The Review of Retail Distribution has certainly taken an interesting turn from where we thought the Regulator was heading with this very important issue a year ago.
The term, “Fees for Service”, implied the banning of commission, and clients having to fork out amounts equivalent to the commission to an advisor before the latter would do any work for the client. Concerns about client resistance were rife.
At the FSB’s Regulatory Seminar, the Registrar for Insurance indicated a very different and far more pragmatic approach. Recognition is given to the various functions performed by the financial advisor, rather than lobbing everything under one banner.
Remuneration for advice
The general principle envisaged by the Regulator is that, where a service is provided to the client, the client should pay for it. Similarly, a function performed on behalf of a product provider should be paid for by the provider. Further clarification on the legal definitions of “advice” and “intermediary services” will be made.
Separate charges will apply for:
- Financial planning/risk planning
- Up-front product advice
- On-going advice
The intermediary will negotiate a fee with the client, but, just like in the current situation, the product supplier can facilitate collection if the client does not opt to pay the advisor directly.
The Regulator currently does not envisage any caps or restrictions, but will probably prescribe some form of “safe harbour” rates, and monitoring thereof by the product supplier.
Different fee ranges, based on the range of the advice, will apply.
A variety of payment forms will be considered, including flat fees, “trail” fees, fees determined as a percentage of the premium and/or time-based fees. What is important is that it should be comparable, and understandable to the client.
This remuneration model will require rigorous up-front and on-going disclosure standards, and constant monitoring to ensure adherence. This will be supported by regulatory guidance and consumer education to ensure that clients also understand their rights and obligations.
Clients retain the right to cancel the on-going advice fee, should they be dissatisfied with the service they are getting.
The Registrar was at pains to point out that the above model will be thrashed out over time in consultation with the industry. It is also very reassuring to know that nothing in the current environment will be stopped or replaced before the new regulations are in place.
The RDR Discussion Paper will be released for comment, following current internal discussions between the FSB and National Treasury.
It is important to look at the envisaged time frames – the following aspects will receive attention in 2014:
Review of potential conflicted remuneration
- outsource/binder fees paid to intermediaries
- 3rd party cell captive arrangements / similar arrangements with intermediaries
- Up-front commission on replacement policies
- Broker franchise models
- Section 8(5) fees
- A review of the appropriateness of the “hybrid” representative model
A review of “equivalence of reward” with regards to incentive driven churn
- “joining” incentives for tied agents
- guidance on application of equivalence principles
Broader RDR and FAIS reforms will receive attention in 2015/2016.