The Financial Services Board (FSB) has given the financial services industry and financial advisers notice that it intends to impose stricter commission/fee regulations because of continued mis-selling of financial products and poor outcomes for consumers.
The main aim of the FSB is to ensure that financial advisers who call themselves independent do, in fact, provide you with independent advice, unfettered by any obligations to product providers.
The FSB wants to build a brick wall between independent advisers and product providers to ensure that you receive the best advice and products for your needs.
This will include cutting product providers out of the payment structure, either by requiring that you pay your adviser directly or by granting a product provider permission to pay an agreed advice fee on your behalf.
In effect, it means banning commissions paid by product providers and changing to a structure where you pay your adviser a negotiated advice fee.
By moving to an advice-fee structure, financial advisers will not be under pressure to sell you products that you do not really need, in much the same way as you pay a doctor to check on your health without the doctor being dependent on your buying medicines.
At the upper end of the market, financial advisers are already moving towards advice-fee structures rather than commissions, but they report that there is consumer resistance because consumers incorrectly believe this fee is charged in addition to the commission.
In a first step, the FSB has sent out a letter to the financial services industry advising it that a review process is under way and that it wants the industry’s responses to the proposed new structure.
In the letter, the Registrar of Short- and Long-term Insurance, Dube Tshidi, who is also the chief executive of the FSB, says the FSB is reviewing remuneration structures for financial advisers to:
* Promote appropriate, affordable and fair advice and services to potential and existing policyholders; and
* Support a sustainable business model for independent financial advice.
The FSB’s main focus is on the life assurance industry, where consumers continue to be sold high-cost products with confiscatory penalties by advisers who are incentivised with extravagant sign-on packages that can exceed R1 million, upfront commissions and other indirect payments (see “Product providers side-stepping the rules”, below).
Also under the spotlight in the FSB’s review are linked-investment services providers (Lisps) and their fee structures for advisers (see “Attention also on Lisp fees”, below).
Tshidi says that, currently, intermediary services are not defined in the same way in the Long and the Short Term Insurance Acts and the Financial Advisory and Intermediary Services (FAIS) Act.
He says there needs to be clarity on the financial services provided by intermediaries.
The FSB has identified four services that advisers may provide to policyholders and product providers. These are:
* Product-specific advice and other intermediary services to consumers, where the adviser is paid a regulated commission or a negotiated advice fee;
* Services provided to policyholders that fall outside services as an intermediary, such as completing tax forms, where a fee could be negotiated with a client;
* Services provided to a product provider through binder agreements, in which there is a separate payment to the intermediary from the product provider; and
* Outsourced services apart from binder agreements, provided to or on behalf of the financial product provider.
Tshidi says there have been significant improvements in protection for consumers after the introduction of the FAIS Act in 2002, which requires financial advisers to act in your best interests, placing your interests ahead of theirs; the transparent disclosure of what they earn from you; and requirements to increase their knowledge and competency.
The FSB wants to achieve:
* A remuneration structure for financial advisers that strikes a balance between giving you ongoing advice and adequately compensating your adviser;
* A situation where your adviser is paid the same way for whatever product you are sold, removing the incentive to mis-sell you a product because of a better commission deal; and
* Full awareness on your part of what you are paying your adviser.
To achieve these goals, the FSB is proposing that:
* Your financial adviser, whether independent or a company representative, must negotiate a fee for advice with you that must be disclosed in a clear manner.
* Advice fees will be separate from and on top of payments for selling you a product.
* The fee-based regime should not prevent you from agreeing to the advice fees being deducted from your investment. But the product provider may not set the fee.
* The amounts you pay should reflect the services you receive, and ongoing charges should apply where you receive ongoing advice.
* Financial advisers must disclose to you whether they provide independent advice or restricted advice or both.
* The fee-based model must apply equally to all investment products and sales channels.
RELOOK AT COMMISSIONS ON LIFE PRODUCTS
The Financial Services Board (FSB) is considering further changes to the commission regulations on life assurance products because of the continued bad behaviour of financial advisers selling these products.
The main proposal is to scrap the payment of all upfront commissions on life assurance products, both investment and risk (cover against death and disability, for example).
The regulated commission structures were revised in the 2005 storm over the confiscatory penalties imposed by life assurance companies on policyholders and retirement annuity fund members who reduce or stop paying premiums/contributions.
At the time, the then Finance Minister, Trevor Manuel, intervened, forcing the industry into a new regime that has seen the capping of the penalties at 15 percent of assets on life assurance savings products.
One reason for the now-reduced confiscatory penalties is that commissions on life assurance savings products are paid upfront and not as and when you pay premiums, as happens in the unit trust industry. If you stop paying premiums or contributions, the life companies recoup the commissions from your savings.
On investment products, the upfront commission was reduced to 50 percent of the total commission, but it remains at 100 percent of the total on risk products, such as assurance against death and disability.
