The sustainability of independent financial advice was always a key aspect in the Registrar’s approach to the Retail Distribution Review.
Board Notice 181 of 2017, published on 10 November last year, aims to level the playing field as far as tied agents and independent advisers are concerned.
The publication of this draft Determination follows RDR Proposal RR, which proposed that specific standards be set to clarify and strengthen the principle of “equivalence of reward” as the basis on which long-term insurers may remunerate their tied advisers.
In response to industry comments received in respect of the above proposal, the FSB subsequently confirmed that full implementation of RDR Proposal “RR” will be deferred until broader RDR proposals dealing with the future remuneration model for long-term insurance are closer to finality. The FSB did however highlight that, despite this deferral, it remained concerned that a number of current practices in relation to tied adviser remuneration give rise to inappropriate distortions in the advice market, posing risk of unintended levels of migration from independent to tied models. Accordingly, the FSB advised that, as an interim measure, pending full implementation of Proposal RR, it intends to clarify certain practices that the Registrar regards as inconsistent with the principle of equivalence of reward.
Key provisions of the draft determination
The determination identifies two specific forms of remuneration or considerations that would enable an insurer to provide its representatives with potentially significant financial advantages that it is not able to provide to independent intermediaries.
- The provision to a representative of various forms of credit or access to credit on terms that are more favourable than those available on an arms’ length basis; and
- Arrangements whereby an insurer in effect “buys the representative’s book of business” from that representative when the representative’s intermediary agreement with the insurer comes to an end. The policyholders contained in the “book” are already customers of the insurer concerned by virtue of its agency relationship with the representative, and the insurer is already obliged to ensure appropriate ongoing service to such policyholders, regardless of whether or not the intermediary agreement with the representative remains in place. Accordingly, the rationale for the insurer remunerating the representative for, in effect, retaining access to its own customers is unclear.
In addition to addressing the above specific remuneration arrangements, the determination includes a more general limitation providing, in effect, that remuneration arrangements where more than 15% of a representative’s overall remuneration comprises benefits that are not generally provided to all of the insurer’s representatives (or all representatives of a particular type), do not comply with the principle of equivalence of reward.
This provision is intended to address other remuneration arrangements (over and above those specifically identified above) through which insurers could provide benefits to selected representatives that it would not be permitted to offer to independent intermediaries. The provision also seeks to ensure a reasonable degree of equivalence with the requirement in Part 3A that an independent intermediary may only be remunerated through “commission in monetary form”, while recognising that Part 3A contemplates that a representative may be remunerated “in cash or in kind”.
The provision seeks to clarify that, in order for remuneration “in kind” to be consistent with the principle of equivalence of reward, it should largely comprise benefits typically available to the insurer’s representatives generally in the normal course of their employment/tied agency relationship with the insurer, rather than including a significant proportion of non-standard benefits that are available only to select representatives’.
The determination contains additional provisions confirming that non-compliance with the principle of equivalence of reward extends, in summary, to arrangements that —
- are substantially similar in effect to those identified in the determination; or
- entail an undertaking to provide the identified forms of remuneration or consideration in the future.
These provisions no doubt stem from practices like “sign-on bonuses”, and are aimed at preventing the industry from using clever terminology to bypass regulations.
Implications of Equivalence of Reward
Cynics may view this as a case of robbing Peter and not paying Paul. Many fiercely independent financial advisers managed to avert the temptation of monetary reward, access to cheap bonds and car instalments, subsidized pension funding, free medical aid and other benefits. Taking such benefits away from tied agents will do nothing for independent advisers, except maybe making it easier to say no.
The real threat, in my view, will come from the onerous compliance obligations currently being layered on the industry. Product providers will not be allowed to offer assistance to top producers in conflict with regulations aimed at curbing conflict of interest.
This may very well lead to independents throwing in the towel and joining the tied agency ranks, where support in terms of compliance is provided, amongst other obligations which the non-tied agent is responsible for. This will put paid to the intended good intentions of sustaining independent financial advice.
At the same time, clients who rely on independent advice will be the biggest losers, which is exactly contrary to why we are seeing the introduction of all the new legislation in the first place.