Up to the end of the previous century, regulation of financial services was by and large left in the hands of the industry itself. The advent of consumerism and money laundering, amongst others, and despite being strange bedfellows, led to more and more concerns about how matters were run in the industry, and led to the publication of the FAIS Act in 2002.
Possibly the single biggest trigger for active involvement came from a paper delivered by Rob Rusconi in 2004 to the Actuarial Society, in which he highlighted the negative effect of costs on returns of contractual savings products.
This led to an investigation by government, and the eventual signing of a “Statement of Intent” in 2005 which saw billions being repaid to clients, and “causal events” charges being capped.
A further outflow of this was the publication of the Discussion Paper on Contractual Savings, the first phase of which saw a 50% reduction of upfront commission for these products. This document set the tone for a major Retail Distribution Review (RDR) in the years to come.
The way forward
In an address at the FSB’s Insurance Regulatory Seminar on 31 October 2013, the Regulator expanded on phase 2 of the RDR, which proposes to deal with inherent conflicts of interest in the relationship between product providers and intermediaries. This phase will include determining just what “independent” advice comprises, and a further review of remuneration models.
Factors which will influence the local roll-out of the second phase include international developments such as the RDR implementation in the UK in 2013 and Australia’s “Future of Finance”. Local interventions, and notably Treating Customers Fairly and the Twin Peaks model of regulation will interact to form what is hopefully a safer environment for consumers.
Two years ago, the Insurance Division of the FSB called for contributions on intermediary services and related remuneration with two objectives in mind:
- To promote appropriate, affordable and fair advice and intermediary services and
- To support a sustainable business model for financial advice
In November 2012, the FSB shared its initial responses. It concluded that “…a broader, cross-cutting RDR is required under the broader TCF banner, and this should not be limited to insurance, nor focussed on remuneration only.”
The Regulator indicated that any reforms should take into account South African conditions, and not blindly follow events elsewhere in the world. It should also continue to support financial inclusion for all, and not become the prerogative of the rich.
One of the broader objectives of RDR is to apply the inherent principles consistently across all financial sectors, rather than only where investments are concerned, and ensuring that all distribution models support the key TCF outcomes.
Assessment of the current landscape
The Regulator identified three areas of risk which need to be considered in the review of product distribution:
The risks to customers:
- Conflicts of interest
- High (sometimes hidden) impact of intermediation/advice costs on product value
- Accountability for quality of advice and customer outcomes not always clear
Risks to intermediaries:
- Not always properly remunerated for advice
- Value of intermediaries’ services 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 not always proportionate
- Some products & related advice fall outside regulatory net
The current model also contains benefits which should be recognised and accommodated:
Ease of payment for advice
- The collection of advice fees, paid in instalments, and facilitated by the product provider
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, and
Professionalisation of the financial advice and intermediary sector
- The industry should build on the strengths of the FAIS framework, allowing for proportionality and effective mechanisms for product-specific training and continuous professional development.
Key FSB Proposals
- Move to a component/activity-based approach to regulating advice and intermediation
- Clarify contractual relationships for different forms of intermediation to avoid consumer confusion
- Remuneration should be linked to the activity-based approach
- “Conflicted remuneration” should be addressed and
- The FAIS framework should be reviewed.
In comparing the current views to the original thinking in 2011, it is clear that the dialogue between the industry and the Regulator has led to a more pragmatic approach which will be beneficial to consumers and the industry.