“Where the FSB
sees the financial
services industry
and its role
players in the
next 24 months”
Retail Distribution
Review
Agenda
 Where we have come from…
Financial
Services
Board
 Where we are going…
 Twin Peaks
 TCF
 RDR
 Complementary market conduct measures
 Key focus areas
 Conclusion: Destination 2016
Slide
3
Where we have come from…
Supervisor:
 Backward-looking, compliance-based approach
Financial
Services
Board
 “One-size-fits-all” – not risk-based
 “Silo” approach
Firms:
 Mixed bag of governance & risk management
 Who’s the customer?
Conduct:
 Despite rules, too many examples of poor customer
outcomes
Where we are going…
 Guiding principles:
Financial
Services
Board
• Forward-looking
• Pre-emptive and proactive
• Outcomes-based
• Risk-based and proportionate
• Comprehensive and consistent
• Intensive and intrusive…
National Treasury
“A safer financial sector to serve South Africa better”
February 2011
Slide
5
Twin Peaks
Financial
Services
Board
MARKET CONDUCT
PRUDENTIAL
FINANCIAL STABILITY
Conduct of Business
Banking
Financial Stability
Oversight Committee
Market Integrity
Insurance
Financial Market
Infrastructure
Consumer Education
Financial
Conglomerates
Resolution Authority
MCA
Slide
6
SARB
TCF
1. Customers can be confident they are dealing with firms where TCF
is central to the corporate culture
2. Products & services marketed and sold in the retail market are
Financial designed to meet the needs of identified customer groups and are
Services targeted accordingly
Board
3. Customers are provided with clear information and kept
appropriately informed before, during and after point of sale
4. Where advice is given, it is suitable and takes account of customer
circumstances
5. Products perform as firms have led customers to expect, and
service is of an acceptable standard and as they have been led to
expect
6. Customers do not face unreasonable post-sale barriers imposed by
firms to change product, switch providers, submit a claim or make a
complaint
Slide
7
These outcomes are to be demonstrably delivered throughout the
product life cycle, from product design and promotion, through advice
and servicing, to complaints and claims handling – and throughout the
product value chain.
TCF
TCF structural model
Financial
Services
Board
Slide
Pillar 1:
TCF Framework
Pillar 2:
Implementing
TCF
Pillar 3:
Incentives &
deterrence
Firms
Regulatory
framework
Culture &
governance
Disclosure &
reporting
FSB
Supervisory
framework
Proactive
supervision
Enforcement
mechanisms
Support
Ultimate fairness through ombud schemes
Regulatory co-ordination & information sharing
Consumer education & awareness
8
RDR: Rationale
 The Retail Distribution Review (RDR) is a prominent
example of this new approach:
Financial
Services
Board
 FAIS has raised standards of professionalism, but
concerns about mis-selling and poor outcomes for
customers persist
 Where existing arrangements fail to consistently deliver
fair outcomes for customers, this requires structural
interventions to change incentives and business models
 Primary concerns: inherent conflicts of interest result in the
potential for adviser remuneration to distort customer
outcomes; and investors do not necessarily understand
the service they can expect from their financial adviser
RDR: Objectives
 Objectives:
Financial
Services
Board
 Advice and distribution that supports the delivery of
key TCF outcomes
 In particular:
 Delivery of affordable and fair advice
 Ensuring a framework that supports a sustainable
business model for financial advice
RDR: Current risks
 Risks to fair customer outcomes:
 Inherent conflicts of interest in commission/fees from product
provider
Financial  Hidden impact of commission on product value can be high
Services
Board  Accountability for quality of advice/customer outcomes not
always clear
 Risks to intermediary sustainability:




Not always properly remunerated for advice
Value of intermediaries’ services not properly recognised
Up-front commission not a sustainable business model
Inappropriate incentive structures expose intermediaries to
regulatory risk
 Risks to effective supervision:
 Imbalances in product supplier/intermediary responsibilities
 Standards for intermediaries not always proportionate
 Some products & related advice fall outside regulatory net
RDR: Activity-based approach
Services to
Product provider
Services to Customer
Financial
Services
Board
Advice
Financial Planning
Up-front Product
Advice
On-going Advice
Intermediation
(non-advice
sales
execution)
On-going
maintenance/
servicing
Platforms
Other services to
client (e.g. tax &
estate planning)
Slide
12
Aggregation
Services /
Referrals
Outsourced
functions
Binder
Functions
Other
Outsourced
Functions (e.g.
