The eagerly awaited discussion document on the review of retail distribution, expected this month, has a long history.
The triangular association – whereby the intermediary provides advice to the policyholder but is incentivised by the insurer, who then recoups such costs from the policyholder – is fundamentally flawed. A commission-receiving intermediary cannot, by definition, be thought to be truly independent. Discussion paper on contractual savings – March 2006.
This was reiterated in the discussion document titled “A safer financial sector to serve SA better”, published in February 2011.
This “Triangular association” affects the ability of the intermediary to act independently and in the best interests of the client. Further, the inconsistent regulatory treatment of fees across the financial sector creates gaps in the treatment of investment and risk product offerings. A possible solution would be to do away with commission for sales of policies and rely more on structured fees.
The following information was conveyed by Mr Jonathan Dixon, DEO at the FSB, during the FSB Insurance Regulatory presentation last year, and at the Discovery Investment Summit last month.
The first of the proposals to be included in the RDR discussion document is “…to move towards an activity-based definition of advice and intermediary services, to clarify which services are provided to which party and what capacity an intermediary acts in when performing these activities.” This was discussed in last week’s Moonstone Investment Indicators.
The second objective is to improve the clarity with which advisers describe their services to consumers, and specifically disclosure of the nature of their relationship with product suppliers. It is envisaged that there will be three strata of advisors.
Independent Financial Advisers
This status will be restricted to advisers who meet two key criteria:
- the absence of any particular product supplier allegiance or contractual commitment and,
- the ability to advise on a range of products. It is recognised that the UK concept of ‘whole of universe’ is clearly unrealistic.
The vast majority of what is currently described as “independent intermediaries” under the Long-term Insurance Act will fall into the category of multi-tied agents, with contractual arrangements with two or more product providers, who will be required to disclose the exact nature and scope of their product provider allegiance and the range of products they can advise on.
This refers to those intermediaries who act solely as the agent of one product provider.
To make the distinction clearer, the FSB is also looking at prohibiting so-called “hybrid” arrangements, whereby insurers allow their tied agents to sell for another insurer.
Each component of the activity-based definition of advice and intermediary services will be separately remunerated. The view of the FSB is that advice, being a service provided to customer, should be paid for by the customer, with separate charges for the various components.
Although the advice fee should be negotiated by the adviser with the client, the product provider should facilitate collection, thereby avoiding financial advisers having to set up their own payment collection facilities.
No regulated caps are envisaged, but some form of regulatory guidance, benchmark disclosure and on-going monitoring will be necessary.
There should also be flexibility in the type of fee that is negotiated – but comparability is going to be important.
Following the activity-based approach, an argument could be made that product providers should be permitted to remunerate intermediaries for selling their products and for performing outsourced services on their behalf, subject to appropriate restrictions to avoid conflicts of interest.
However, the current view is that this will be restricted to life risk products – in other words, commission and other product provider fees will be prohibited in the investment product space. One of the main motivations for this is the desire to ensure a level playing field across investment products, such as collective investment schemes, where no commission is paid.
In light of the fact that advisory services will be separately remunerated by means of a client fee, commission levels will have to be adjusted accordingly. It will also be important to ensure that the timing of commission payments incentivises and supports on-going service to clients.
Application of principles
What will this mean in practice? Details will be contained in the discussion document expected to be released before the end of June. The possible reforms will provide for a transitional period, but the following are the likely implications:
- For investment products, commission will be prohibited, to be replaced by an advice fee negotiated with the client.
- For life risk products, commission for selling policies will still be permitted, but not all up-front and at a lower level to strip out remuneration for advice. Advisers will be able to negotiate an additional fee with the client for advice.
Other fees paid by the product provider will be reviewed to avoid conflict of