South Africa’s insurance industry has largely welcomed the release of the Retail Distribution Review (RDR) discussion document, which was released by the Financial Services Board (FSB) on 7 November. Now begins the serious scrutiny of the long-awaited document and the formulation of responses required by March 2015.
“We anticipate mixed reactions in the market,” Anthony Smith, head of the KPMG Financial Services Regulatory Centre of Excellence tells RISKSA.
Smith and Lyndall Hobson, Financial Services Insurance manager at KPMG explain that knowledge gained from the UK RDR model showed that after a year of implementation, financial advisors managed to change their business models to adapt. A survey done in UK indicated that 88 per cent of customers were satisfied with changes made to remuneration models.
“We are confident that there will be a similar reaction in South Africa. However, the cost outlay for advisors and insurers in terms of systems and processes has not come at an opportune time,” say Smith and Hobson.
Indeed, the costs of compliance to the myriad of new financial services regulation in South Africa, particularly in the current tough market conditions, are a major concern for intermediaries.
The current public comment period is the time for intermediaries to have a say in shaping the regulation, which will in turn shape the way business is done going forward.
Smith and Hobson note that for certain players that have established compliance departments and resources which are able to understand the implications of such regulation to their business models, the comment period is sufficient. However, for the smaller industry players who are currently facing a myriad of regulatory changes, RDR may not receive sufficient attention.
Distribution channels
“There are some early signs of unhappiness from various sectors with regards the proposed caps on insurance binder fees payable to multi-tied intermediaries (binder holders) per binder activity,” says Justus van Pletzen, CEO of the Financial Intermediaries Association of Southern Africa (FIA). He adds that these issues will be tackled as the FIA responds to the 50-plus proposals in the RDR discussion document.
The FIA reiterates that a precursory viewing of the document suggests that the FSB has been mindful of the requirement for differentiated fee structures on products that are marketed to low income consumers. It is also clear that the FSB will level the playing field between adviser and product supplier in ensuring fair outcomes for consumers.
The RDR executive summary notes: “Key structural changes include placing greater responsibility on product providers for ensuring the delivery of fair customer outcomes through their chosen distribution channels…”
“As RDR places more responsibility on the product suppliers to ensure delivery of fair customer outcomes, we expect that product suppliers will need to consider their current distribution channels and whether these remain appropriate. We expect that there will be more of a focus on the quality of distribution channels used,” explain Smith and Hobson.
There are numerous proposals contained in the RDR aimed at capping intermediary remuneration. The FIA notes that the RDR proposes far-reaching reforms to the regulatory framework for distributing retail financial products to local consumers, and are aimed at addressing poor customer outcomes in the current system.
The experts at KPMG note that the environment may become challenging for the smaller players as their remuneration structures may be less lucrative as a result of commission scales being regulated. “Intermediaries with limited diversification in their current portfolios may be affected more than others.”
Product suppliers
“We may see a reinvention of products and a potential decrease in the appetite to sell lower-end products that are not lucrative in terms of earnings,” note Smith and Hobson.
They add that this will result in product suppliers being more innovative in product design.
Due to proposed changes in remuneration to intermediaries, products may be structured differently to encourage intermediaries to sell the products.
Overall, the market has anticipated many of the changes put forward in the RDR discussion document. Only on further investigation and practical application will one be able to see whether there are any unexpected challenges, say Smith and Hobson.
The FIA adds that despite the numerous delays in publication of the document, the organisation is cognisant of the complexities the regulator has had to deal with in ensuring that the discussion paper considers all possible scenarios in the financial advice space.
The Financial Planning Institute (FPI) in particular welcomed the references to financial planning, as contained in the paper. “We have been engaging with FSB and National Treasury over a few years to work on the concept of regulatory recognition for the profession and the concept of financial planning, and are very excited about this opportunity to further engage on this topic,” says Gerhardt Meyer, FPI board member and FPI advocacy committee chairperson.
“One will only be able to truly evaluate any unintended consequences once the proposals emanating from the RDR become effective. Unintended consequences may not impact the market as a whole, but may rather impact specific products working through specific distribution channels. These consequences may only be realised once entities consider the impact of RDR on their individual business models,” conclude Smith and Hobson.