The Retail Distribution Review

STAKEHOLDER CONSULTATION WORKSHOPS

23 and 25 FEBRUARY 2015

Presenters:

Jonathan Dixon: DEO, Insurance

Caroline da Silva: DEO, FAIS

Leanne Jackson: Head, Market Conduct Strategy

Financial

Services

Board

Slide 2

Agenda

• Context and objectives of the RDR

• Types of services provided by intermediaries

• Product supplier / intermediary relationships

• Remuneration proposals

• The way forward

Context and objectives of the RDR

Financial

Services

Board

Slide 4

Context

• The RDR has been undertaken in the context of the Twin

Peaks market conduct mandate and the TCF framework

• It is a prominent example of a more interventionist

approach to market conduct regulation

“Treating Customers Fairly in the Financial Sector: A draft Market Conduct Policy framework for SA”,

National Treasury, December 2014

Financial

Services

Board

Slide 5

Scope of the RDR

• A mainly retail focus – wholesale market reforms

are being addressed through complementary

processes

• A cross-cutting, cross-sectoral approach

• Particular focus on advice

Financial

Services

Board

Slide 6

Objectives of the RDR

To ensure that financial products are distributed in ways that

support delivery of TCF outcomes and enable –

• Delivery of suitable products and fair access to suitable advice

• Customers to understand and compare the nature, value and

cost of advice and other services

• Enhanced intermediary professionalism to build consumer

confidence and trust

• Customers and distributors to benefit from fair competition for

quality advice and services, at prices more closely aligned with

the service provided

• Sustainable business models for financial advice.

Financial

Services

Board

Slide 7

How the RDR is structured

Chapter 1: Context, scope, objectives

Chapter 2: The current distribution landscape

Chapter 3: Current risks and benefits

Chapter 4: A total 55 specific proposals, under three main

headings:

• Services provided by intermediaries: (A to J)

• Product supplier / intermediary relationships: (K to GG)

• Remuneration: (HH to CCC)

Chapters 5 & 6: Regulatory implications and way forward

Comment is invited on all parts of the paper – please use

the feedback template.

Types of services provided by

intermediaries: An activity based approach

Financial

Services

Board

Slide 9

An activity based approach

Services connecting

product suppliers

and customers

Outsourced functions Advice

Financial planning

Sales execution

Ongoing maintenance/

servicing

Aggregation services /

referrals

Up-front product advice

Ongoing product advice

Binder

Functions

Other Outsourced

Functions

Services to

customer

Services to

product

supplier

Platforms

Financial

Services

Board

Slide 10

Service to customer:

Financial advice

• Three forms of advice defined – each will have their own

standards (A)

• financial planning

• up-front product advice

• ongoing product advice

• Standards for “low advice” distribution models (B)

• Standards for “wholesale” advice (C)

Financial

Services

Board

Slide 11

Services connecting product

suppliers and customers

• Standards for sales execution (D), especially in non-advice models

– product standards; specific fit & proper standards; establishing

financial capability

• Standards for ongoing product servicing (E)

• Insurance premium collection limited to qualifying intermediaries (F)

• Revised standards for investment platform administration (G)

• Standards for product aggregation and comparison services –

informed by international standards (H) – proposal (D) also means

these will be restricted to simple products

• Standards for referrals and lead generation (I)

Financial

Services

Board

Slide 12

Services to product supplier

Outsourced services on behalf of product suppliers to

generally be more clearly identified and regulated (J)

• Approach will be modelled on principles in the

current insurance Outsourcing Directive

(Directive 159)

Product supplier / intermediary

relationships:

Untangling the web

Financial

Services

Board

Slide 14

Types of adviser defined

• Three types of adviser defined – independent adviser (IFA),

multi-tied adviser; tied adviser (different terminology for

short-term and health) (K)

• All business cards, letterheads, e-mails, websites, etc. must

reflect the relevant status

• An adviser who meets standards to be a financial planner

may use this designation in addition to one of the other three

• Regulator may „re-classify‟ an adviser

• Adviser may only act in one of these capacities – but an

investment products IFA may be multi-tied for risk products

and/or health benefits (L)

• Status disclosure rules for each type of adviser (O, Q, S, U)

Financial

Services

Board

Slide 15

Independent financial adviser (IFA)

An IFA will need to meet two sets of independence criteria –

1. Product & product supplier

choice (M)

2. Freedom from product supplier

influence (N)

Specific input needed on:

• No. of product types / specific

products (not “whole of market”)

• No. of product suppliers / types of

suppliers

• Range of investment platforms

• Use of “panels”

• Approach for risk / short-term /

health specialists

• Relevance of remuneration

model?

