After attending the FSB’s seminar on Monday, I was actually at a loss as to where to start with conveying the contents of the Retail Distribution Review proposals. We will cover the proposals in a series of articles over the next few weeks.
It is very important to bear in mind that this is a discussion paper, based on proposals from the Regulator. It is not yet legislation.
The document contains 55 specific proposals for discussion and comment. While most of those affected will want to get to the nuts and bolts of how it will impact on their pockets, it is very important to understand the broader perspective. It is not only about intermediary remuneration – there are plans to redefine the types of services provided by intermediaries, and formalise the relationships with product providers. The last two may even create new streams of revenue for advisers.
In order to address the most pressing concerns, we discuss some of the key principles contained in the proposals covering intermediary remuneration:
- Intermediary remuneration should not contribute to conflicts of interest that may undermine suitable product advice and fair outcomes for customers. We have already seen this being addressed with the prohibition of sign-on bonuses which in many instances were merely bribes to switch policies from one provider to another. The Regulator was forced to take action before the publication of the RDR document to prevent a flurry of such activities prior to the proposals becoming law.
- All remuneration must be reasonable and commensurate with the actual services rendered. In order to understand this, one needs to take cognisance of the proposed distinction between services to customers, services connecting product suppliers and customers and services to product suppliers.
- Remuneration structures should strike a balance between supporting ongoing service and adequately compensating intermediaries for up-front advice and intermediary services. Ongoing fees and/or commission may only be paid if ongoing advice and services are indeed rendered.
- All fees paid by customers must be motivated, disclosed and explicitly agreed to by the customer. In terms of investment products it is proposed that the payment of commission by product suppliers to intermediaries be banned and replaced by an advice fee that must be explicitly agreed up-front with the customer. In contrast to what happened overseas, the payment of the advice fee will still be administered by the product provider as in the past. The big difference is that it will now be done in terms of a mandate from the client. This will obviously necessitate clear disclosure to the client of exactly what it is that he or she is paying for, in terms of different types of services mentioned above.
- Commission for selling and servicing life risk policies will comprise a mix of up-front commission and as-and-when service fees. 50% of the remuneration payable by long-term insurers in respect of life risk policies may be paid up-front as a sales commission, with the remaining 50% be payable on an as-and-when basis to provide for on-going servicing and maintenance of the risk policy. All doom and gloom? Not quite: you may still negotiate an advice fee, in addition to the commission you will receive, which essentially means you are better off than before. Another positive is that it creates the opportunity of building recurring monthly income in your business which increases the value of your practice should you decide to retire or sell your practice.
- Product supplier commission will be prohibited on replacement life risk policies, to address conflicts of interest and miss-selling risks. What about the genuine replacement, which is in the client’s best interests? You are now able to negotiate financial planning and advice fees, which form part of the new proposals, to compensate for the “loss” resulting from the proposal to ban commission on replacements.
- An appropriate remuneration dispensation for product suppliers and intermediaries serving low-income customers, in respect of life insurance risk products and investment products, will be developed to support access to financial advice, linked to products that meet certain standards of simplicity and value.
- The as-and-when remuneration model for short-term insurance will be retained. The current provision allowing for additional fees over and above commission (through section 8(5) of the Short-term Insurance Act) will be replaced by an advice fee that must be explicitly agreed with the customer up-front. See article below for further details.
- Investment platform administration services (LISPs) will only be permitted to be remunerated by means of a platform administration fee disclosed, agreed to, and paid for by the customer. Payments from product suppliers to LISPs, including any rebates, will be prohibited. This practice, which is often based on volumes of business, is seen as being conducive to the creation of conflict of interests.
- The changes will also support the development of more competitive markets and the development of more transparent and fair products, including reduced penalty charges on contractual savings products like retirement annuities and endowment policies. There can hardly be a better example of how the Regulator has, for years, tried to get the industry to toe the line, only to see some players ignore the spirit of the regulations.
From the above it should be abundantly clear that the proposals should be studied in its entirety, rather than isolating certain sections.
No doubt, various role players will nit-pick certain elements to drive their own agendas. If ever there was a time for objectivity, this is it.
The closing date for comment is 2 March 2015. We will be running information sessions in January to provide more clarity on the bigger picture, and obtain views from attendees to build into our own feedback.