Plans to review the way in which products are distributed, and specifically the way in which advisors are remunerated, took centre stage in the media recently.
RDR is not only about replacing commission with fees.
It is actually dangerous to separate remuneration from the rest of the envisaged changes as it creates an incorrect perception of the bigger picture. I find it strange that so many expert opinions are expressed on a matter which is still under review after extensive consultation. A lot more discussion will take place before final decisions will be reached, in consultation with the industry.
Perhaps looking at the project historically, rather than hysterically, is the wiser option for those most likely to be affected.
The project was initiated in 2010 as an extension of discussions going back to 2006, when the “Discussion Document on Contractual Savings” was published. The focus of the RDR process was a review of current distribution and commission models, with special attention where up-front commission is paid. An important element concerns the status of the advisor, and how this impacts on his ability to provide objective advice and avoid interest conflicts which could impact on clients.
During the FSB’s Insurance Regulatory Seminar on 21 November 2013 three areas of risk, which need to be considered in the review of product distribution, were identified:
The risks to customers:
- Conflicts of interest
- The high (sometimes hidden) impact of intermediation/advice costs on product value
- A lack of clarity on accountability for quality of advice and customer outcomes
Risks to intermediaries:
- Advisors are not always properly remunerated for advice
- The value of an intermediary’s services is not properly recognised
- Up-front commission not a sustainable business model
- Inappropriate incentives expose intermediaries to regulatory risk
Risks to effective supervision:
- Imbalances in product supplier/intermediary responsibilities
- Standards for intermediaries are not always proportionate
- Some products and related advice fall outside regulatory net
The Regulator acknowledged that the current remuneration model has certain benefits:
- Ease of payment for advice: the collection of advice fees, paid in instalments, and facilitated by the product provider is working well
- Cross-subsidisation in favour of low-income customers: recognition that, in any new system, it may not be feasible for the cost of advice to be fully paid for directly by low-income customers.
This appears to be an indication that the current model will not simply be scrapped.
Immediate Focus for 2014
During the Insurance Regulatory Seminar on 21 November 2013, a review of potential conflicted remuneration was highlighted for more immediate attention. These include:
- Outsourced/Binder fees
- Third party cell arrangements
- Up front commission on replacements
- Broker franchise models
- Section 8(5) fees
- Joining fees for tied agents
We expect these matters to be addressed in more detail during 2014.
The Bigger Picture
Some of the proposals under review by the Regulator, and which will be commented on in more detail in May this year, include:
- A move to a component/activity-based approach to regulating advice and intermediation
- Clarity on contractual relationships for different forms of intermediation to avoid consumer confusion
- A shift in focus to ensure that remuneration is linked to an activity-based approach
These matters form part of the longer-term discussions which will be addressed in 2015/2016.
On My Wish List
The presentation referred to above alluded to the possibility of implementing separate charges for financial planning, upfront product advice and ongoing advice. Anyone who suffered the injustice of having commission clawed back after a contract was terminated for a reason which had nothing to do with the advice process, will no doubt endorse this.
Check the Facts
If your interest in the matter lies in fact, rather than fiction, may I suggest that you study the slides of the presentation by the FSB in November last year? This is bound to be far more reassuring, coming from the Regulator, than speculation and conclusions based on assumptions which are, at times, tainted by ulterior motives.