A pragmatic approach will benefit the industry as a whole

Jonathan Faurie, FAnews Journalist

The American cultural anthropologist Margaret Mead once famously said: "Never doubt that a small group of thoughtful, committed, citizens can change the world. Indeed, it is the only thing that ever has.” This maxim has been proven to be true throughout the world and especially in South Africa if we look back at the history of the country.

In fact, this thought is so important to us that government cannot pass a law without seeking comment from the public. This was the process that was followed by the Financial Services Board (FSB) through the formulation of the proposed objectives of the much debated Retail Distribution Review (RDR).

Fighting for key members

The South African insurance industry was built on the back of an intermediated distribution model with brokers, advisers and intermediaries playing an important role in the growth of the industry. Quality advice provided by professional intermediaries will remain important into the future.

The proposals contained in the RDR will undoubtedly have an impact on the country’s risk and financial advisers, many of whom are members of the Financial Intermediaries Association of Southern Africa (FIA).

The FIA – as the representative body for South Africa’s intermediaries – has issued a detailed response to the FSB’s proposals in which it highlights the consequences for the industry if they are accepted unchanged. I consider some of the FIA’s responses in the paragraphs that follow.

Types of advisers

One of the proposed changes centres on the categorisation of the Independent Financial Adviser (IFA). While IFAs will argue that they are independent because they do not specifically work for a company, the FSB argues that they may not be truly independent.

It comes down to the relationship that the intermediary has with the insurer. And this is where the FSB wants the separation to be. They are proposing that advice will be provided on three levels. By tied intermediaries, where there is a distinct relationship between one insurer and the intermediary, by multi-tied intermediaries where there is a distinct relationship between various insurers and the intermediary, and by independent intermediaries where there is no relationship between any insurer and the intermediary.

The FIA feels that the FSB needs to tread with caution here as there are instances in the short-term sector where an intermediary agreement needs to be in place in order for intermediaries to deal with insurers, whether they are independent or not. In other words, the mere existence of a contractual relationship does not indicate that the broker is aligned to the insurer.

The FIA adds that it is unclear as to who in the short-term sector would be regarded as an independent broker as there are no brokerages that do not at least earn commission or act in some way on behalf of the insurer. The proposed standards to be regarded as independent may therefore be unreasonable and could result in the majority of independent brokers under the current dispensation being regulated as multi-tied advisers in the future.

Forms of advice

Another distinction that the FSB wants to make is that between upfront product advice and on-going product advice. These will be defined and will carry relevant conduct standards.

The FIA says that while the association can support the principle of separating advice from intermediary service and the further sub divisions of advice and intermediary services, this will set the industry in South Africa apart from its global peers. This would not only be disruptive, but could result in higher risk and increased costs, both at implementation stage and on an ongoing basis.

A major focus of the RDR is that actions in the industry must be in the best interest of the client. However, the FIA urges the FSB to assess whether this particular separation will be in the client’s best interest.

Standards for on-going product servicing

Because commissions may be scrapped in favour of a negotiated fee for advice, it is unclear how on-going advice will be handled in the future nor whether it will be profitable.

The FIA feels that this needs to be split into the annual renewal service and services that may need to be performed during the year. The association adds that the annual renewal requirement may compromise both commissionable services to the provider and advice to the client. Similarly, services performed during the cover period may be services performed on behalf of the insurer or further advice to the client such as in the case of a change of personal circumstances.

In its response to the FSB, the FIA states that access to relevant policyholder data needs to be considered in light of generally accepted practice and cost implications. As the standard set for ongoing product servicing is raised the level of remuneration will have to be adjusted in order to maintain the financial soundness and sustainability of the financial services provider.

Editor’s Thoughts:
If customer centricity is the mantra of the FSB, then unintended consequences could be viewed as the mantra of the industry at large. Any proposals introduced by the FSB need to be well thought through and should and seek to limit or mitigate any unintended consequences. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.