Countdown to RDR implementation

Regulatory change and the challenges that it presents have been a key topic of discussion in the industry for some time. However, with the proposed effective date of the Insurance Bill dated to 1 January 2017, the Retail Distribution Review (RDR) timelines moved.

While some see this in a positive light, there is no time to sit back and do nothing. The time should be used to review the principles of RDR and the impact it will have on your business.

FAnews asked a few people in the industry what brokers and advisers can do to prepare for RDR and what precautions they can take to avoid any harsh penalties for non-compliance. We believe we have a good mix between the life, short-term and compliance fraternity to bring you a very balanced view.

Although D-day for RDR keeps on changing, it is a reality, and will not go away. What exactly does a broker/adviser need to change as a matter of urgency to be compliant?

Richard Rattue – Compli-Serve SA

It is important to understand that RDR will be rolled out over a period of time. There will not be a tick-box approach to RDR, for example, a list of 15 items that once ticked, will mean you are compliant with RDR, as we will see principles being applied for the first time in conjunction with rules. It will be important to understand some of the key pillars of RDR, specifically around the remuneration and conflicts of interests requirements which will be clarified by the Financial Services Board (FSB) later this year.

Danny Joffe - Hollard Broker Markets

Brokers can tentatively start preparing for the fact that an advice fee will be introduced over and above the premium with the client’s consent and will replace the current Section 8(5) fee. Binder fees will be capped, we just do not know to what level. Budgets and strategy should start to take that into account. With deadlines moving and consultations still happening, I would advise brokers not to make dramatic changes to their systems and processes at this stage as changes may still happen. One important issue brokers should begin working on is the way they transfer data to insurers if they are issuing schedules or underwriting with a binder on the insurer’s behalf. The sooner the data issue is sorted out, the better.

Schalk Malan – BrightRock

The initial proposal of a phased implementation has a strong emphasis on disclosure and on any possible, external influence from product suppliers. As a result, financial advisers will have to prioritise the reviewing of these two aspects in their businesses.

Cornea Matthee - Centriq Insurance

Financial advisers should determine how their businesses will respond to the proposed RDR changes and assess the impact of RDR. They should determine which category the majority of their current representatives’ fall and assess the sustainability of their business when it comes to operating as a tied adviser or an independent adviser. Financial advisers should also do a cost projection once the new fit and proper requirements are effective, taking the type of adviser agency model chosen into account. They should assess and define all income streams, and brainstorm solutions to increase or replace it with new income streams i.e. outsource fees and broker fees. Brokers should assess current business practices against what they expect the regulator will no longer permit i.e. multiple registrations as a key individual or representative; and determine strategic solutions once RDR is implemented. Lastly, they should engage their compliance officer, obtain a legal opinion, and if possible - participate in any one or more of the FSB RDR implementation steering committee work streams and attend industry workshops.

Louw Conradie - Mutual & Federal

Most of the RDR proposals have not yet been finalised and are currently under review and discussion in the industry, and until then, no changes can be planned or implemented. The following proposals are those that will affect brokers the most:

• Tied advisers may no longer provide advice or services in relation to another insurer’s products which will affect tied agents. The FSB is considering allowing “gap filling” for products not provided by the tied agents;
• Advisers may not act as representatives of more than one juristic intermediary. Another proposal for a later phase is that juristic representatives will be disallowed from providing financial advice, which may further impact this proposal. This proposal will then affect advisers linked to juristic intermediaries or juristic representatives;
• Restricted outsourcing to financial advisers and certain functions permitted to be outsourced to financial advisers (covered under e below);
• The FSB’s view on remuneration is that remuneration (commission) will mainly remain unchanged, they are considering regulated caps, but still need to do further technical work and consultation. As for broker fees, they are proposing replacing this fee with an advice fee, which brokers/advisers will have to negotiate with individual clients and agree on the fee to be paid;
• When a short-term insurance policy is cancelled via the broker/adviser, new additional conduct standards will apply to ensure that the client has consented to a new replacement policy prior to cancellation of the policy; and
• The FSB has a strong view that the binder fees will be capped.

What if the broker or adviser is not RDR-ready when it officially kicks in?

Richard Rattue – Compli-Serve SA

Even if it is not specifically prescribed in legislation, it is likely that the industry will be given some time to bed down the key pillars of RDR. It is important to remember however, that if business undertaken is deemed to fall ultra vires to the RDR principles/regulations, then one would not expect the Regulator to sit idly by, simply because there is a settling-in period. The issue of fines would certainly arise if the conduct of the firm was such that a fine was a deserved outcome.

