Over the next two years, you will see fundamental changes in the financial services sector, Jonathan Dixon, deputy executive in charge of insurance at the Financial Services Board (FSB), says.
Dixon was speaking at the Discovery Financial Planning Summit in Sandton this week. He is part of a team of FSB policy makers charged with reviewing the financial services sector.
An evaluation of the industry has been prompted by a number of key factors including the lessons learned from the 2008 global financial crisis, international regulatory developments and, in the case of South Africa, regulatory catch-up, he says.
The proposed changes are part of a greater remodelling of the industry in terms of the “twin peaks” model announced by the Minister of Finance in 2011. In terms of this model, the FSB will be responsible for market conduct (treatment of consumers) and the South African Reserve Bank will be responsible for ensuring that the industry remains financially sound.
The FSB and National Treasury are developing an integrated legislative framework for the conduct of banks, long- and short-term insurers, pension funds, collective investment schemes, asset management companies and financial advisers.
The over-arching market-conduct framework of the FSB will be named Treating Customers Fairly (TCF), which, it is envisaged, will replace the current rules-based, compliance-checklist environment.
“While the 2002 Financial Advisory and Intermediary Services Act raised standards and professionalism, there are still too many examples of mis-selling and poor customer outcomes,”
Dixon says.
He says the proposed rules seek to align the interests of the public, advisers and the FSB, allowing the FSB to play less of a compliance-checking role. There will be greater accountability on product providers, and it is proposed that advisers’ businesses become more sustainable, transparent and outcomes-based.
One of the important components of the review has been an investigation of the industry’s product distribution system – the way in which products and services are sold to you and how they are costed – called the Retail Distribution Review (RDR). The FSB has made a number of proposals, the details of which will be released in a discussion document in the coming months.
“I believe the new policies will be a ‘win-win’ for both consumers and advisers,” Dixon says. “Currently, from a consumer’s point of view, there is a conflict of interest in the manner in which advisers are paid, and in some cases a high hidden impact of commission-based fees. It is also not always clear where the accountability for the quality of advice and customer outcomes lies.
“On the other hand, I do not think that advisers are properly paid for the advice they give. The value of their services is not recognised. There is an imbalance of responsibility, they face regulatory risk, and the use of commissions does not allow for building sustainable businesses.
“We believe the reforms, to be described in more detail over the next month or so, will promote and strengthen independent financial advice companies,” he says.
In the future, advisers will have to declare to their clients the nature of their relationships with product providers. They will have to tell clients if they are independent (have no supplier allegiance), if they are a multi-tied agent (represent a small range of product providers) or if they are a tied agent (represent one product provider).
Dixon says current hybrid versions of these three categories will be removed.
He says that, as a general principle, all services provided to customers will be paid for by the customers in future. Advisers will be able to charge fees depending on the nature and range of activities offered. These may include separate fees for upfront product advice, financial planning, risk assurance planning and ongoing advice.
Dixon says the new rules propose that there should be no caps on fees and they allow for fees to be negotiated between the adviser and the client. There will, however be rough guidelines, or “safe harbour”, rates and monitoring of fees by product suppliers. Product providers will be able to collect fees on behalf of advisers from the investments of their clients.
“In short, we will move to a system where advisers are properly remunerated in a transparent manner, in a way that allows for easy collection,” he says.
Dixon says that new policies under the umbrella of TCF and RDR would prohibit instances of “conflicted remuneration”. Examples of this might include a scenario where an adviser might have a profit share in an asset management business or where an adviser was offered “joining incentives” by a product provider, thus becoming a tied agent associated with a single provider.
He says that criticism of the TCF model as applied in the United Kingdom includes complaints that a fee-based remuneration model has led to a drop off of service levels to poorer communities.
“This may or may not be true; we don’t know the extent to which these communities were serviced before TCF,” he says.
Dixon says that in South Africa financial inclusion is a regulatory objective, and new remuneration models will therefore look at special remuneration dispensation for investment and risk products sold to low-income customers. These will be combined with alternative measures aimed at achieving fair outcomes – for example, only products deemed to be fair or offering adequate value may be offered.