THE Retail Distribution Review (RDR) promises to bring significant regulatory reform to the financial services industry, but it seems that consumers’ awareness of the looming legislation is low.
South Africans are notorious for not being in control of their investment decisions, which often results in their paying exorbitant fees.
According to the 2016 Old Mutual Savings & Investment Monitor, only 6.2 out of 10 consumers feel confident to make financial decisions. The survey also found that only 5.7 out of 10 consumers are satisfied with their financial situation.
The Financial services Board (FSB) published its RDR discussion document in November 2014. Against the background of the Treating Customers Fairly approach to regulating market conduct, RDR proposes a series of regulatory reforms aimed at ensuring that distribution models will:
• Support the delivery of suitable products and provide consumers with fair access to suitable advice;
• Enable consumers to understand and compare the nature, value and cost of advice and other services that intermediaries provide;
• Enhance standards of professionalism in financial advice and intermediary services to build consumer confidence and trust;
• Enable consumers and distributors to benefit from fair competition for quality advice and intermediary services at prices that are more closely aligned with the nature and quality of the service rendered; and
• Support sustainable business models for financial advice that enable advisers’ businesses to deliver fair customer outcomes over the long term.
South Africa’s RDR closely resembles the RDR model implemented in the United Kingdom in 2013. RDR in the UK resulted in consumers receiving separate breakdowns of the fees they pay directly to their advisers for financial advice and the charges they pay for investment management. This made it easier for consumers to compare the cost of advice, platforms and investments.
The stricter regulations resulted in many financial advisers closing shop. In 2013, when the RDR became law, it is estimated that there were about 35 000 advisers in the UK, whereas there are only 21 000 this year.
South Africa’s RDR contains 55 proposals grouped under three main headings: services provided by intermediaries; product supplier/intermediary relationships, and remuneration.
The regulations will see advisers falling into two main categories:
• Product supplier agents (PSAs) will not be licensed in their own right to provide financial advice. PSAs will provide advice as agents of a financial institution that provides financial products.
• Registered financial advisers (RFAs), who will be licensed in their own right to provide financial advice. An RFA may be either a natural person (a sole proprietor) or a legal entity (an RFA firm). An RFA firm will appoint financial advisers to provide advice on its behalf, and it will be responsible for the advice provided by those representatives.
Lizl Budhram, the head of advice at Old Mutual Personal Finance, says that, although RDR will be implemented gradually, it is important that consumers take heed of the changing environment to ensure they are equipped to achieve the best outcome available to them.
“For consumers, the greatest change triggered by RDR will be the clear demarcation of fees for financial products and financial advice.
“Currently, when a financial adviser offers a customer a product, the premium includes the commission that covers the financial advice. In future, financial advice will become a separate commodity entirely, and be charged as such. A consumer will be able to select the financial service they want,” says Budhram.
RDR also proposes to amend the Financial Advisory and Intermediary Services (FAIS) Act’s fit and proper standards, by requiring product suppliers to monitor advice and distribution outcomes and to put reasonable controls in place to promote fair treatment and mitigate the risk of mis-selling.
The regulations propose that an individual may not be appointed as a representative by more than one financial services provider in respect of the same product classes.
The regulations state that an insurer’s tied advisers may not provide advice on another insurer’s products.
Furthermore, an insurer may not in respect of short-term commercial lines policies have a binder agreement with a non-mandated intermediary who is licensed under the FAIS Act to provide advice.
Public consultation on a draft bill is scheduled to take place this year, and the legislation is expected to be promulgated next year.
To find out more about the proposed regulations, go to www.fsb.co.za/NewsLibrary/