Time for the hammer to fall?

The Retail Distribution Review (RDR) has been one of the major talking points in the financial services industry for the past three years now. The Financial Services Board (FSB) is keen to implement it and the industry will reluctantly accept it.

Destination 2016 came and went without the implementation of RDR; but this does not mean that the FSB has forgotten about it, the regulator is now working towards a new date, which is March 2017, for the implementation of Phase I of this key piece of legislation.

The long road

The initial RDR discussion document was published in November 2014. Against the background of the Treating Customers Fairly (TCF) approach to regulating conduct of business in financial services. The RDR discussion document proposed substantive reforms to the regulatory framework for financial advice and for distribution of financial products to customers.

The RDR put forward a range of regulatory proposals to be implemented in three broad phases. In November 2015 the FSB published an update on the implementation plans for the Phase I RDR proposals, followed by a more general status update in December 2015.

Technical work, consultation processes and reviews of extensive stakeholder inputs have continued throughout 2016. The status update document as at December 2016 provides an overview of the status of specific regulatory instruments that will give effect to RDR Phase 1 proposals and provides an update on the FSB’s current thinking regarding proposals to be implemented in RDR Phases II and III, including planned technical work that will be undertaken.

The implementation of RDR proposals has been delayed a number of times, presumably because the FSB is working hard to refine the legislation so that it will not cause unintended problems in the industry.

While these are noble intentions, making the industry wait on tenterhooks for this to take place is concerning. The basic principle of business is that the work that is done today will be done to open the doors of the business tomorrow, but who wants to go to bed at night unsure about how the industry will be regulated tomorrow? And if the implementation is delayed a number of times, it is like a stay of execution in a way.

Full steam ahead

Another reason for the delay is presumably because there needs to be an overarching piece of legislation put in place that will govern RDR.

In a release to the media in December 2016, the FSB said that RDR Phase I is being given effect through proposed amendments to the following regulatory instruments:

• The General Code of Conduct for Authorised Financial Services Providers and Representatives, issued under the Financial Advisory and Intermediary Services Act (FAIS Act), to be consulted on in early 2017;
• Fit and Proper Requirements for Financial Services Providers, issued under the FAIS Act, published for comment in October 2016;
• Regulations issued under the Financial Advisory and Intermediary Services Act, which will be consulted on in early 2017;
• Regulations under the Long-term Insurance Act and the Short-term Insurance Act, published on 9 December 2016, for comment by 22 February 2017;and
• Policyholder Protection Rules under the Long-term Insurance Act 52 and the Short-term Insurance Act 53, to be published on 15 December 2016 for comment by 22 February 2017.

Issues of clarity

Since the FSB announced that it will be implementing RDR, there has been precious little insight into the FSB’s thinking regarding the actual makeup of the legislation. There has however been a lot of speculation concerning this.

One issue that the FSB has been adamant about is the banning of commission. Their headstrong outlook was questioned at an industry event in 2016 which did raise some eyebrows.

RDR has split the industry down definite lines. There are those who believe that it will improve the industry and there are those who believe that if we implement RDR in its current form, the industry will struggle to operate as it used to.

Our version of RDR comes hot off the heels of the implementation of RDR in the UK. By all accounts, our version of RDR will look very similar to what has been implemented in the UK. 

Vigorous debates

There was a vigorous debate at the SRP Africa Structured & Alternative Investments Conference in 2016 where a number of industry professionals spoke about the dangers of following a cut and paste model from the UK. These professionals suggested that adaptation was needed; particularly when it comes to the issue of banning commissions.

Marius de Jongh, Senior Specialist within the Collective Investment Scheme team at the FSB, said at the conference that commission will indeed be banned and that performance fees will be brought in. He added that the FSB feels very strongly about this.

It was pointed out to De Jongh that this was unnecessary as there are financial services industries in Europe which have implemented RDR but commission is still the main form of remuneration.

De Jongh stood his ground. “We cannot build an industry where commission is banned in some cases and not in other cases. We will not regulate by exception. The stance taken by the FSB is an informed decision. However, this does not mean that it is the right decision,” De Jongh did try and extrapolate this stance further by saying  “It’s more about getting a car on the road then getting the perfect car on the road.”

The only thing worse than shifting the goal posts and being frugal when providing information into its thinking is if the FSB was to say one thing and implement something else. Make a decision and stand by it. Whether it will benefit the industry remains to be seen, and only the FSB will be held accountable if it doesn’t.