The full implementation of the much-anticipated Retail Distribution Review (RDR) paper, released by the Financial Services Board (FSB), is expected in mid 2016, and the FSB has been collating comments from industry since the paper’s release.
The study was built on the foundation of the (Financial Advisory and Intermediary Services) FAIS Act, which promoted greater industry professionalism, and is informed by Treating Customers Fairly (TCF). The aim is to reduce the negative associations customers have about the financial advice process and have greater transparency all round. Customers need to know what’s on offer and trust the advice process is about serving their needs, not just the industry and its representatives.
The structural changes the paper proposes will mean significant changes to many business models. Some of the proposals, such as those relating to intermediary/product supplier relationship, will come into effect at the implementation date. In other areas, the financial services industry will be transitioning to the new model.
What will the impact of the RDR be? Below are some of the main proposals for structural changes in the financial services industry:
Types of services provided by intermediaries
Regulation proposed here chiefly concerns defining who can offer financial advice which will be defined in three categories:
- Financial planning
- Upfront product advice
- Ongoing product advice.
For offering products without advice, only simple products will be allowed to be sold according to set standards.
Standards will also be set for ongoing product servicing, product aggregation, comparison services and lead generation. Only qualified intermediaries can collect insurance premiums and customers need to be informed to make proper comparisons of products available.
Relationships between product suppliers and intermediaries
The proposals call for transparency, so customers know the relationship of intermediaries to product suppliers. Advisers need to be defined clearly as either independent financial advisers, multi-tied advisers or tied advisers. “Juristic representatives” can no longer offer financial advice.
To limit conflicts of interest, outsourcing product supplier functions to financial advisers won’t be allowed, other than in instances of specific, regulated functions. There will be reviews of relationships between product suppliers and intermediaries to assess any conflicts of interest.
The focus here is on fairness: Any remuneration must be commensurate with the services rendered and ongoing fees may only be charged if advice is ongoing. An intermediary cannot charge a customer twice for the same service and all payments need to be explicitly agreed to and understood by the customer.
Standards will be set for financial planning fees, both upfront and ongoing. For life-risk policies, 50% of remuneration may be paid upfront as a sales commission and 50% payable on an as-and-when basis. Maximum insurance binder fees will be set, and the cap for credit life group schemes has been lowered to 7.5% (from 22.5%).
General standards will ensure that no product suppliers offer financial interest to intermediaries unless it is made allowance for within the new regulatory framework.
There has been much speculation on how the industry will adapt to these changes, especially in light of similar overseas examples. Overall, the reforms are meant to strengthen the sustainability of the financial services industry and make the role of financial services more ethical.
These are interesting times in which we need to adapt, upskill, be transparent and communicate clearly with the regulators and our customers.