What goes up must come down

Unintended consequences often defeat the object of the exercise. It appears as if this is also happening in financial regulation, internationally.

It is common knowledge that much of the regulation of financial services in South Africa closely follows the models developed and tested in the UK and Australia.

Conducting a proper needs and risk analysis prior to assisting the client in making an informed decision is of particular importance to the regulators. This requires obtaining all the relevant information from the client, looking at the big picture and then offering holistic advice.

An advisor is not supposed to sell policies any more. The annual compliance report requires the advisor to provide details of how many clients waived their right to an in-depth analysis. This is clearly not the preferred way of doing business, and could well lead to an on-site visit from the FSB.

A friend in Australia recently sent me a document entitled “FOFA: providing scaled advice”.

FOFA, by the way, is not a crude way of telling financial advisors to “get lost”. It is the abbreviation for “The Future of Financial Advice”.

The introduction reads as follows:

While many clients wish to receive comprehensive financial advice, the Australian Securities and Investments Commission’s (ASIC) Report 224 Access to financial advice in Australia, released in December 2010, found that a third of Australians “are now expressing a preference for piece-by-piece advice, rather than holistic or comprehensive advice”.

ASIC has provided encouragement for advisers and licensees to embrace scaled advice through their new regulatory guidance. This is principally due to the “best interests” duty and related obligations being introduced under FOFA…

Apparently ASIC is …trying to give advisers comfort and confidence to provide scaled advice; in other words, advice on a piece by piece basis rather than holistic advice about a client’s financial circumstances.”

Scaled advice is typically advice on one or several topics, rather than on the client’s entire financial circumstances. The scope of the advice may be limited by the client, through their instructions to the adviser, or by the adviser, through their understanding of the client’s situation.

Provided it is suitable for the client, scaled advice can be given at any time — whether it is for a new client, or an existing client who has previously received general or comprehensive advice.

Why is this of importance to you?

The FSB is currently assessing remuneration models. At the end of last year it conceded that “…reviewing remuneration models is only part of the solution, the project is to be broadened into a full cross-sector Retail Distribution Review (RDR). Distribution issues need to be reviewed as part of the broader TCF framework”.

One aspect of the review concerns differentiating between different levels of intermediaries, and the introduction of the term “limited advice” which would be determined by the status of the intermediary. “…intermediaries (are) to declare themselves to a prospective policyholder as either an insurer agent (i.e. a tied agent or an independent broker), or an independent financial advisor – the distinction being that insurer agents are remunerated by one or more insurers only and independent financial advisors are remunerated by the customer only…”

In its feedback to the industry last December, the FSB said that it is “informed by international developments in the UK and Australia” and other countries.

We trust that the introduction of scaled advice was noted.

Whilst there is a need for holistic advice, advisors come across many instances in the real world where it is both impractical and, quite frankly, an irritation for the client who is not really interested in the advisor’s regulatory obligations.

Scaled advice is, in fact, nothing new in our industry. If a client wants to add a new car to his policy, or remove a beneficiary from his policy, it is highly unlikely that a full review of his portfolio is required.

We trust that thorough consultation with the industry by the FSB, while reviewing retail distribution across all sectors, will lead to practical changes that achieve the common goal – a better financial services industry for consumers.


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