• How is ongoing independence

demonstrated?

Proposed criteria include:

• No agency / rep / outsourcing / other

mandated relationship

• No product supplier targets

• No direct or indirect ownership or

similar financial interests (both

directions)

• No restrictions by one supplier on

recommending / earning from another

• No other influence

• Voluntary choice by adviser to restrict

product / product suppliers they offer to

below the minimum range also

disqualifies adviser from being an IFA

Financial

Services

Board

Slide 16

Multi-tied adviser

• A multi-tied adviser - any adviser that is not a tied adviser

and also does not satisfy the criteria to be an IFA – i.e. if

either of the two independence criteria to be an IFA is not

met, the adviser will be multi-tied (or tied, if applicable) (P)

• Additional conduct standards to manage conflicts arising

from specific scenarios – for e.g. where unequal

relationships exist with different product suppliers

• Multi-tied adviser will be required to keep records regarding

the proportions of business placed with different product

suppliers, with motivations

Financial

Services

Board

Slide 17

Tied adviser

• Any adviser whose contractual, ownership or other

relationship with a product supplier restricts the adviser to

providing advice on the products of that product supplier

only (R)

• For this purpose “product supplier” includes entities in the

same product supplier group – to be defined and regulated

to avoid abuse

Financial

Services

Board

Slide 18

Financial planner

• Conduct standards, including appropriate fit & proper

standards, to be set for financial planning

• Standards may be set with reference to membership of

and/or qualifications provided by appropriate professional

associations, or may take these into account

• A tied or multi-tied adviser may be a financial planner – but

with appropriate standards to manage possible conflicts

arising from limits on product/product supplier choice

Financial

Services

Board

Slide 19

“Hybrid” advice models

A range of proposals to reduce unwarranted complexity -

• Insurer tied advisers no longer able to provide advice on

another insurer‟s products – relates to a specific provision

in the LTIA commission regulations (V)

• “Juristic representatives” to be disallowed from providing

advice (W)

• An adviser may not act as a representative of more than

one adviser firm (Y) (Is an exception needed for gaining

experience under supervision? RDR is silent on key

individuals – how should they be treated?)

• General review of ownership arrangements between

product suppliers & intermediaries (GG)

Financial

Services

Board

Slide 20

Status of adviser firm vs. its

individual advisers

Some implications flowing from other proposals are (X):

• An adviser firm can be either an IFA firm or a multi-tied firm – the firm

cannot be tied (flows from prohibition on juristic reps giving advice)

(Should exceptions be considered within groups? If so, how do we

prevent abuse?)

• An adviser firm can only be an IFA firm if the firm itself meets both sets

of independence criteria

• Whatever the status of the adviser firm (IFA or multi-tied), individual

advisers still need to meet the relevant standards to describe

themselves as an IFA or multi-tied adviser

• An individual adviser can be multi-tied if the firm is an IFA firm, but not

vice versa – individual cannot be “more independent” than the firm

• An individual adviser within a firm cannot be a tied adviser

Financial

Services

Board

Slide 21

Outsourcing

No product supplier or investment management functions may be

outsourced to a financial adviser, unless specifically permitted and

regulated (Z)

• Includes prohibition on CIS manco outsourcing investment management to

an entity that is also an adviser (e.g “authorised agent” or 3rd party models)

• Does not affect outsourcing to entities acting solely for a product supplier,

that are not advisers or associates of an adviser

Permissible outsourcing to an adviser (with comment invited on

other permissible outsourcing) includes (AA)–

• Binder functions, subject to the binder regulations

• Retirement fund or medical scheme administration

• Issuing insurance policy documents (not separate from binder function for

binder holders)

Financial

Services

Board

Slide 22

Product supplier responsibility for

advisers

Level of product supplier (and investment manager) responsibility

proportionate to degree of influence:

Tied (BB) Multi-tied (CC) IFA (DD)

