FSP -Contractual-Obligations

Addressing Unintended Consequences

The financial services industry faces massive changes which need to be managed very carefully to avoid disruptions which it may never recover from.

The South African Chamber of Commerce and Industry (SACCI) recently issued a media statement, urging government to make transparent, consultative, internationally recognised regulatory impact assessments (RIAs) mandatory when drafting new legislation.

SACCI expressed concern that not enough evidence based policy development, and a thorough investigation of the impact of proposed legislation, is conducted before it is introduced. The result is often legislation which has negative and unintended consequences for affected parties and the economy.

The Chamber lists the Promotion and Protection of Investment Bill, the Expropriation Bill, the Tax Laws Amendment Act and new regulations and amendments to the existing Road Accident Fund as examples. The impact of not conducting an RIA on the Visa Regulations is possibly the best example of how things can go wrong.

When industry conducted its own RIA after introduction, it found that it would cost the economy R2,6 billion in 2015 and a potential 5800 jobs. If this had been determined before the introduction to the regulations, this impact could have been avoided.

“Fortunately”, the debacle resulting from the unexpected dismissal of the Minister of Finance, which caused the Rand to go into freefall against other currencies, may have stopped the rot. This will be seen from the figures on tourism which will be released on Thursday.

In an article, titled “Impact of RDR on access to advice”, Jaco van Tonder, Advisor Services Director at Investec Asset Management, writes:

Whilst the South African financial services industry has been busy processing feedback on the Financial Services Board (FSB) consultation paper on our Retail Distribution Review (RDR), a number of interesting developments have been playing out in the UK financial services industry post the implementation of their RDR program almost three years ago.

We have commented before on the developments affecting the structure of independent advisor firms in the UK, specifically the significant level of product provider acquisitions of previously independently owned financial advisor networks. A second, equally significant development has been the growing body of evidence pointing to the UK middle market consumer increasingly finding it difficult to obtain financial advice – the so-called middle market advice gap.

He notes that the UK Financial Conduct Authority (FCA) expressed its concern about a growing advice gap in the UK since at least 2013, but denied that the RDR program was responsible for the gap. It published an independent research report stating that, whilst an advice gap surely existed, this was not caused by the UK RDR program.

The Financial Advisor industry in the UK disagreed with the FCA, and pointed to the fact that the UK RDR dramatically increased the regulatory risks associated with giving advice, whilst at the same time significantly altering the revenue model for advice (by, amongst others, banning product commissions in favour of advice fees). This was highlighted by the decision of most major UK high street retails banks to completely close down all their advice businesses (with the exception of their high net worth customer advice businesses).

In its “Status Update: Retail Distribution Review Phase 1” the FSB makes the following observation regarding its plans to review equivalence of reward:

The FSB is however concerned that a number of current practices in relation to tied adviser remuneration give rise to inappropriate distortions in the advice market. The concept of equivalence of reward is intended to ensure a reasonably level playing field between the sustainability of independent and tied advice models. However, the current non-observance of the equivalence principle poses risk of unintended levels of migration from independent to tied models.

The FSB shares concerns expressed by non-tied advisers that tied advisers currently enjoy an unfair advantage by earning remuneration and incentives significantly in excess of those available to non-tied advisers, while current “hybrid” distribution models also allow them to offer similar product and supplier choice to that offered by non-tied advisers. In addition, the FSB has recently noted the implementation of benefit structures for tied advisers that appear to be aimed at circumventing the recently introduced sign-on bonus prohibition and constitute increasingly aggressive deviations from the principle of equivalence of reward.

It is heartening that the Regulator, as evidenced from the above, values the importance of independent advice.

Whilst the significant increase in consultation with the industry is a welcome deviation from how regulatory change was conducted in the early years of FAIS, one has to wonder if there is not more than a little merit in the call for “…transparent, consultative, internationally recognised regulatory impact assessments…”.

The vast number of exemptions published shortly after new legislation was introduced in the financial services environment is indicative of “unintended consequences” which may have been prevented by thorough impartial impact assessments.

Consider also the deliberate and continued abuse of the “Statement of Intent” principles by some product providers when effecting S 14 transfers, subsequent to the publication of a directive and a call for internal audits. This clearly illustrates the need for an objective assessment of the impact of intended legislation.

People will comply with regulations they can understand because it is clear and unambiguous. The more complicated it becomes, the bigger the chances of innocent people transgressing it unknowingly, and the not so innocent delighting in finding loopholes to abuse the spirit of the law.

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