South Africa's business community is being stifled by over-regulation. Nowhere is this more evident than in the financial services industry where financial advisers and insurance brokers (referred to as advisers in this article) find themselves under a barrage of increased scrutiny by the regulatory authorities.
As the law stands, before an adviser can begin to give advice on complex insurance and investment products they must comply with a number of regulations and accompanying codes. These include the FAIS Act and its General Code of Conduct and Conflict of Interest regulations; Binder regulations; Outsource agreements and the principles-based Treating Customers Fairly initiative to name a few.
This continued regulatory onslaught has changed the financial advice landscape with many smaller practices merging with others, being bought out by larger firms or closing their doors for good since the FAIS Act ‘landed’ in 2004.
Those who still ply their trade in this competitive industry must forever balance rising operating and compliance costs on the one side with a declining (regulated) income stream on the other. The irony is that by raising compliance costs the regulators are achieving the exact opposite of their pro-consumer mandate – their regulations are contributing to a decline in adviser numbers when it is accepted that an advised consumer is better off than one who is not.
Despite an already expansive regulatory landscape the Financial Services Board (FSB) is pushing for another major intervention, known as the Retail Distribution Review (RDR). The original RDR document released in November 2014 contained 55 proposals, a few of which are necessary and in line with the previous incremental approach to regulatory change. Others range from fairly innocuous ‘naming’ requirements to anti-free market determinations on what functions an adviser can perform and how much an adviser can earn.
Following the consideration of comments on the proposals and cursory engagement with key industry stakeholders the FSB released a Status Update on the RDR in November 2015 calling for further comment by the end of February 2016. This update appeared to take little cognisance of industry representations to date and instead added further areas for change or increased supervision.
“The Board of the FIA understands the need for a rewrite of current legislation to accommodate the ‘Twin Peaks’ regulatory structure and is also cognisant of the need to address certain market conduct activities that result in poor outcomes for consumers,” says Justus van Pletzen, CEO of the Financial Intermediaries Association of Southern Africa (FIA).
“Even so we are concerned with the course that the RDR is taking and believe that its implementation could have serious consequences for our members’ businesses, the financial advice community, financial services consumers and the economy at large.”
The FIA is a trade association that represents the country’s short-term insurance brokers (including brokers in the SME and SMME space, national broking firms and firms with global parentage); professional financial advisers (including IFAs, certified financial planners and tied agents); and advice-givers, brokers and consultants in the employee benefits, healthcare and assistance business space.
The association’s immediate concern centres on the extent and pace of the implementation of the Phase 1 RDR proposals. In addition the intermediated industry is deeply concerned about certain comments in the RDR that paint all advisers with the same brush as those few individuals who may have broken the rules, bringing the honesty and integrity of the entire industry into question. Publically available information supports that the number of ‘poor customer outcomes’ are miniscule in relation to the volume of advice given and claims paid.
More specifically our concerns include the staged approach to the RDR implementation (where if certain matters are not settled up front or in conjunction with others there will be increased potential for unintended consequences across all stakeholder groups); the inclusion of unrelated practices in what was meant to be a “retail distribution” review – something called regulatory creep; and the ongoing erosion of the service offered to consumers coupled with the erosion of the adviser’s right to earn an income from providing such services.
These concerns must be considered against the backdrop of an economy that is faltering on the brink of recession and the dire unemployment problem the country is currently facing.
The FSB says it has considered the lessons learned from offshore RDR implementations, yet has pushed ahead with many SA-only initiatives where outcomes will be ‘tested’ for the first time. It has, for example, insisted on including short-term insurance in the RDR despite other markets such as Australia and the United Kingdom (UK) only focussing on life and investment products. “This decision has introduced unnecessary complexities to the RDR debate, with the regulator attempting to do away with necessary arrangements such as specialist and commercial binders,” says Van Pletzen.
A critical oversight in the current process is the perceived failure to rely on empirical and independently verified data with regards the value added by advisers in the current environment as well as the impact of the proposed regulatory interventions on the level of service offered to consumers, level of adviser remuneration, employment in the financial services sector and a range of other macroeconomic factors.
“In addition to providing professional advice on financial products today’s brokers and advisers perform many specialised business functions on behalf of product suppliers, for consumers. The consumer stands to lose these benefits if the current advice model becomes untenable,” says Van Pletzen.
“We have therefore suggested to the regulator that its proposed 'extensive remodel' of the intermediated distribution environment should only proceed following thorough studies which can better inform the regulatory direction as well as be used as benchmarks to assess post-reform outcomes.” In the absence of such benchmarks, there is no way to conclusively prove the positive or negative outcome of the regulatory intervention or indeed the need for such intervention.
Research into the impact of RDR on that market has been stymied by the inability to obtain a clear picture of the environment pre-RDR. The UK regulators are already rethinking certain of their RDR decisions, a fact the local regulator ignores at SA’s peril.
“All facts considered, we strongly suggest that the regulator pause the RDR process at this critical juncture, because to forge ahead with so many unknowns could lead to unintended consequences for consumers, the financial services industry and the economy,” concludes Van Pletzen.