The FSB’s chief executive, Dube Tshidi, says the commission on risk products was not changed because no penalties can be levied on consumers when they cancel these products.
But, he says, recent experience has shown that financial advisers have switched from selling the investment products with reduced upfront commissions to selling the risk products with 100-percent upfront commissions.
And on top of this there has been a “significant uptick” and “worryingly high level of churn” of risk products.
Churn occurs where advisers get policyholders to cancel their policy from one company after two years and take out a new policy, generating another 100-percent upfront commission.
Tshidi says the 100-percent upfront commission on life assurance risk products “puts upward pressure on overall costs … which ultimately leads to higher premiums for consumers”.
The upfront commission structure does not incentivise ongoing service, and the introduction of a fee-based advice model could further aggravate the pattern of switching to selling products that do pay an upfront commission, Tshidi says.
The life assurance commission review is also being driven by an Appeal Court judgment handed down last year that in effect limits payment to regulated commissions and does not allow the direct payment of fees, even where the commissions are rebated or are not paid at all.
PRODUCT PROVIDERS SIDE-STEPPING THE RULES
The Financial Services Board (FSB) has launched an investigation into the new ways life assurance companies have found to pay financial advisers amounts in excess of those laid down in commission regulations.
The side-stepping of commission regulations is part of a major market-share war that is under way, and consumers are often the victims because they receive tainted, commission-driven advice. This advice can cost you money because you may have to pay penalties for early surrenders or receive inferior products, which on the face of it may be cheaper but will be more expensive in the long term.
Earlier this year, Personal Finance revealed that some life assurance companies were offering generous sign-on packages to financial advisers to join their sales staff. The packages, which include cash and share options, were initiated by Discovery but have now spread to other companies.
However, the packages often come with tough sales targets, which may encourage mis-selling and the churning of products as advisers jump from one company to the next.
The FSB is now also investigating a practice where life assurance companies indirectly pay advisers for vague “administration” duties.
The FSB investigations have been confirmed by FSB deputy executives Jonathan Dixon, who is in charge of insurance, and Gerry Anderson, who is in charge of market conduct.
In simple terms, financial advisers or financial advice companies, such as bank brokerages, set up separate companies that ostensibly undertake administrative duties on behalf of a life assurance company, for which the company, and therefore the financial adviser, receives payment.
A similar structure was used by Sanlam some years ago when it set up a separate company to provide luxury foreign trips for financial advisers after the trips had been banned.
Liberty also fell foul of the commission regulations in the 1990s when it started paying advisers to populate the first of the computer-driven financial needs analysis programs, Blueprint.
Liberty was forced to abandon the payments, which were considered a breech of regulations.
However, the FSB is drafting regulations for what are called binder agreements, in which intermediaries can provide services to product providers.
There are indications that some of the services being paid for are those that are required to be undertaken by advisers in terms of the Financial Advisory and Intermediary Services Act and the Long Term Insurance Act.
The FSB says the binder regulations will clearly identify the services for which an intermediary may receive a fee from a life assurer, over and above commission.
ATTENTION ALSO ON LISP FEES
The linked-investment services provider companies (Lisps) that introduced many of the now banned perverse sales incentives into the financial services industry, such as luxury foreign trips for financial advisers, are under the spotlight again.
In the past, you could negotiate with your adviser the fee a Lisp paid your adviser. This could include an upfront fee as well as an on-going fee.
All fees, both advice and Lisp fees, tended to be deducted by selling investment units.
But more and more Lisps are moving towards what is called an all-in fee, where all the costs, including the advice fee, are not deducted by the Lisp but by the management companies of any collective investment schemes (unit trust funds) in your portfolio.
The advice fee is often a fixed fee of between 0.7 and 0.8 percent a year of the value of your investments in any particular fund.
The structure is of concern to the Financial Services Board (FSB), particularly where the advice fee cannot be negotiated, says Gerry Anderson, the FSB’s deputy executive in charge of market conduct.
Rosemary Lightbody, the senior policy adviser at the Association for Savings & Investment SA, says advice fees within all-in fees are generally not negotiable. This is because the management company deducts them at its level. So it is difficult for you, as an individual investor, to negotiate a different fee.
The only way this could be overcome is by the Lisp refunding you some of the broker fee on behalf of your adviser.
She says although the all-in fee structure and all fees are disclosed in the Lisp application form, you will not see the fees impacting on your unit holding. There will not be a sell-off of units to pay fees. However, the all-in fees will result in smaller (if any) dividends being paid.
Lightbody says the law requires clear, annual disclosure of what amounts are paid to which parties and for what purpose, so the rand value of these fees should be disclosed in statements.
She says generally both methods are used by Lisps, because not all unit trusts on offer are “all-in fee” arrangements. So an investor can find that two different fee structures apply within a single product, depending on the unit trusts selected.