MoneyMarketing recently reported that 50 members of the Actuarial Society of South Africa (ASSA) agreed to assist the FSB with the assessment of the feedback received on the proposals contained in the Retail Distribution Review (RDR).
The ASSA website contains copies of its feedback on RDR, as well as a covering letter which summarises the gist of its input. The information below is taken from this letter.
We support the regulatory intention to enhance the professionalism and accountability frameworks in the distribution landscape, and the RDR contains a number of positive proposals in this regard.
We are, however, of the opinion that many of the proposals may introduce significant complexity, which will not really support the new outcomes based regulatory approach. We therefore recommend an approach where outcomes are clear and simple, and can be enforced and monitored.
The resources to support the new regulatory approach will take some time for the Regulator to assemble. This is not a task to be underestimated and we would therefore encourage the Regulator to start early in building the additional expertise required for the new approach.
In view of both the nature and extent of the changes, we believe that keeping matters as simple as possible is crucial to successful implementation of the proposals. We would therefore also recommend a phased approach towards implementation, focusing initially on the areas where the risk of abuse is the highest. This could also minimize the risk of some of the unintended consequences raised in this letter.
We support the more proactive, interventionist and outcomes-based regulatory approach mentioned in the document and echoed more recently by the Regulator. This is a significant change to the more reactive compliance-based regulation that applied until now.
The new approach will require the Regulator to understand companies and the services they offer more intimately and will depend heavily on the judgment of the Regulator. It is therefore important for the Regulator to have the right skills set in place and we believe that it might take some time for the Regulator to acquire these skills to an appropriate extent. This will also require employees of the Regulator dealing with companies at the forefront to have adequate practical experience of the industry. The establishment of unambiguous guide-lines will be essential to ensure a consistent standard and approach in an environment where the Regulator will be required to exercise judgment to an increased extent.
Supporting TCF Outcomes
The main aim of the RDR is to support the TCF outcomes. The RDR proposals are, however, mainly input- based, which suggests a large number of interventions and proposals. Each of these interventions or proposals then cascades into various further proposals and interventions, resulting in a large number of inputs/processes/functions that have to be supervised. This leads to a highly complex situation, giving rise to the risk that the desired outcomes will not be met.
An alternative approach could be to define the outcomes more clearly and elaborate more on what is expected from the various parties involved, i.e. make the outcomes more tangible and measurable. The role of the Regulator would then be to be diligent in interrogating, measuring and enforcing these outcomes. This should create more regulatory certainty and will be consistent with the outcomes-based approach in TCF.
Risks, unintended consequences and other issues to consider
A risk in the new approach is that considerable effort, money and time will be spend on implementing RDR without actually improving the outcomes for consumers. This will be driven in particular by the resulting need of industry players to focus extensively on internal compliance metrics without necessarily focusing externally on improving customer outcomes. The increasing cost of compliance may also impact negatively in this regard.
We would therefore recommend that new regulations focus, initially, on the high-impact interventions that involve the lowest compliance impact. A cost-benefit analysis could be considered and hard measures should then be put in place to measure the success of interventions.
Many of the proposals may have unintended consequences, for example, the abolition of commission on replacement of risk policies will reduce churn, but it may also lead to advisors not actively seeking better solutions for clients, thus leading to poorer outcomes for the client. This will impact negatively on consumers’ access to quality and timeous financial advice, while we believe it is essential for consumers and advisors to review their financial portfolios regularly. A more outcomes-based approach could be to report on churn ratios at advisor level and to interrogate advisors’ financial advice frameworks where churn seems to be abnormally high. Another example is that onerous requirements might increase barriers to entry for new advisors. These are but two examples.
Most insurers are becoming more agile in both creating and analysing internal data. It is now possible to report on individual member outcomes, based on agreed reporting standards. The Regulator could therefore consider shifting its focus primarily to measuring actual outcomes and leveraging off current technologies to do this. The current RDR proposals do not seem to lend themselves to this approach.
The distribution of credit products is not covered in the proposal. This is probably one of the areas where the risk of abuse is the highest. We understand that under the new Twin Peaks regime the Market Conduct Authority will also have powers to investigate abuses in this area, and recommend that this also form part of the RDR work by the Regulator.
You can download the full ASSA response to the proposals here.