A new discussion document on RDR is due for release before the end of December for industry input.
At the Insurance Regulatory Seminar in Cape Town on 17 November 2016, the following information, which will form part of this document, was shared.
Two-tier adviser categorisation
There will be two main categories of financial adviser, with the originally proposed category of multi-tied agent falling away:
- A Product supplier agent (PSA) who is not licensed in own right, but authorised to provide advice on a product supplier’s licence and
- A Registered financial adviser (RFA) who is a firm or an individual (sole proprietor) licensed to provide advice in its right, and not a product supplier
No individual adviser or firm may operate in both capacities. In other words, you cannot be a representative for product provider A and be an independent broker at the same time. Strict rules will apply in the case of “Gap filling”, in other words, where the employer of the representative (PSA) does not offer certain products.
This is only likely to be introduced in Phase three of RDR.
An individual adviser (RFA or PSA) may use the additional designation “financial planner” if the adviser has met all requirements for such designation set by a professional body recognised by SAQA and is a member in good standing of such an association.
Currently only the Financial Planning Institute and its CFP designation meet this requirement, but it is open to other associations to apply to SAQA for the necessary approvals. Recognition of foreign equivalents will be considered, in consultation with SAQA and professional bodies
There is, at this stage, no clear case for applying the model to Short-term insurance.
The FSB feels very strongly that advice provided by an RFA should not be influenced by any product supplier or other third party. This forms the basis for determining a RFA’s independent status, and contains a number of steps to mitigate the possibility of influence, including the outlawing of production targets. Further work is underway on standards for contract terminations.
No RFA firm or individual RFA adviser may describe itself or its advice as “independent” unless:
- It has no direct or indirect ownership interest in any product supplier and no product supplier has any such ownership interest in it
- It does not earn any direct or indirect remuneration from any product supplier other than regulated commission (where applicable) – i.e. no binder fees, no outsourcing fees, no profit shares, no cell arrangements, no joint venture arrangements, etc.
- No other relationship exists with any product supplier or other third party that could result in any product supplier influencing the advice provided.
Product supplier responsibility
Product suppliers and advisers share responsibility for customer outcomes. The greater the amount of risk of product supplier influence, the higher the level of product supplier responsibility.
The product supplier will have full accountability for PSAs.
There will possibly be a less intensive, more reactive approach for fully arms’ length relationships of RFSs.
The FSB is considering stricter criteria for earning s.8(5) fees by means of Phase 1 STIA Regulation changes.
The next step will be to confirm new short-term commission caps and the setting of standards for advice fees.
It is also still considering whether separate caps should be set for remuneration for selling versus remuneration for ongoing policy servicing, or whether both should be included in a combined cap – either way, both will be payable as-and-when premiums are paid.
The future model, and possible commission caps, will be informed by technical activity segmentation work which is currently underway. The knock-on effects of other remuneration caps are a key consideration.
Initial findings of activity segmentation in the short-term industry:
- Significant duplication and overlaps in activities for which intermediaries are remunerated
- Inconsistent interpretation of differences between “services as intermediary”; outsourced activities and/or binder activities
- The current remuneration levels for binders & outsourcing are largely based on prevailing market practices, with little evidence of robust activity-based costing linked to actual cost of activities
Implementation of the above is scheduled for Phases 2 and 3.
The FSB agrees with feedback that premium collection should be seen as an outsourced service on behalf of the insurer. This approach will apply once it has set qualifying operational criteria for premium collection, with possibly also a fee cap for this function.
Until then, premium collection is regarded as part of “services as intermediary” – i.e. subject to current commission caps, with no separate remuneration payable.
In the next few newsletters we will discuss, amongst other important matters, the latest thinking on remuneration for investment advice and life risk products, early termination charges, replacements, FAIS Cat I and II licences, the outsourcing of investment management to advisers as well as further news about binder agreements, outsourcing and juristic representatives.