In November 2014, the Financial Services Board (FSB) released a paper titled “Retail Distribution Review 2014” or RDR as it has come to be known.
The aim of this paper and the review as a whole is summed up in the paragraph which reads: “The RDR proposals seek to give retail customers confidence in the retail financial services market and trust that product suppliers and advisers will treat them fairly. This in turn will support a more sustainable market for financial advice and financial services over the longer term.”
Employed by a product provider or not?
One of the proposals in RDR is to create a distinction between advisers who are linked to product suppliers and those who are not. The FSB proposes that advisers who are employed by product suppliers would have to disclose that they are in fact agents of the product supplier rather than advisers who are registered in their own rights or who work for companies that provide no products. This proposal acknowledges that “advisers” who work for product suppliers do not provide untainted advice to their clients but act primarily as sales agents of their employers. The proposal is therefore to create 2 groups – one called agents who would have to designate themselves as Product Supplier Agents and a second who can call themselves advisers.
Agents vs Advisers: Does that resolve the independence issue out?
RDR also addresses the second group of advisers which do not work for product suppliers. This group of advisers is not necessarily independent. Independence is a tricky concept as South Africans have learnt from the ongoing State Capture saga. RDR attempts to address independence by limiting which
advisers will be allowed to use the term “independent” in future. Advisers must meet all of the following to be able call themselves independent:
- The adviser does not have a direct or indirect ownership interest in a product supplier;
- The adviser is not owned in part by any product supplier;
- The adviser does not earn any remuneration from a product supplier other than through regulated commission; and
- There is no other relationship of influence between the adviser and a product supplier over the advice provided.
Despite the reassurances and the “Chinese walls” that exist in financial services companies, it is important to be vigilant of the elements which the FSB has included in the list above. Financial services companies, including banks and insurers, are well-known for driving the cross-selling agenda. Advisers who are owned by or who own product suppliers always have the temptation to advise their clients to use those products. This financial incentive drives behaviours which are not in the interests of the clients.
‘Chinese wall’ is a business term used to describe an information barrier within an organization that prevents exchanges of communication or information that could lead to conflicts of interest.
This is true, too, for advisers who receive remuneration other than through regulated fees. This remuneration may be in the form of administration fees for a product supplier (such as a binder agreement), outsourcing fees, joint ventures, etc. The additional income from such arrangements makes it more likely that these products will be recommended to clients than others and even more perversely, that these products gets recommended when they shouldn’t be recommended at all.
The last requirement is often not as obvious as the others. A principle-based approach to assessing this may be required. The FSB has not provided any guidance on what it intended in this criterion. What we have learned from the State Capture saga is that influence must been seen to include family members and in the case of corporates, directors and office bearers. For example, the advice that an adviser gives may be influenced by the fact that there is a common directorship between the adviser firm and a product supplier.
Please click here to read the follow on to this article: Does independence really matter?