RDR General Status Update on Investments

The information contained in the update published in December is divided into seven “Themes”. This article provides a summary of some of the points discussed in Theme 2: Investments. At the end of the article we provide a link to the detailed discussion on this theme which covers RDR proposals impacting on the distribution of investment and savings products, including those offered through long-term insurance policies —whether structured as lump sum investments, recurring contribution products, or income generating annuity products.

Key stakeholder feedback and initial responses for Theme 2

Investment Platforms

There was general support for proposal YY that investment platform administration services should be remunerated only through a platform administration fee that is disclosed, agreed to and paid for by the customer, with rebates and other payments from product suppliers or investment managers to LISPs being prohibited. Some views were expressed that, provided rebates are passed on to customers (as currently required by FAIS), they are in fact beneficial to customers. Although the FSB agrees that such rebate structures may not have a direct detrimental financial impact on customers, we remain of the opinion that a “clean pricing” approach will improve customer understanding and that greater transparency and comparability of charges in a “clean pricing” model will promote more competitive pricing.

Outsourcing of investment management to financial advisers

The proposed prohibition” on a collective investment scheme manager outsourcing investment management to “authorised agents” (as defined in the Collective Investment Schemes Control Act) or intermediaries that are also financial advisers, attracted extensive comment. Arguments in favour of retaining “white labeling” included the fact that this model facilitates market entry for potential new investment managers (as a form of “incubator”) and also that this is a mechanism for offering customers “model portfolios” through which they are able to access risk-profiled, customised investment options that pose a less bewildering choice than selecting from the full range of funds available on the market.

The FSB confirms that it is not the intention to disallow outsourced investment management but do remain very concerned that there is an inherent conflict of interest in allowing a financial adviser to recommend funds to a customer (and earn related advice fees) while also being remunerated by the investment manager concerned for outsourced investment management on those same funds. In a number of cases, the advisers in these models are not necessarily competent to carry out actual investment management services and are therefore potentially being rewarded for services without adding meaningful value to customer outcomes.

The FSB also intends reviewing the role of Category II intermediaries in view of distribution models comprising potentially confusing “layers” of multiple Category I and Category II intermediaries, with increased risks of conflicts of interest and unwarranted layers of costs.

Prohibition of product supplier remuneration on investment products

The proposal that intermediary remuneration for selling and servicing investment products be restricted solely to advice fees payable by the customer drew some favourable responses insofar as it relates to lump sum investment products. Views regarding recurring contribution investment products (described by some as “savings” products) were mixed.

Some argued that recurring contribution products should be excluded from the proposal and remain eligible for product supplier commissions for the following reasons:

  • It will have a negative impact on adviser sustainability due to reduced cash flows and create a barrier to entry for new advisers; and
  • It will lead to an “advice gap” for lower and middle income consumers who were either unwilling to pay advice fees or where it would not be profitable for advisers to serve them in view of the relatively small investment amounts concerned.

The FSB remains of the opinion that Proposal MM should apply to both lump sum and recurring contribution investments, subject to the low income market dispensation, in order to ensure a level remuneration playing field between products sold through long-term insurance and other investment products but proposes to effect changes in a phased manner.

Legacy practices and termination charges

Proposals PP and QQ address commission regulation anomalies in relation to variable premium increases on investment policies and conflicted remuneration on retirement annuity transfers.

Engagement will also continue with the long-term insurance industry in relation to broader measures to reduce termination charges.

Consultation with industry reference groups on the proposals under this theme will continue during the first half of 2016.

Please click here to read the comprehensive Theme 2 discussion.

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