The Financial Services Board (FSB) is taking a more proactive stance and looking to influence behaviour within the financial services industry as part of their Retail Distribution Review (RDR). The RDR is a set of rules aimed at introducing more transparency and fairness in the investment industry.
Your financial advisors’ current old-school model of charging commissions on the products will no longer be allowed and investors will need agree fees with their advisers upfront. This is expected to motivate financial advisers to be more independent and professional in their dealings with their clients.
Key objectives of the RDR:
- Ensure clients are not sold unsuitable products with high commission structures but products that best meet their client’s needs.
- Customers to understand and compare the nature, value and cost of advice and other services.
- Enhanced advisor professionalism thus building consumer confidence and trust.
- Customers and distributors to benefit from fair competition for quality advice and services, appropriately priced
- Sustainable business models for those provide advice
“While SA has made progress on the market conduct within the current legal framework, these initiatives can be strengthened through structural change…..In many instances poor market conduct practices are driven by inappropriate incentives. This well illustrated by the deeply conflicted financial advisory industry….” Financial Services Board
Key benefits to the man on the street
- Increased transparency for consumers in relation to charges for both products and advice
- Empower customers to choose what best suited to their needs
- Enable customers to understand and compare the; nature, value and cost of advice and other services provided – consumers will know exactly who they’re dealing with and the status of the intermediary.
Benefits for the industry
- Build on the professionalism of the industry by enhancing competency and conduct standards.
- Better align the interests of advisers with their customers by reducing a number of key remuneration based conflicts of interest that could lead to poor financial advice.
- Strike a fairer balance between the responsibilities of product suppliers and advisers in relation to fair customer outcomes.
- Remove inappropriate incentives.
Who will be impacted by the review
Beyond the end customer, RDR will impact both the advisors and financial institutions, who will both need to review their business models and work practices; to ensure that they are fully compliant with RDR and customer-friendly.
Financial advisors will be required to declare their mandate
Further to the changes in fee model, financial advisors will be divided into two main categories of a financial adviser:
- Registered financial adviser (RFA): A firm or individual (sole proprietor) licensed to provide advice – not a product supplier
- Product supplier agent (PSA): Not licensed in own right, authorised to provide advice on a product supplier’s licence
No individual adviser or firm may operate in both capacities.
An individual adviser (RFA or PSA) may also use the designation “financial planner” if they have met all requirements for such designation set out by the SAQA.
Higher costs for the advisers and increased risk as a result of greater responsibility to their clients are two reasons driving financial advisers away from being independent planners.
A number of Certified Financial Planners (CFPs) in South Africa already practice as independent financial advisers and therefore have the choice to advise clients on products from different financial service providers rather than only promoting one product house.
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Will RDR deliver tangible benefits to the market and man on the street or is it unnecessary compliance
We believe that this will be advantageous to the industry as a whole, although it will be quite onerous to implement. The draft proposals go beyond compliance and will impact on current business models.
It is, however, too early to tell whether RDR will achieve the goals and objectives of the Regulator.
The magnitude of final proposals will need to be debated and mechanisms to ensure compliance will need to be put in place.
Given change in fee structure it is anticipated that certain individuals will be a move towards automated advice
A core objective is to provide individuals with choices, therefore for low value products, where little one on one advice is required, it is anticipated that clients will move towards automated channels, while high net worth clients seeking personalised advice will continue to engage with their financial advisors.
Implementation planning proves challenging due to continued changes to draft proposals and on-going lobbying
Due to the ongoing rounds of feedback and lobbying resulting in the original draft proposals either being amended or shifted out, it is difficult to formulate a firm view of the requirements and develop a detailed implementation plan.
Current progress against the three phased implementation plan
Phase 1 in progress, the FSB are yet to provide feedback relating to comments requested on Phase 1. The FBS in their document entitled RDR status as at Dec 2016, stated that phase 1 dates will be confirmed once all inputs have been received. Therefore until all inputs have been received Phase 1 remains in progress.
Phase 2 and 3 timelines will also be informed by further technical work.
Phase 2: Will use a combination of existing sectoral instruments and, where necessary, conduct standards under the Financial Sector Regulation Act.
Phase 3: Will comprise measures that are best introduced once the overarching Conduct of Financial Institutions (CoFI) Act is in place – anticipated in 2018.
The FSB through via Treating Customers Fairly (TCF) legislation and keeping abreast with the global financial services industry continues to ensure our hard earned savings are being invested wisely.