Financial Services Legislation – Two Big Changes

financial-services-legislationWhen laws and regulations change, it’s the responsibility of every financial advisor to take note of new regulations, apply them in accordance with the law, and keep clients informed about their rights and responsibilities.

In this article we take a close look at two new regulations from the Financial Services Board and find out how they affect both financial advisors and their clients. For more information on these new regulations, feel free to contact the Northwood team today.

Retail Distribution Review

For several years, the topic of broker’s fees and commissions has been hotly debated in South Africa. As mentioned in our previous blog posts and articles, Northwood has always believed that financial advice should be objective and not related to commissions from policy providers – and the new Retail Distribution Review should go a long way in ensuring that this becomes a reality.

The Financial Services Board (FSB), which regulates the activities of financial advisors in South Africa, recently released its Retail Distribution Review, which will make several important changes to the way financial advice is given to clients. Some of the changes include:

  • Limits on the commissions advisors may receive from policy providers like insurance and investment firms, with a possible ban on incentives for investment policies.
  • New measures to ensure that clients receive unbiased financial advice, including improved monitoring of financial planners and policy providers

The new regulations will make it more difficult for brokers to make their living purely from taking commissions. While some brokers may see this as a limit on their income, the overall result should be a financial services industry which puts the needs of the client first. Northwood supports the new regulations, which are in line with the approach we have been taking to our own clients for many years.

Prevention of ‘client selling’ by brokers

The second regulation announced by the FSB has to do with a very worrying practice which some brokers and policy providers have been involved in: the bulk buying and selling of clients.

To understand how this practice works, and why it needs to be regulated, let’s take the real-life example of a broker who is approached by a policy provider – with a deal that’s too good to be true.

The policy provider agrees to pay the broker up to R6 million upfront – but there’s a catch. In exchange for selling his brokerage, the broker is required to move all of his existing clients to the new policy provider within two years. This practice may be great for the broker, but the clients who trust that their investment and insurance needs are being served will be the ones who lose out.

In a situation like this, which unfortunately, is all too common in South Africa, the broker is forced to ‘sell’ his clients policies that may not be in their best interests.  The clients end up paying for the generous cash payment the broker has received, while the policy provider is guaranteed a steady flow of business over the next few years – if not decades.

Northwood has always maintained that financial planners should work for their clients, and not for policy providers. The worrying practice of ‘buying and selling’ clients is an example of what can happen when brokers rely on commissions and stop acting in their clients’ best interest, and we welcome these new measures which will make this practice illegal.

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