Behind the Survey

We recently came across a media release of a survey titled SA advisers unprepared for regulatory change.

We approached them for clarity on certain issues, and provide our questions, with their responses, below:

Comment in Media release:

Adviser revenue in South Africa still relies on commission payments and financial advisers remain unprepared for looming regulation, despite spending more than average time on administration and compliance work.

Two studies by CoreData Research reveal almost 70% of financial advisers in South Africa say they are planning for upcoming regulatory changes in the industry, but less than a fifth have business models ready to deal with these developments. The rest may find themselves on the back foot once any change comes into force.

Moonstone Question:

Which regulatory developments, specifically, are you referring to? I take it that the Retail Distribution Review is one. Are you expecting this to follow the same pattern as in the UK? The next discussion document on this topic is only due for release in May 2014.

We refer to the Retail Distribution Review and Treating Customers Fairly initiative; we are basing these comments on what officials at the Financial Services Board have so far released and commented on with respect to both of these developments. As you can see in our answer to the next question, there is good indication that RDR in South Africa will follow the trajectory of the UK RDR to some extent – however, the ‘implementation’ will be different. It seems that the FSB are consulting with advisers and taking longer to come up with an RDR which does not produce the kind of shockwaves in the SA adviser industry as were felt in the UK post-RDR.

Comment in Media release:

Two thirds of adviser income is currently generated through commissions paid by financial product providers and only just over 10% of adviser income is generated by client fees, either upfront or ongoing.

This shows fee structures in adviser businesses are not adapting to foreseeable change, despite the fact that advisers recognise the need to change business practices in light of upcoming regulation.

Moonstone Question:

Can you be more specific about the “foreseeable change” you refer to?

Leanne Jackson, Head of the Treat Customers Fairly (TCF) initiative at the FSB, admitted in an interview late last year that although the framework of the TCF copies a similar initiative in the United Kingdom, its implementation would be different: “From the start – unlike the UK – we’ve been quite clear that outcome-based regulation is by no means a light touch and we very much intend scrutinising this quite intensively and intrusively” (Leanne Jackson, in an interview with Africa Insurance Review, “Fair play”, published 7th November 2013, accessible online at:

This suggests that reporting standards will be more rigorous and demanding than they currently are. There will also be another round of FAIS exams, presumably, as the FSB have been seeking input from advisers about the first round in order to better develop the second round in light of criticism after round 1 last year.

Financial Services Board deputy executive Jonathan Dixon went as far as to claim that the distribution landscape in South Africa is complex and houses a wide range of models which pose threats to the consumers and intermediaries. He cited inappropriate incentives, such as upfront commission, as an example of potential threats to intermediaries from a regulatory perspective. Dixon said the overarching principle should be that when financial advisers provide a service to consumers, the cost of this service should be both negotiated and paid for by the consumer, with separate charging for financial planning and risk assurance planning, upfront product advice and ongoing advice all coming into play.

Comment in Media release:

Potential contraction in the advice market can also be expected as most advisers are not seeking younger clients although over a third of clients are at, or post-retirement.

Similarly, although over a quarter of advisers clients are mass market investors, nearly two thirds do not intend to offer a differentiated service to lower income investors such as these, meaning that advisers may lose this business if they are forced to raise fees by new regulation.

Moonstone Question:

If I am not mistaken, specific provision will be made for clients at the lower end, which will exclude them from paying upfront fees?

Yes, as Jonathan Dixon suggested, “…the cross-subsidisation of the cost of advice in favour of low-income customers … should be accommodated in any new model through, for example, allowing advice fees to be paid in instalments, facilitated by the product provider, and by finding remuneration models that will encourage the provision of advice and intermediary services to the low-income market” (‘Adviser commissions under scrutiny’, Personal Finance, November 2013:

However, it seems likely that there will be some changes to the way advisers are remunerated for lower-income clients. At any rate, the question we posed to advisers was whether they intended to provide a differentiated service to clients with investment pots or not – and nearly a fifth replied that they will not offer their services to these clients, and nearly two-thirds said they would offer “the same services as I would for those with larger investment pots”; which may or may not be a sensible move, depending on the provisions made for lower-income clients by the new regime. I suppose that the upcoming document on RDR that the FSB intend to release in May will help clear some of this up for everyone!

Moonstone comment:

As stated so often before, we are of the view that it is better to react to the facts as they become available. The Regulator’s proven track record of thorough interaction with the industry before making decisions is reassuring for all those likely to be affected by the proposed legislative changes.


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