Last week we discussed what we believe to be an ”over-focus” on commission in better safeguarding investors in the financial services industry. This week we look at feedback from the FSB on input from the industry in response to a document entitled Contractual Savings in the Life Insurance Industry sent to industry bodies in November 2011.
The original objectives were set out as follows:
- To promote appropriate, affordable and fair advice and services and
- Support a sustainable business model for financial advice
Under the heading “General comments received”, the following are noted:
- A review of remuneration models should be seen as only part of a solution to fair outcomes
- There is a need to recognise SA circumstances in applying international developments
- There is a need to avoid any unintended consequences of reducing the number of advisers or changing the mix between independent and tied distribution.
The FSB shared the following views:
- It agrees that reviewing remuneration models is only part of the solution
- The project should be broadened into a full cross-sector Retail Distribution Review (RDR)
- Distribution issues need to be reviewed as part of the broader Treating Customers Fairly (TCF) framework
It also indicated that proposed changes may have implications for FAIS:
- There should be a review of the respective roles and responsibilities of product providers and the FSB with regards to the oversight of intermediaries in light of TCF
- Consideration should be given to possible further differentiation of the licence regime for tied / multi-tied agents of product suppliers vs. independent financial advisors/ intermediaries.
Something that will be investigated in the light of feedback received, is the differentiation of the various services:
- Possible differentiation between financial / risk planning vs. product advice (with definitions)
- For product advice, possible differentiation based on range of products advised on
- Appropriate remuneration for different components and/or different types of advice and other services
With reference to the short-term industry, the following views were provided by the industry:
- Similar comments were raised regarding a separation of components – financial planning / risk planning; product advice; intermediary services
- The nature of intermediary services is seen as on-going – hence support for continued as-and-when commission
- Should a separate fee be negotiated with client for risk planning or for product advice?
- A separation of advice will need an adjustment to commission rates, otherwise clients will be paying the same for less
The FSB’s initial reaction to this is:
- General agreement with comments received
- It will review components of advice and intermediary services to determine which components should be remunerated by means of commission and which by means of policyholder fees
- Definitions will also be informed by binder regulations and outsourcing directive
Concerning the way forward, the FSB advises as follows:
- A new discussion paper will be drafted in the first quarter of 2013 and published as soon as possible
- Regulatory recommendations will be aligned with broader TCF regulatory framework proposals – especially in relation to TCF Outcome 4 (suitable advice) which may require legislative / regulatory amendment
- Transition periods will be provided to allow sufficient time for implementation
Moonstone Comment:
We are heartened by the view that the bigger picture takes precedence over “band-aid” remedies which have, in the past, led to one leak being plugged while two others sprung.
A particularly welcome change is the acceptance of the need to differentiate between the various components of the advice process. Our long held view is that the financial advisor shares his professional knowledge and experience with the client in exchange for remuneration in exactly the same way as any other professional. Unforseen events, six months down the line, does not affect the fees charged by an attorney. Why should it apply to a financial advisor?
The FAIS Act, and subsequent legislation like the conflict of interest legislation, was implemented to ensure correct market behaviour. If it does not achieve this, the shortcomings need to be addressed – not the symptoms.
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