The past four years have not been kind to independent financial advisers

General Notice 1258 of 2022 – Levies on Financial Institutions was published on 29 August and effectively put paid to any further concessions from the regulator to alleviate the plight of an industry still staggering from the after-effects of a few horrible years.

The notice was accompanied by a document containing the industry’s comments on the original proposals.

Masthead made a number of meaningful points, particularly this closing comment:

“We are not confident that a considered view has been applied in the levies proposed for 2022, particularly from a small independent FSP perspective … these FSPs have been and continue to be directly impacted and are still struggling financially. This becomes even clearer when considering the cost of compliance with additional regulatory requirements, technological and data/systems advancement requirements. We are concerned that a further increase in fees, whether directly or indirectly, will be passed on to the financial clients or, worse, lead to the financial exclusion of many more due to FSPs having to exit the industry.”

Masthead’s comments

R3 982 is a considerable amount for small and start-up FSPs. The regulator is aware that there has been severe and ongoing economic impact on the income of FSPs due to Covid-19. Therefore, while in a conventional year, 5% would seem to be a reasonable increase and arguably lower than the inflation rate, the past few years leading into 2022 have not been a typical business environment, with small businesses in all industries being placed under significant financial pressure.

The average business’s profitability has decreased over the period, and despite most businesses running a leaner profit and loss, if this decline in profitability continues, the ongoing viability of small FSPs will be threatened.

(Independent) FSPs are totally reliant on the client market, which is and will remain under increased pressure due to the financial crisis and financial impact of Covid-19, the KZN floods, as well as ongoing economic and political challenges, both locally and internationally.

FSPs have also been hampered by limited interactions with clients. In terms of investment and insurance product trends, client saving elements were not increased during this period. The feedback that we have received from FSPs indicates that clients are still requesting to reduce premiums on their retirement products, on endowments and other investments, and are taking up premium relief options on risk cover and retirement products. Also noteworthy is the decline in funds available due to decreased client income, resulting in clients scaling down to reduce costs.

The result is that FSPs have seen a significant reduction in new business numbers, have fewer clients and less assets under management. The immediate and more severe impact experienced was due to the large number of South African businesses closing down, causing a major shift in the group benefits space.

In addition, these FSPs are also operating in an environment where the “cost of staying in business” has become a harsh reality when running a small FSP. This is especially true in the face of the increased prices of consumer goods, fuel, information technology, electronics and other business services.

An analysis by Masthead of the data of plus/minus 1 800 independent FSPs has established that most businesses have struggled financially during the period from 2018 to 2022.

In terms of life risk policies, from 2018 to 2019, there was a 22.9% reduction in new life risk policy business. From 2019, there was a further 52% decrease in the number of transactions. In 2021 and the early stages of 2022, we can see that life risk transactions are increasing. Despite this recent increase, FSPs are still recovering with the aim of achieving targets from 3 or 4 years ago.

When factoring in business costs and the detail above and below, they are on average, earning less than before and did not achieve a 5% growth on their income.

In terms of short-term policies, from 2018 to 2019, there was a 11.7 % reduction in new short-term risk business, with a further 28% reduction in number of transactions going into 2020. In 2021 and the early stages of 2022, we do note an improvement on the number of transactions, which is likely driven by factors such as the KZN floods, riots and other environmental and client factors resulting in an increased need for short-term cover. However, if this same data is considered over a 4-year period (2018 – 2021), it still reflects a negative growth rate at -11.4%.

In terms of assets under management (AUM), from 2018 to 2019, there was a 14% decrease in AUM due to economic factors and the start of Covid-19. In 2019 to 2020, there was an increase in AUM due to market opportunities and a number of client deaths and retrenchments which resulted in benefit pay-outs in the billions and those funds being re-invested for beneficiaries. During the period from 2020 to 2021, it is clear that this segment of the market has remained under pressure with AUM decreasing again by 22%, as clients continue to apply their reserves in an effort to counter the impact of the economic and political factors noted above.

In view of the above, we strongly urge the regulator to apply some of the same thinking in relation to these levies for FSPs. Therefore, we propose that all levies under s15(1)-(3) remain unchanged from those set last year.

A reduction of levies will also encourage job creation through new representatives entering the market, which has been hindered by cost in general but also due to FSPs having to pay annual fees for representatives who are not employed or mandated for the entire period.

FSCA’s response

Please note these proposals have been considered with the development and finalisation of the Financial Sector Levies Bill. However, the status quo will be maintained pending the finalisation of the Financial Sector Levies Bill.

Category IV FSPs

Masthead also expressed concern about the reduction in authorised FSPs from 12 028 in 2019 to 10 029 in 2020, and in particular, those who service the lower-income market.

Given the ongoing financial constraints and challenges placed on these types of FSPs as a result of Covid-19, in addition to financial challenges which may be faced in “normal” circumstances, we propose that the regulator reduce the base levy by 50%, or at a minimum, that it remains unchanged. These types of businesses had already encountered difficulties during 2019 and 2020 in staying in the industry, and we strongly believe that these unprecedented times call for additional financial relief to be provided for these types of FSPs.

In the FSCA’s 2020/2021 annual report, there were 107 Category IV FSPs in 2021, an increase of only 8, with a total number of 10 196 licensed FSPs. These Category IV FSPs and their client market are particularly vulnerable due to a lack of financial support and resources and are struggling to stay in business.

We believe that the regulator should apply a unique approach to these FSPs who service clients falling within the lower income bracket and who will be most severely impacted by their inability to continue with services. By reducing the prescribed levy on a blanket basis, it will avoid to some extent, the need for the regulator to suspend and possibly withdraw licenses, which will avoid a knock-on effect on financial services customers.

This outcome will be contrary to the FSCA’s strategic objectives of promoting an inclusive, customer-centric, and competitive financial sector wherein financial customers have access to innovative and appropriate products and services, and a financial market that functions fairly, effectively, and efficiently.

Masthead on the FAIS Ombud levy

While we recognise and agree that the FAIS Ombud provides a key service to the industry and, in particular, to financial services customers, we strongly suggest that due to the economic hardship and business pressures noted above, that the regulator consider an approach where the base fee remains unchanged from 2021, i.e., a zero percentage increase is applied.

FSCA’s response

FSCA already considered all factors that might have had an impact on the country’s economy by increasing the 2022 levies with 5%.

Masthead on payment method

Given the challenges faced by many FSPs as a result of the national and international factors, the ongoing impact of Covid-19, the associated costs of changing the way in which business can be conducted, as well as the costs resulting from compliance with recent regulatory changes such as the Protection of Personal Information Act, Omni-CBR and Cofi Bill, we propose that FSPs be allowed to opt for a monthly payment of their levies that exceeds the prescribed period of 6 months. We also recommend that interest is not charged on any overdue amounts.

We note that the regulator has responded to the above recommendation, stating that a financial institution may formally request in writing for a pay arrangement which normally does not exceed a period of 6 months. In exceptional circumstances, pay arrangements exceeding 6 months are approved, based on the compelling reasons presented to FSCA.

In terms of FSP awareness and sharing of information with stakeholders, we feel that it would be valuable to include this information in the levies document.

FSCA’s response

Please note these proposals have been considered with the development and finalisation of the Financial Sector Levies Bill. However, the status quo will be maintained pending the finalisation of the Financial Sector Levies Bill.