A comprehensive update on the Retail Distribution Review will be published in the next two weeks. A glimpse into what this will entail was presented at the FSB Insurance Regulatory Seminar in Cape Town on 2 November 2015.
Fourteen of the fifty proposals were proposed to be implemented using current regulatory frameworks before implementation of the Financial Sector Regulation (FSR) Act, which is now only expected to become effective late in 2016.
The overall timeline therefore moves forward by approximately 6 months, with RDR Phase 1 implementation now proposed for July 2016, although some effective dates are still subject to consultation.
NB The updated approach to the fourteen Phase 1 proposals provided at the seminar is not final as each measure is still subject to specific consultation.
Below are some of the proposals earmarked for the July 2016 deadline, with comments from the RDR team.
Prohibition of commission on replacement life risk policies
This was certainly one of the most contentious proposals, and no doubt attracted a lot of attention.
The Regulator indicated that commission related interventions will be deferred to a later RDR phase, possibly to align with the implementation of advice fee standards. In the interim, strict replacement monitoring obligations are to be imposed on insurers for long-term risk policies with up front commission, including:
- A clear definition of “replacement” for these purposes
- the new insurer may not release commission or any other fees until it has confirmed in writing (with a copy to old insurer) that the replacement advice record meets specific requirements
- Extended cooling-off periods
Failure by intermediaries to report replacements will attract commission clawbacks and appropriate regulatory action.
This proposal is to be welcomed. We have always maintained that the biggest driver of churning is not the adviser – it is the adviser who is paid to do so by the product provider. The current reporting structure on replacements to the FSB is a step in the right direction, but an on-site inspection may reveal to what extent mere lip service is being paid to the current industry designed replacement documentation.
Apparently there were some views that, under RDR, insurers will move to up-front remuneration of advisers. Any future remuneration payable by insurers will be on an as-and-when basis, but possibly subject to new caps.
Further consultation is planned for the next RDR phase on whether this as-and-when remuneration should be split between separate caps for “selling” (commission) and “servicing” (service fee) as per the initial RDR proposal, or whether a single commission cap should cover both.
The immediate concern is the section 8(5) fee under the Short-term Insurance Act (STIA). Currently, no customer consent is required, and the purpose of the fee is unclear. It is also inconsistent with RDR principles.
Section 8(5) of STIA was repealed by Financial Services Laws General Amendment Bill 2013, but the repeal is not yet effective. It is to come into effect together with other STIA Regulation changes envisaged in the future.
This fee is to be replaced by advice fees when the RDR advice fee standards come into effect. In the interim, the repeal is to be combined with an alternative mechanism requiring the customer to agree to the fee, and its purpose, in advance.
The Regulator intends monitoring the charging of these fees (and their purpose) and related disclosures will be monitored.
These are but two examples of the thinking that is going into restructuring the industry in a win-win situation for all concerned. The publication of the comprehensive feedback document, and further consultation on the proposals, should result in the best possible outcome for all.
RDR going forward
One thing is sure – if you thought that 2015 was a busy year, wait until you see what lies ahead.
The RDR Phase 1 update document will be published in the next two weeks. While feedback is welcomed, the FSB intends to engage in specific consultation with affected groups.
Despite an overall implementation target date of July 2016, implementation of some specific measure will be consulted on, together with transition measures where necessary to allow for changes to business models and systems.
In addition to regulatory measures, various supervisory activities are also planned, including:
- Publication of a binder thematic review
- A range of specific reviews needed to finalise proposals
- New conduct of business returns for insurers and FAIS licensed FSPs
A high-level implementation update for the remaining RDR proposals is to be published by the end of 2015.