Paying commissions upfront to financial advisers on the sale of contractual investment products is not a sustainable business model for the financial services industry, Jonathan Dixon, deputy executive in charge of insurance at the Financial Services Board (FSB), says.
Dixon, who was speaking at an FSB roadshow, is leading a team that is reviewing the industry’s distribution models (how it makes its products and services available to you). The review, formally called the Retail Distribution Review (RDR), may result in reforms to how financial advisers are remunerated.
The review is a result of the public outcry about the penalties charged by life assurance companies on their investment products. The outcry led to the previous finance minister, Trevor Manuel, limiting the penalties. The restrictions introduced by Manuel also capped upfront commissions on life assurance investment products to 50 percent in the first two years of the investment term, with the balance of the commission paid when you pay your premiums.
Dixon says that the RDR will go further than studying advisers’ commissions. It will aim at ensuring that distribution models for financial products support fair outcomes for you, the consumer.
He says the review will slot in with the revised approach to regulating the financial services 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.
Dixon says it is also likely that financial products that are currently unregulated will, to an increasing extent, be covered by this overarching net.
The new outcomes-based regulatory system based on Treating Customers Fairly (TCF) will dovetail with this legislation, as will the Financial Advisory and Intermediary Services Act.
Dixon says a key change in the FSB’s role will be a move from promoting consumer education to providing education.
He says the distribution landscape in the financial services industry is complex and characterised by a wide range of models that pose risks for consumers; contain conflicts of interest; have high, and sometimes hidden, costs that affect product value; and pose risks to intermediaries, who are not always adequately remunerated and whose value is often not recognised.
He says that inappropriate incentives, such as upfront commissions, which are not a sustainable business model, expose intermediaries to regulatory risk.
However, not everything in the current distribution system is wrong, Dixon says. The positive features include the ease of paying for advice and the cross-subsidisation of the cost of advice in favour of low-income customers.
These features should be accommodated in any new model through, for example, allowing advice fees to be paid in instalments, facilitated by the product provider, and by finding remuneration models that will encourage the provision of advice and intermediary services to the low-income market.
Dixon says the FSB’s thinking on the proposals it would like to discuss with Treasury include:
* A move to a component and activity-based approach to regulating advice and the sale of products, which, in turn, will be linked to different types of remuneration.
Dixon says the general principle should be that, when financial advisers provide a service to consumers, the cost of the service should be negotiated with, and paid for by, the consumer.
He says there could possibly be separate charges for:
– Financial planning and risk assurance planning;
– Upfront product advice; and
– Ongoing advice, with different fee ranges based on the range of advice.
The fees should be negotiated between the adviser and the client, but the product provider could facilitate the collection of the fees.
It is envisaged that various fees would be negotiable and would include a flat rand fee, a “trail” fee, a percentage of the premium and time-based fees. The ability to compare fees will be important in order to promote informed decisions.
You will be able to stop ongoing advice fees (something you can already do but which is not entrenched in law), and you will need to be fully informed of all fees.
* The clarification of the contractual relationships for different forms of intermediation, to avoid consumer confusion. This would include your adviser telling you whether he or she is independent or is a tied agent of a product provider, selling the products of the provider only, and the products that he or she is entitled to advise on and sell you.