IFA view, said that commission should never be banned. “RDR is trying to address conflicts, and the way that advisers, brokers and intermediaries are remunerated,” he said. He reiterated that the average middle income South African consumer could not afford a big upfront fee for advice. 

And finally, the question the audience was waiting for. What would you like to see in a future FSCA Conduct Standard for Advice Remuneration Models... “I would like to see guidelines with as little interference into the profession as possible,” said Minnie, keeping his response short and to the point. Seyffert agreed, adding that he expected a conduct standard to enshrine principles such as getting paid for the work done; not getting paid twice for the same thing; doing actual work for actual pay; and receiving recurring pay for recurring work. “Advisers and planners also need clarity about what they can contract into and out of i.e., what can two grownups agree as far as their adviser-client or adviser-product provider relationship,” he said. 

An IFA’s remuneration wish list

Brukman was last to share his remuneration standards ‘wish list’. He advocated first-and-foremost for clearer delineations of advice roles between adviser, broker and intermediary. “We must have much clearer guidelines around who we are; what we can and cannot do; and how remuneration plays out for each role … this would help a lot of people,” he said. And we conclude with another sentiment that emerged clearly during the discussion, being that the FSCA should regulate the industry, not the financial planning process. It was felt that the ‘how to’ of financial planning should always remain in the profession’s hands. 

Writer’s thoughts:

Almost a decade after RDR surfaced, financial and risk advice professionals are still waiting for clarity on the future of advice remuneration. In the commission and fee context, do you prefer clear, concise and non-negotiable rules or a set of guidelines that allow for flexibility around commission and fee-charging? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.

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