Three disruptors every financial adviser needs to prepare for
The fast-track implementation of the two-pots retirement solution has shone the spotlight on South Africa’s significant financial advice gap. In an ideal world, every household should have access to financial advice before making decisions that may impact long-term savings and investment outcomes. Unfortunately, vast swathes of our population have little, if any, contact with advice professionals.
Advice in the two-pots world
Advice in the two-pots context featured during a recent discussion with Financial Planning Institute of Southern Africa (FPI) CEO, Lelané Bezuidenhout, CFP®. “You need a financial advisor to help you with your decisions when it comes to the two-pot system,” she said. Yet the bulk of the R43.4 billion in two-pots withdrawals processed by the South African Revenue Services (SARS) between 1 September 2024 and the end of January this year were completed unadvised.
There are some economic realities that make it difficult to address financial advice shortages. High unemployment an obvious influencer, but financial advisers struggle to extend their services to households in the lower LSMs due to affordability constraints. Put differently, it is unrealistic to extend holistic professional financial planning to every household. “Not everybody needs holistic financial planning, but everybody needs professional financial advice,” Bezuidenhout said. And there is nothing wrong with commission-based advisers advising consumers on straightforward, single-need products.
A recent FPI member survey set out to learn more about the issues facing advice professionals. A common theme was that members wanted greater clarity on what lay ahead in terms of the Conduct of Financial Institutions (COFI) Bill. “COFI is a very important piece of financial sector regulation,” Bezuidenhout said. She added that the outcomes and principles contained in the COFI Bill had been filtering into the regulatory environment ever since the Retail Distribution Review (RDR) surfaced back in November 2014.
A rush of conduct, prudential, and joint standards
Many of the 55 proposals contained in the original RDR have since been implemented via other regulatory mechanisms, including those enabled under the Financial Sector Regulation (FSR) Act. By way of example, the more than 30 conduct, prudential, and joint standards issued by the Financial Sector Conduct Authority (FSCA) and Prudential Authority (PA) are all steering the industry towards the regulatory landscape being prescribed under COFI. Another way to think of COFI is as the formalisation of a conduct journey that started with RDR.
There are three big disruptors that advice professionals will have to prepare for. The first, is the pending Omni CBR (Conduct of Business Reports); the second, centres on the categorisation of representatives for licensing purposes; and the third is remuneration models. COFI is principle- and risk-based, so the risk rating per financial institution that the Omni CBR enables should be welcomed. Finalising licence categories could present challenges. There is some irony that two of today’s disruptors stem from unfinished parts of the RDR; for over a decade, the industry simply kicked the can down the road on adviser categorisation and fee models.
The FPI CEO reminisced on attempts to write remuneration models into the FAIS General Code of Conduct. At the time, the regulators were so overwhelmed by industry responses during the public comment window that they put the process on hold. Under COFI, advisers can expect remuneration rules to appear alongside conflict-of-interest regulations. “Conflict of interest and remuneration must run together because [both are part] of your client disclosures,” Bezuidenhout said.
Commission has as role to play
She argued that abolishing commission would do more harm than good by widening the financial advice gap and setting back financial inclusion efforts. One solution might be to shift regulatory focus from the advice practice to the product provider. It may be easier to regulate commission and manage conflict of interest at the provider level, freeing up the adviser to offer a need-appropriate product to his or her clients.
“Product design is covered in the Treating Customers Fairly (TCF) principles, we are already seeing better outcomes for consumers as product design improves,” the CEO said. Adviser categorisation could prove more difficult to finalise than fees. One of the main concerns is that the definitions the industry and regulator decide on will confuse consumers. Imagine moving from a world of advisers and brokers, independent and tied, to one where consumers would need a 10-page definition guide to figure out who they are transacting with.
The FPI is positive about the changes being introduced through the various standards and eagerly awaits a conduct standard covering fit and proper requirements. Bezuidenhout commented that standards under COFI were akin the Board Notices issued under the FAIS Act. This enthusiasm aside, there are concerns about regulatory overwhelm, especially at smaller financial services providers (FSPs). To stay ahead of the regulation, FSPs need to be up-to-speed on both the FSR Act and COFI. “You cannot read COFI or even comprehend COFI if you have not read the FSR Act,” Bezuidenhout said.
Loads of reading in your future
Your writer offered one of those hopeless shrugs, exclaiming: “But the FSR Act runs to around 275-pages.” Indeed, it is 275-pages; but that telephone book regulation will likely be dwarfed by the combined COFI Act and all the standards that orbit it. Your best defences against this regulatory onslaught include to leverage your association and institutions to keep you informed of regulatory developments; to read extensively; and to work closely with your compliance resource, whether internal or external. A final tip is for the various silos across your business to interact and share regulatory information. Everybody needs to come together to make COFI work.
The discussion touched on the 10-year period between the RDR surfacing and the still unfinished conduct regulatory framework. In broad brushstrokes, the failure to move from proposal to legislation contributes to uncertainty while making it difficult for new entrants to the market to get to grips with the regulatory landscape. Until such time as COFI is enacted, advisers will have to keep an eye on old frameworks like FAIS, the Long Term Insurance Act and Policyholder Protection Rules as well as new regulations under the FSR and Insurance Acts and the various conduct and prudential standards.
Bezuidenhout pointed out that a new adviser appointed to help retirement fund members to navigate the two-pots solution would need extensive knowledge of the market prior to that regulatory change, including the tax treatment of withdrawals. Advisers in this space also need an appreciation of how non-retirement disciplines may affect their clients in areas like credit and medical schemes, to name few.
Many more advice professionals needed
Even if you allow for the macro factors, South Africa has a shortage of professional financial advisers. The FPI reckons it has the situation in hand, with over 1000 people in the CFP® pipeline presently. One of the encouraging professionalisation trends is in the number of people considering career changes from accounting, asset management, and tax into financial planning. Another plus is that the CFP® programme is accessible through more learning institutions that ever.
The FAnews / FPI conversation closed on an upbeat note, with the observation that TCF principles will, over time, address legacy issues in both the advice and product realms. High penalties on the exit from legacy retirement annuities and so-called orphan clients should simply not occur in TCF-focused environment. “The embedding of TCF principles is what excites me about COFI,” Bezuidenhout concluded. “My hope is that the regulator does not over-complicate Omni CBR, because that could constrain COFI.”
Writer’s thoughts:
The advice gap is widening, regulation is ramping up, and COFI is knocking at the door. Are you ready to turn principles-based regulatory reform into real-world change, or is complexity getting in your way? Please comment below, interact with us on X at @fanews_online or email us your thoughts editor@fanews.co.za.
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