Under construction
Uncertainty is a breeding ground for rumour and confusion. It is a phenomenon that often exhibits in the financial services sector due to the lengthy lead times that go hand-in-hand with new regulation. One example is the Retail Distribution Review (RDR) discussion paper which has been on the cards since late 2011 but is only likely to land mid-year 2014.
The Financial Intermediaries Association of Southern Africa (FIA) has become aware of a number of myths that have been circulating with regards the RDR process. Top among these, is that the legislation will result in risk and financial advisers earning less for their advice giving and intermediary services. Is this true?
Don’t make hasty judgements
First and foremost, you should note that RDR is not yet a regulation – nor is it likely to emerge as a standalone law. It is a discussion document that is still being finalised by the regulator. It is thus too early to suggest that upfront commission payments will be abolished even for pure risk cover life business. It is equally wrong to conclude that the process will result in a reduction in the fees paid to risk or financial advisers.
The Financial Services Board (FSB) clearly states that the primary objective of RDR is to ensure that the definitions of intermediary services and related remuneration structures in the insurance sector:
• promote appropriate, affordable and fair advice and services to potential and existing policyholders; and
• support a sustainable business model for financial advice.
Jonathan Dixon, Deputy Executive Officer of Insurance at the FSB reinforced this objective when addressing attendees at the FIA 2013 Regional Road Shows. He said, “Let me make it quite clear that we place a high value on independent advice to customers and that one of the outcomes of our review will be to make sure that we are able to support the continued model of independent advice to consumers.”
Adequate protection for consumers
He added that the guiding principles of the RDR will be to make sure that policyholders are adequately protected in that they receive the quality of advice that they need, both in terms of the professional quality of the advice, and the confidence that this advice is not tainted by conflicts of interest.
“At the same time, we have made it very clear that one of the joint objectives of the review is to make sure that we have a model for advice to customers that is sustainable. In other words, we have to make sure that the level of remuneration and the model for remuneration for advice and intermediary services is appropriate and is able to support a vibrant intermediary community,” he said.
Advisers can take heart from this two-part objective - particularly the commitment to support a sustainable business model for financial advice The FIA believes that the eventual model will incorporate fair remuneration for advice and intermediary services with sensible acknowledgment and management of potential conflicts.
Invitation to comment
After publication of the RDR discussion paper, the regulator will invite comment on the proposals contained therein. As the voice for South Africa’s risk and financial advisers, the FIA has already established two RDR steering committees to formulate our response. A first draft of an RDR bill will only follow after a period of extended consultation, with plenty of time for transition to a new model.
The industry is aware of the negative impact of RDR-type interventions in the UK and Australia. We are confident that the FSB will make the necessary adjustments to its RDR proposals to prevent any undesirable consequences of radical changes to fee and commission structures.
Our view is that RDR must ensure the survival of the intermediary as a key component of the good financial advice process. And our role as the FIA is to ensure that remuneration structures are appropriate and fair to ensure both the survivability and profitability of our intermediary members.