• Full responsibility for

quality of advice and

compliance

• Similar to current

FAIS FSP / rep

responsibility

• Explicit

responsibilities for

product knowledge

and monitoring TCF

outcomes

• Specific

responsibilities

under multi-tied

apply for tied

advisers too

• Check that adviser equipped to

provide appropriate info & advice on

products (incl. product knowledge)

• Reasonable pre-contracting

assessment of TCF delivery capacity

• Reasonable monitoring of TCF

indicators at adviser level, plus

appropriate response to mitigate

identified risks

• Identifying high risk activities, with

risk mitigation controls in place

• Complaints management and

mitigation processes

• Monitor adherence to fee guidelines

Further consultation on proactive

management of quality of advice

• Where commission paid

or advice fees

facilitated, ensure

product knowledge (as

for multi-tied)

• Identifying high risk

activities, with risk

mitigation controls in

place

• Monitor adherence to

advice fee guidelines,

where facilitated

• Complaints

management and

mitigation processes

(less rigorous than for

multi-tied)

Financial

Services

Board

Slide 23

Additional product supplier

responsibility

Responsibility for non-advice sales execution (EE, also see D):

• Product design to meet standards for non-advice sales - simple

products only

• Fit & proper standards for sales “agents”

• Other relevant conduct standards, e.g. disclosure

Responsibility for customer data (FF)

• Standards for access to and monitoring data held by intermediaries

& outsource providers, to ensure TCF accountability

• Standards for levels of (authorised) customer information to be

provided to advisers – with checks and balances

• Confidentiality safeguards

Remuneration proposals:

Removing conflicted incentives

Financial

Services

Board

Slide 25

Remuneration disclosure

General standards will be set for (HH):

• Standardised terminology to describe types of services,

fees and charges and to disclose the impact of these on

benefits

• Production and accessibility of fee “schedules” or “menus”

• Content, timing and record keeping of remuneration

disclosures

• Disclosure relative to fee guidelines or benchmarks to be

set by the regulator.

Financial

Services

Board

Slide 26

Advice fee standards

Standards will be set for different types of advice fees:

Type of standard

Pla

nn

ing

(II)

Up

-fro

nt

(JJ)

On

go

ing

(JJ

, K

K)

Explicit advance customer consent to quantum, calculation, manner of payment,

scope of planning / type of advice

Reporting to regulator on fee earnings and related disclosure (including in relation to

alignment with regulator benchmarks)

Product supplier to monitor fees charged by tied advisers and quality of planning /

advice, and report to regulator

Product supplier to monitor and report to regulator on advice fees charged by multi-

tied and IFAs, where facilitated

Limits on extent to which advice fees may vary between product types

Fees to be commensurate with service, not to cross-subsidise product costs

No ongoing fee unless customer agreed in advance to get ongoing advice, agreed to

fee amount, and ongoing advice is in fact provided – customer can “opt out” of

agreed ongoing fee if no ongoing advice provided

Adviser can stop providing ongoing advice if customer does not pay / stops paying

agreed ongoing advice fee

Financial

Services

Board

Slide 27

Product suppliers to facilitate advice

fees

• Advice fees may – but need not be – charged directly to the

customer (LL)

• Product suppliers will be obliged to accept instructions from the

customer to deduct up-front or ongoing advice fees – from

contributions or investment product values - and pay these across to

the appointed adviser

• Product suppliers will also be obliged to stop or amend deductions

on the customer‟s instruction

• Comment is invited on the range of fee deduction options product

suppliers should be obliged to facilitate

• Product suppliers must offer the same deduction facilities to all three

types of adviser

• Product suppliers must disclose deductions to customers, separate

from product charges

Financial

Services

Board

Slide 28

Remuneration for selling and

servicing products

Investment products: (MM) No remuneration from product supplier may be paid

or received. Remuneration will comprise advice fees only (subject to arrangements

between adviser firms and individual advisers). Advice fees may be facilitated.

Exceptions will apply for the low income market.

