Indications are that we will, in the next week or two, see updates on a number of proposed legislative changes, including the Policyholder Protection Rules.
In the publication of the Phase 1 proposals in December last year, it was envisaged that drafts of subordinate legislation to give effect to the majority of the RDR Phase 1 proposals would be published for comment in April 2016, with effective dates of specific provisions staggered between July and November 2016.
National Treasury later requested that consultation on insurance related subordinate legislation be deferred until after Parliament’s Standing Committee on Finance (SCOF) has been briefed on the Insurance Bill, 2016.
Some RDR measures can be effected through other types of insurance regulatory instruments or through FAIS subordinate legislation which are not affected by the Parliamentary processes. Fourteen proposals were listed in the Phase 1 documentation, and later reviewed in the General Update.
“We are therefore in the process of reviewing the timing and implementation of the full set of measures to determine whether all aspects need to be deferred as above, or whether there are some measures that can feasibly be implemented – or at least consulted on – at an earlier stage. Once we have done so and once we have confirmation of the SCOF schedule, we will provide more clarity on the revised timing of the RDR Phase 1 implementation.”
“Conflicted Remuneration”
Under the heading Theme 2: Investments, the Status Update states:
The RDR Phase 1 Status Update provides details regarding implementation of Proposals PP and QQ, which address certain “legacy” practices in relation to investment products. These include resolving commission regulation anomalies in relation to variable premium increases on investment policies sold by long-term insurers, and conflicted remuneration on retirement annuity transfers.
Engagement with the long-term insurance industry in relation to broader measures to reduce termination charges on legacy policies will continue in Phase 1. Implementation of such measures will be phased in to appropriately align with the stepped decline in maximum termination charges that will apply to new investment policies, with due regard to both the interests of existing customers and the potential financial impact on insurers.
Phase 2
“In Phase 2, consideration will be given to introducing a prohibition of product supplier commissions for lump sum investment products, including annuity products. The FSB considers that the possible negative impacts of disallowing commissions – such as the cash flow impacts for advisers and the potential for an “advice gap” for certain customers – are less likely to materialise for these products than for recurring contribution savings products.”
“We note in this regard that a considerable number of lump sum investments are being placed in collective investment scheme based products outside long-term insurance wrappers, and that advisers in these cases are therefore already typically remunerated through advice fees rather than commissions.”
“Also, the dependency on implementation of Proposal TT (low income market dispensation) is lower in respect of lump sum investments as lump sum long-term insurance investment policies are not common in this market segment. Also, both new and existing advisers operating in the low income market are relatively less dependent on commissions for lump sum insurance investment sales as a source of cash flow.”
“Prohibiting commissions on lump sum investments will mean that standards in relation to advice fees and the requirement for product suppliers to facilitate advice fees (Proposals JJ, KK and LL) will also need to be implemented in Phase 2, in relation to lump sum investment products – recognising that lead times will be required for product suppliers to effect any necessary system changes.”
Comment
- We are in the fortunate position to be able to learn from what happened in the UK, and trust that those lessons will guide us through the murky minefield of replacing commission with fees to avoid the catastrophes that befell both advisers and clients there, the final effects of which are still to be realised.
- Serious consideration should be given to separating the low income market totally from the rest of the industry. Currently, it is regulated more by exemption than rules applicable to the rest of the industry, e.g. regulatory exam requirements.
- Is there still a place for endowment policies? Often, these products are sold for commission purposes, rather than the client’s real needs. Tax-free savings will in most instances be a better option, also in terms of the client’s interests. Monthly unit trust investments will equally serve the purposes of clients far better than conventional endowments.
- Endowments and conventional retirement annuities (as opposed to unit trust based ones) contain a far bigger cost and commission element, which is beneficial to the product provider and the adviser, but seldom to the client. Its inflexibility in times of financial hardship for clients makes it particularly unsuitable for the times we live in.
- The proposed “…stepped decline in maximum termination charges that will apply to new investment policies…” does not address the needs of current policyholders who are held to ransom in order to prevent product provider losses.
Like we saw in the recent municipal elections, the proposed legislative changes will see various players in the industry jockeying for position to ensure the best outcomes for their particular constituents. Participation is of paramount importance if we want to ensure the best possible outcome for advisers
