A Draft “Market Conduct Framework” was published in December for comment. It contains the latest thinking by the Regulator on a number of key issues. The following is a synopsis of the rationale behind proposed changes to product distribution and intermediary remuneration.
Significant progress has been achieved since the FAIS Act was introduced in terms of raising intermediary professionalism, improving disclosure to clients and addressing certain conflicts of interest in the advisory and intermediary sector. However, concerns remain about poor customer outcomes, as practices of inappropriate advice and product miss-selling continue. As part of the broader TCF implementation, the FSB has undertaken its RDR, aimed at clarifying and improving the manner in which financial products are sold, advice is provided, and intermediaries are remunerated. The primary aim of the RDR is to ensure that financial products are distributed in ways that support the delivery of TCF outcomes – in particular, to promote advice that is appropriate, affordable and fair. It will also ensure that financial products in the retail market are appropriately distributed through sustainable business models. Similar distribution model reviews have been undertaken in other countries, including the UK and Australia.
As with the TCF initiative, the RDR approach is a further example of uniform, activity-based regulation across the financial sector. It advocates a consistent cross-sectoral approach to regulating the distribution of financial products and the provision of advice.
The RDR will therefore also complement the retirement reform process underway, by addressing the impact of intermediary remuneration models on benefits delivered by contractual savings products, such as retirement annuities.
The RDR paper, released in November 2014, sets out a number of proposals to support fair customer outcomes – with an emphasis on retail financial customers, who are most vulnerable to the risks of unfair and conflicted advice and sales practices. In particular it seeks to obtain outcomes to ensure that distribution models:
- Support the delivery of suitable products and provide fair access to suitable advice for financial customers
- Enable customers to understand and compare the nature, value and cost of advice and other services intermediaries provide
- Enhance standards of professionalism in financial advice and intermediary services to build consumer confidence and trust
- Enable customers and distributors to benefit from fair competition for quality advice and intermediary services, at a price more closely aligned with the nature and quality of the service, and
- Support sustainable business models for financial advice that enable adviser businesses to viably deliver fair customer outcomes over the long term.
The paper highlights the complex distribution landscape for financial products in South Africa. It proposes a number of measures to rationalise this. Proposals are grouped according to three main themes:
- The types of services provided by intermediaries to customers and product suppliers respectively
An activity-based approach to categorising these services is proposed, in particular to clarify when an intermediary is providing services for a client, or a product provider.
- Rationalisation of the range of relationships between product suppliers and intermediaries
Proposals 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 outlined in the preceding proposals.
Project action plan to better align retail distribution with customer interests
Interim steps will be implemented to address specific concerns relating to potential conflicted remuneration giving rise to incentive-driven product churn and inappropriate arbitrage between tied and independent distribution models.
Regulatory standards developed for the distribution of financial products through the RDR process will be integrated into a future market conduct legislative architecture under Twin Peaks, specifically for products that are marketed and sold to retail customers.
In the early days, after the introduction of FAIS, many felt that the Act and its accompanying regulations contained too much “what” and far too little “how”. From the above it appears that this will be addressed to assist compliance with requirements as well as regulation thereof.