Risk products:

Life risk (long-term) insurance (NN) Short-term insurance (UU)

• Mix of up-front sales commission and as-and-

when service fee (max 50% up front) – both will

be capped

• Up-front portion all at inception, including for

contractual premium increases

• “Clawback” retained for up-front portion

• No commission or service fee for policy

replacement (advice fee can be charged) (OO)

• Commission anomalies on “legacy” policies

and conflicts on RA transfers to be addressed

(PP, QQ)

• All remuneration as-and-when, to cover both

sales commission and service fee – both will

be capped

• Section 8(5) mechanism for additional fees will

be removed

• Stricter conditions for cover cancellations (VV)

Both life risk and short-term insurance: • Commission levels to be reviewed, as an advice fee is also now chargeable

• As-and-when service fees conditional on ongoing service – input requested on range of services to

which service fee should apply

• Product charges must be adjusted to reflect new commission levels

Financial

Services

Board

Slide 29

Equivalence of reward

Standards will be set to clarify the operation of “equivalence of

reward” for tied advisers of long-term insurers (RR):

• Equivalence applies at individual adviser level on a “cost to

company” type basis – specific comment invited on how to apply

the principle for new tied advisers

• The remuneration elements, tranches of business and time

periods to be taken into account in determining equivalence need

to be addressed

• Equivalence relates to commission earning business only (i.e.

risk business) – adviser remuneration for investment business

may not exceed customer advice fees paid (SS)

• Input is invited on whether the equivalence principle should be

extended to short-term insurance business

Financial

Services

Board

Slide 30

The low income market

Additional consultation to take place on a special dispensation

for the low income market (TT):

• Potentially retaining a component of sales commission for

investment products, subject to a limitation / prohibition on

early termination charges

• Product standards and appropriate commission levels

(investment and risk) to qualify for this dispensation

• Alignment with micro-insurance and tax-free savings

product initiatives

• Types of intermediary and intermediary / product supplier

relationships that will qualify for this dispensation

Financial

Services

Board

Slide 31

Remuneration for services connecting

product suppliers & customers

Direct non-advice sales execution (WW)

• Remuneration must be commensurate with the fact that no advice or

ongoing service is provided

• For insurance, remuneration may not exceed sales commission caps

Referrals and leads (XX, also H)

• Models to be reviewed to assess conflicts, esp. in commission sharing

arrangements

• Specific standards for product comparison / aggregation services

Investment platform administration (YY)

• Platform administration fees to be disclosed, agreed to and paid for by the

customer as the platform‟s only remuneration

• Payments from product suppliers or investment managers, including

rebates, will be prohibited

Financial

Services

Board

Slide 32

Remuneration for service to product

supplier: Binder fees

Maximum binder fees to non-mandated multi-tied advisers to

be capped (ZZ). Indicative caps for consultation:

• Entering into, varying, renewing = 2%

• Determining wording, premiums, value of benefits = 2%

• Settling claims = 1% to 3% (depending on extent of

services)

Financial

Services

Board

Slide 33

Remuneration for service to product

supplier: Other outsourcing fees

Limited outsourcing to advisers (Z) – where permitted, caps

will apply:

• 22.5% commission cap for credit life schemes “with

administrative work” to be scrapped – cap to be 7.5% for all

credit life schemes (pending further group schemes review)

(AAA)

• Fee for issuing insurance policy documents – indicative fee

for consultation = R100 flat fee (not permitted for binder

holders) (BBB)

Financial

Services

Board

Slide 34

General standard

No financial interests may be provided by product

suppliers to intermediaries unless specifically

provided for in the regulatory framework (CCC)

• Further consultation on the extent to which this

principle should extend to financial interests for

recommending, distributing or servicing “add on”

products or services offered with the core financial

product

RDR: The way forward

Financial

Services

Board

Slide 36

Phased implementation

Final RDR proposals, informed by the consultation process,

will be phased in as the Twin Peaks legislative architecture

evolves –

• Phase 1 (Priority proposals – see p.64 of RDR): Changes to

be made within current regulatory framework – between

close of comment and promulgation of Financial Sector

Regulation Act (estimated April 2015 – end 2015)

• Phase 2: Changes post effective date of Financial Sector

Regulation Act – estimated during the course of 2016

• Phase 3: Changes post effective date of future overarching

“Conduct of Financial Institutions Act” - estimated in course

of 2017

Financial

Services

Board

Slide 37

Next steps

Between now and end 2015 the FSB aims to:

• Analyse comments received

• Carry out additional technical work and consultation on

selected proposals

• Finalise, consult on, and implement the identified priority

proposals – likely to be staggered during the course of the

year

• Finalise and communicate a roadmap for the remaining

proposals, aligned to FSR Bill developments

Qu

esti

on

s?