Danny Joffe - Hollard Broker Markets

RDR will not be brought in overnight by the FSB. In the past, implementation periods of up to a year were allowed in order for agreements, models, systems and processes to be changed. While a year goes by very quickly it does allow time to plan and make the necessary changes. Once the period is over, the proposals will become law and be enforced like any other regulations are with possible enforcement action following breaches.

Schalk Malan – BrightRock

It is always better to be prepared in advance than to be reactive because clients will be unlikely to support businesses that lack transparency once RDR is in full force. The first step would be to look out for RDR compliant products that support the RDR’s emphasis on the importance of advice.

Cornea Matthee - Centriq Insurance

Failure to consider the proposed RDR competency framework on your current business model may result in non-compliance with the proposed new regulatory regime. This could result in a material contravention of a regulatory requirement which may consequently lead to your license being suspended or a fine being imposed by the Regulator. Given the time allowed to ensure compliance, you may not have an acceptable excuse.

Louw Conradie - Mutual & Federal

There will be sufficient time given by the FSB to implement any changes, and the FSB will give clear guidance on exactly what changes are required, and by which date all changes are to be implemented. It is to your advantage to prepare for the imminent changes before RDR is officially effective.

How exactly do brokers and advisers who have not yet done it, change their business model?

Richard Rattue – Compli-Serve SA

The most important advice would be for advisers to understand the cost associated with the servicing of the client, and to work back from this adding in a margin and then breaking it down to an hourly rate.

Danny Joffe - Hollard Broker Markets

The better the advice the broker provides, the more the broker will be able to charge for it. There will be no caps on advice fees as there was with commission as there is an understanding that the amount and quality of advice differs from broker to broker and it cannot be a capped amount. The big difference is that commission was paid by the insurer from the premium and now the client will have to agree to the advice fee being charged over and above the premium.

Schalk Malan – BrightRock

Advisers who balance their remuneration between upfront and ongoing earnings, who demonstrate the value they provide to their clients, and provide advice that is sustainable through various life stages will be well positioned to succeed in the new regime.

Cornea Matthee - Centriq Insurance

Start with your appointed compliance officer to assist you with managing the regulatory risks. Ask an insurance expert to guide you on the impact of the RDR proposals on your business model. Engage with your strategic partners i.e. insurers on whose behalf you bind / UMAs you have intermediary agreements with and find mutual beneficial solutions. And finally, but most importantly, start engaging with your customer base on where the industry is going, and what changes it will bring about - especially in relation to fees. During this stage, you should put forward the value proposition you will be offering to your customers in the near future.

Louw Conradie - Mutual & Federal

The fee versus commission model debate is not applicable in the short-term insurance industry.

The FSB has very specific views about outsourcing. What can we expect?

Cornea Matthee - Centriq Insurance

The FSB is of the view that stricter outsourcing controls are needed, particularly in relation to investment management outsourcing, which has been deferred to the next phase of RDR. A few of the expected outsourcing models include:

• Advisers who hold binders to enter into (vary or renew policies will not be permitted to earn outsourcing fees for policy administration as this is implicit in the binder function);
• Other advisers may not earn outsourcing fees for policy administration, unless the parties are able to prove administrative efficiency that enables real-time data capturing, for example through direct capturing on the insurer’s platform;
• Fees for outsourced policy administration are expected to be capped. Although it has not been determined, 2% of the premium was initially proposed; and
• Conduct standards for outsourcing is expected to be strengthened to further reduce conflicts and increase the quality of the insurer’s oversight.

Louw Conradie - Mutual & Federal

For administrative functions, the FSB is of the view that brokers/advisers who are not binder holders may earn outsourcing fees from an insurer for the administrative services performed, but on condition that the administrative functions which are performed, enhance administrative efficiency and eliminate duplication of effort and cost. The FSB also proposes to cap the remuneration for this function where the broker/adviser is not a binder holder because it would be more efficient and cost effective for the insurer to perform this function.

We need to remind ourselves that regulation is here to stay; there is no escape. The only way that businesses can survive this stormy world of compliance is to prepare rather than sit back and wait for D-Day.

On a positive note we must also remember that these changes will create a sound foundation for the industry to be recognised as one that can be trusted.