Who should pay the Piper?

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While there is clarity on the existing remuneration system, which is essentially commission driven, proposals under the Retail Distribution Review aim to differentiate between various kinds of services, and establish fair remuneration for it. One such aspect concerns “intermediary services”, which forms an integral part of the FAIS Act.

Despite the FSB publishing a lengthy guidance note to clarify what constitutes an intermediary service, the distinction between factual advice and an intermediary service remain opaque for many. To avoid possible non-compliance, many FSPs actually registered their administrative staff as representatives, and had them write the regulatory exams.

The recently published Retail Distribution Review discussion document contains a number of examples of inconsistencies between “…FAIS and sector-specific provisions”, including the definitions of intermediary services.

“The existing definitions of intermediary services in the respective insurance laws are not the same, nor are they completely consistent with the definition contained in the FAIS Act.”

Under the proposed RDR process, an activity-based approach is proposed to distinguish between:

  • advice (a service to the customer),
  • intermediary services (services connecting product suppliers and customers) and
  • other services provided by advisers and intermediaries (services to product suppliers).

The question that arises is who is obliged to pay for these services?

Currently, the client pays via either ongoing commission or trail fees, while often also subject to administrative charges by the product provider for certain services.

Perhaps the time has come for product providers to come to the party in a more meaningful way than simply administering commission payments to advisers on behalf of clients and charging clients a variety of service fees.

Even the best products will remain largely on the shelves of the providers without intermediation by financial advisors between them and the buying public. This is currently paid for by the client via the product provider.

One should also bear in mind that products stay on the books largely via the service and support provided by intermediaries.

In a discussion on tied and independent intermediaries, The RDR document states:

These intermediaries (independents) are also commonly referred to as “brokers” or “brokerages” (terms not defined in legislation), depending on whether they are natural or juristic persons. In terms of our common law, they are regarded (at least in certain respects) as the agent of the customer to whom they provide advice in spite of the fact that they are remunerated by the product supplier.

The reality is, of course, that the remuneration is merely administered by the supplier on behalf of the client.

“In practice some of the services they provide in addition to intermediary services could be seen as administrative services that are, in effect, outsourced to them by product suppliers and provided for and on behalf of the product supplier.”

Should this cost also be borne by the client?

One way of ensuring a fairer outcome for customers may be for product providers to become liable for payment for services rendered on their behalf by advisers.

The old adage: “He who pays the piper calls the tune” appears to be an important consideration in the proposed restructuring of the way in which financial advisors are remunerated. The underlying principle is to prevent commission from causing conflict of interest.

This certainly holds true for the advice process, but not when outcomes five and six of TCF are concerned:

  • Products perform as firms have led customers to expect, and service is of an acceptable standard and as they have been led to expect.
  • Customers do not face unreasonable post-sale barriers imposed by firms to change product, switch providers, submit a claim or make a complaint.