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
Agenda Context and objectives of the RDR Financial Types of services provided by intermediaries Product supplier / intermediary relationships Remuneration proposals The way forward Slide 2
Context and objectives of the RDR
Context The RDR has been undertaken in the context of the Twin Peaks market conduct mandate and the TCF framework Financial It is a prominent example of a more interventionist approach to market conduct regulation Slide 4 Treating Customers Fairly in the Financial Sector: A draft Market Conduct Policy framework for SA, National Treasury, December 2014
Scope of the RDR A mainly retail focus wholesale market reforms are being addressed through complementary processes Financial A cross-cutting, cross-sectoral approach Particular focus on advice Slide 5
Objectives of the RDR To ensure that financial products are distributed in ways that support delivery of TCF outcomes and enable Financial 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. Slide 6
Financial 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: 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
An activity based approach Financial to customer Advice Financial planning Up-front product advice connecting product suppliers and customers Sales execution Ongoing maintenance/ servicing to product supplier Outsourced functions Binder Functions Ongoing product advice Platforms Aggregation services / referrals Other Outsourced Functions Slide 9
Financial 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) Slide 10
Financial 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) Slide 11
to product supplier Outsourced services on behalf of product suppliers to generally be more clearly identified and regulated (J) Financial Approach will be modelled on principles in the current insurance Outsourcing Directive (Directive 159) Slide 12
Product supplier / intermediary relationships: Untangling the web
Financial 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)
Independent financial adviser (IFA) An IFA will need to meet two sets of independence criteria 1. Product & product supplier choice (M) Financial 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? Slide 15 2. Freedom from product supplier influence (N) 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
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 Financial 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 Slide 16
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) Financial For this purpose product supplier includes entities in the same product supplier group to be defined and regulated to avoid abuse Slide 17
Financial planner Conduct standards, including appropriate fit & proper standards, to be set for financial planning Financial 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 Slide 18
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) Financial 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) Slide 19
Financial 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
Outsourcing No product supplier or investment management functions may be outsourced to a financial adviser, unless specifically permitted and regulated (Z) Financial Includes prohibition on CIS manco outsourcing investment management to an entity that is also an adviser (e.g authorised agent or 3 rd 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) Slide 21
Financial 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 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 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. Slide 25
Planning (II) Up-front (JJ) Ongoing (JJ, KK) Advice fee standards Standards will be set for different types of advice fees: Type of standard Financial 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 multitied 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 Slide 26
Financial 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 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. Life Risk risk products: (long-term) insurance (NN) Mix of up-front sales commission and as-andwhen 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) Short-term insurance (UU) 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
Equivalence of reward Standards will be set to clarify the operation of equivalence of reward for tied advisers of long-term insurers (RR): Financial 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 Slide 29
The low income market Additional consultation to take place on a special dispensation for the low income market (TT): Financial 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 Slide 30
Financial 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
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: Financial Entering into, varying, renewing = 2% Determining wording, premiums, value of benefits = 2% Settling claims = 1% to 3% (depending on extent of services) Slide 32
Remuneration for service to product supplier: Other outsourcing fees Limited outsourcing to advisers (Z) where permitted, caps will apply: Financial 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) Slide 33
General standard No financial interests may be provided by product suppliers to intermediaries unless specifically provided for in the regulatory framework (CCC) Financial 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 Slide 34
RDR: The way forward
Phased implementation Final RDR proposals, informed by the consultation process, will be phased in as the Twin Peaks legislative architecture evolves Financial 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 Slide 36
Financial 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 Slide 37
Questions?