Retail Distribution Review Discussion Paper

While the general expectation is that this document’s sole intention is to replace commission with fees, it is far more encompassing than that. We publish below some of the aspects contained in the management summary, and will dwell on these in more detail over the next few weeks.

The review was undertaken in response to the fact that, despite the significant progress achieved through the Financial Advisory and Intermediary Services (FAIS) Act in raising intermediary professionalism, improving disclosure to clients and mitigating certain conflicts of interest, significant concerns about poor customer outcomes and miss-selling of financial products remain.

This paper outlines a number of key risks inherent in the current distribution landscape, including distribution relationships and intermediary remuneration models that contribute to poor outcomes and miss-selling, and puts forward a number of proposals aimed at addressing these risks. The review outlines a more proactive and interventionist regulatory approach; it proposes a shift away from a purely rules-based compliance approach to one that also sees the introduction of a set of structural interventions designed to change incentives, relationships and business models in the market in a way that supports the consistent delivery of fair outcomes to customers.

Key structural changes include placing greater responsibility on product suppliers for ensuring the delivery of fair customer outcomes through their chosen distribution channel; limitations on the types of remuneration that intermediaries can earn and from whom, designed to address conflicts of interest; and enabling customers to understand and compare the nature, value and cost of advice and other services that intermediaries provide. These changes should also support the development of more competitive markets and the development of more transparent and fair products.

Structure of the paper

Chapter 1 outlines the context, scope and objectives of the RDR.

Chapter 2 describes the current financial services distribution landscape in South Africa, which is characterised by a wide and complex range of distribution models. The paper describes the current distribution landscape from three perspectives: Types of service provided by intermediaries; types of relationships between intermediaries and product suppliers; and types of remuneration earned for the services concerned.

Chapter 3 outlines risks and benefits of the current distribution landscape. It highlights that aspects of the current distribution landscape pose risks not only to fair customer outcomes, but also to intermediary sustainability and supervisory effectiveness.

Chapter 4 sets out a range of specific regulatory policy proposals to meet the desired RDR outcomes. A total of 55 specific proposals is put forward for discussion and comment. The proposals aim to rationalise the complex distribution landscape outlined in the paper, in order to address the various risks the paper highlights. The proposals are grouped around:

  • The types of services provided by intermediaries to customers and product suppliers respectively, proposing an activity-based approach to categorising these services.
  • Rationalisation of the range of relationships between product suppliers and intermediaries. Proposals under this heading also address the responsibility of product suppliers for advice and intermediary/outsourced services provided.
  • The types of intermediary remuneration models that should apply to the revised sets of services and relationships proposed, including measures to deal with conflicts of interest in the provision of financial advice.

Chapter 5 outlines the implications for the regulatory framework in order to give effect to these proposals. The changes will be implemented in a phased manner; some changes will be carried out within the current regulatory framework, while other changes will be implemented as the Twin Peaks legislative framework evolves.

Lastly, Chapter 6 provides some concluding comments and maps out the way forward, including some comments on transitional measures.

We strongly suggest that the paper be read in its entirety, rather than selectively. In view of concerns about changes to the current remuneration model, though, we publish below a brief summary to allay some concerns:

Proposals relating to intermediary remuneration

Greater clarity on the activities that make up advice, intermediation and outsourced services respectively, as well as on whose behalf the services are rendered, creates the foundation for a clearer set of principles and rules for intermediary remuneration. To achieve the desired RDR outcomes, it is proposed that the future regulatory framework for intermediary remuneration should meet the following criteria:

  • Intermediary remuneration should not contribute to conflicts of interest that may undermine suitable product advice and fair outcomes for customers. As part of this aim, intermediary remuneration should not undermine reasonable customer benefit expectations or inhibit customers’ access to their savings (such as through early termination charges designed to recover commission costs)
  • The regulatory framework should recognise the range of services available, the related remuneration for these, and whom may pay or receive it
  • All remuneration must be reasonable and commensurate with the actual services rendered
  • Remuneration structures should strike a balance between supporting ongoing service and adequately compensating intermediaries for up-front advice and intermediary services
  • Ongoing fees and/or commission may only be paid if ongoing advice and services are indeed rendered
  • An intermediary may not be remunerated for the same or a similar service twice
  • All fees paid by customers must be motivated, disclosed and explicitly agreed to by the customer
  • The different types of services and fees should be readily comparable by customers; and
  • Remuneration structures should promote a level playing field between different types of intermediaries providing similar services.

We are attending the FSB’s Insurance Regulatory Seminar today, and will be conducting information sessions to report back on the practical aspects. More detail to follow soon.

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