premium
collection,
administration)
12
RDR: Contractual relationships
 Intermediary to disclose nature of relationship with product
suppliers
 Independent Financial Adviser (IFA):
Financial
Services
Board
 No product supplier allegiance/commitments
 Can advise on a range of products, but “whole of universe”
not realistic
 Multi-tied agent:
 Covers most of current so-called “independent intermediaries”
 Should disclose range of product and/or product supplier that
can advise on
 Tied agent:
 Limit to one supplier / group only
 Remove current “hybrid” models
RDR: Advice fees
 General principle: service provided to customer, paid for
by customer
 Separate charges for:
Financial
Services
Board
 Financial planning / risk planning
 Up-front product advice
 On-going advice
 Fee negotiated by adviser with client, but product
supplier can facilitate collection
 No caps/restrictions, but possibly some form of “safe
harbour” rates and monitoring by product supplier
 Different fee ranges based on range of advice
 Various payment forms negotiable – flat fee, “trail” fee, % of
premium, time-based, etc., but comparability important
RDR: Commission
 Distinguish “intermediation” (selling) from other
outsourced product supplier services (e.g. premium
Financial collection, administration)
Services
Board
 General principle:
 Intermediary “sells” on behalf of product supplier – can earn
commission
 But…have to consider level playing field issues in
investment product space
 Commission levels and structures to be reviewed
RDR: Application of principles
 Investment products
 Advice fee (financial planning/product advice/on-going)
 Possible exemption: commission / salary basis for “access”
Financial
Services
products
Board
 Life risk products:
 Commission (structure and level adjusted)
 Advice fee
 Fee from product provider for on-going policy maintenance /
outsourced functions (reviewed to avoid conflict of interest)
 Short-term insurance products:
 Commission (level reviewed)
 Advice fee (to replace s.8(5) fee)
 Fee from product provider for outsourced functions
(reviewed to avoid conflict of interest)
RDR: Conflicted remuneration
 Arises when incentives introduce bias in product advice
and/or interfere with primary duty to act in best interests
of customer
Financial
 Uncapped remuneration / profit share can introduce
Services
Board
conflicts, for example:




Outsourced fees (including binder fees)
Replacement commission
“Joining incentives” for tied agents
Broker consultant fees paid directly/indirectly to
intermediaries
 Ownership interests (e.g. cell captive dividends, joint
venture profit shares, bancassurance)
 General principle: advice should not be conflicted, but
this may require specific rules / structural interventions to
support fair outcomes
Complementary measures
 Reforms have considered international developments,
but are tailored to local circumstances – in particular,
Financial supporting financial inclusion:
Services
Board
 SA model will look at a special remuneration dispensation
for investment and risk products sold to low-income
customers (e.g. commission or salaried basis)
 Combined with alternative measures aimed at achieving fair
outcomes for low-income customers, notably product
standards (e.g. microinsurance, NT accredited retirement
savings products) aimed at ensuring that products are
suitable and offer adequate value
 Similar focus on product development stage may have to
be applied to other “low advice” models, e.g. direct
distribution
Key focus areas
 Enhanced focus on culture and governance:
 Properly
embedded
TCF
culture
and
adequate
Financial
measurement and management of risk (both financial and
Services
Board
conduct of business) support a pre-emptive, risk-based
supervisory model
 Emphasis on data and systems capability
 Proper management information is key to both SAM & TCF
governance and risk management
 Particularly important in intermediated / outsourced models
 Corresponding changes to FAIS framework
 Greater accountability on product providers for outcomes
arising from their chosen distribution channel
 Regulator no longer “first line of defence”
 Will require a partnership in delivering fair outcomes
Conclusion: Destination 2016
 Twin Peaks, SAM, TCF, RDR all implemented…
 Forward-looking, pre-emptive, risk-based and outcomesfocused regulation and supervision
Financial
Services
Board
 Firms…
 Customer-centric
 Enhanced enterprise risk management – not only financial
risks but also conduct risks
 Raising the bar; but competition on a level playing field
 Financial advisers…
 No more elaborate schemes to earn extra income – can
build value in the business by demonstrating expertise and
added value to customer
 Less compliance focus, more outcomes focus
 Customers…
 Can have confidence and trust that they are dealing with
firms that will treat them fairly
Thank You