FSB to financial advisors: Retail Distribution Review will help, not hurt you

South Africa’s Financial Services Board is set for a busy 2015, spearheaded by the adoption of a new Retail Distribution Review modelled on the one successfully introduced in the UK. In this CNBC Africa interview, the FSB’s Caroline da Silva explains why the new regulation will be a boon for financial advisors – supporting her case by using recently released research from the British experience. – AH

ALEC HOGG:  Welcome back.  We’re joined in the studio by Caroline da Silva, Deputy Executive Officer of Financial Advisory, and Intermediary Services, at the Financial Services Board.  To find out what this year has in store for the financial services industry.  A very big year but also time to compress those titles of yours Caroline, I think with you arriving at the Financial Services Board, you can maybe…

CAROLINE DA SILVA:  Yes, make titles shorter.

ALEC HOGG:  Why not?  I remember Jerry Yang from Yahoo.  His title, he was the guy who started it, was Chief Yahoo.

CAROLINE DA SILVA:  Yes, well my title really is DEO, so how short is that?

ALEC HOGG:  There we go, but it’s a big year for the financial services industry, with these new regulations.

CAROLINE DA SILVA:  It is.  It is almost a watershed year, 2015, and if we can start with probably one of the big effects that going to affect the industry, is what we call the ‘Twin-Peaks Regulation’.  Predominantly in the past, regulators have focused mostly on prudential and financial regulations, which are the stability of the company itself, and suitability of market’s resolution, in terms of failure.  But we’ve learnt, over time and especially with the global financial crisis, that the conduct of financial services providers very often has an impact on the financial stability.

ALEC HOGG:  That’s very nicely and diplomatically put.


ALEC HOGG:  We had 2008 and 2009, global financial crisis.  We’ve learnt something from that.

CAROLINE DA SILVA:  Yes, we’ve learnt and the market conduct was a big learning, especially for supervisors across the world, so the architecture that’s been introduced now, sort of separates market conduct from prudential.  It takes away that conflict of interest.  It puts prudential with the Reserve Bank and takes market conduct into the financial services.  That’s a big impact because organisations, like banks, have never been subject to market conduct regulation.  Insurance companies – some market conduct market regulation.  Financial service providers – quite a lot, in terms of the phase Act, but based on a very compliance, driven rules basis.

ALEC HOGG:  [Just with everyone’s terms, in the past they were trusted.  Now you have to watch them.

CAROLINE DA SILVA:  Well they were supervised, from a prudential perspective, which is very important to customers, their financial stability, and their ability to meet their liabilities, but the market conduct.  The things they do, the way they incentivise their staff, the way they drive incentives, the way attract customers.  What they disclose to customers.  What the outcomes from customers are, so they’ve never been supervised as a focus, and that’s the future of ‘Twin Peaks’.

Market conduct is a lot different in its approach to the past, so in the past it was very compliance driven.  Tick the box.  Have you applied the rules and have you done this?  Market conduct is more outcomes focus, so even if you’ve ticked the boxes, has the outcome for the customer been fair, and that allows the Regulator to be far more interventional and takes much more structural intervention, which brings us to the first example of market conduct, which is the retail distribution review that we’ve introduced recently.

A much more interventional approach, it changes the structure of remuneration within the industry to bring better outcomes from customers, because the ‘tick-the-box’ approach or the disclosures weren’t sufficient.  It still resulted in poor outcomes for customers.

GUGULETHU MFUPHI:  What about the concerns that Alec was joking about, some of the consultants worried about losing some of their commission now?

CAROLINE DA SILVA:  Well, it’s not about losing commission.  It’s more about packaging in terms of the way that customers can properly understand who pays for what.  Advisors act in the best interest of the customers, but they’re remunerated by the product supply, and that creates a triangle of conflict that needs to be managed.  Sure, product supply – our product suppliers use advisors on their distribution channel and they should be rewarded for that, and that’s commission.  But the advice they give to the customers is for the customer alone, and that shouldn’t be swayed or conflicted with what they do for the product supply, and that’s the separation that RDR introduces.

You can give advice to your customer for the function you perform for them, and you can get a commission, from the insurer, for the distribution but that commission will be changed, in terms of how it was done in the past, except (sorry) in the investment space, there will be no commissions.  It will only be advice fees.

ALEC HOGG:  It’s a dramatic change and probably a long overdue one, because there has been this terrible conflict of interest but how the…  Financial advisors are actually heroes in many ways because they’re going to people who don’t want to save and they’re explaining to them why they should save, or why they should take insurance, and when something happens they aren’t really thanked for it.  But they keep doing it and keep the savings going in the country.  Are you expecting that financial advisors are going to leave the industry because they’re perhaps not being remunerated in the way they were in the past?

CAROLINE DA SILVA:  No, and I’ll tell you why because RDR has a very specific focus, the ‘value of advice’.  That’s its focus.  The stability of the market, the integrity of the market and the stability…the continued value of advice, so what it has, as it heart, is teaching the customer to understand the value of the advice.  To understand the value of the advisor, and that’s what it does because when the advisor’s remuneration is hidden in the product supply.  It is hidden, therefore the value is hidden, and the way it’s structured at the moment where commissions in the risk industry for example, and life is all upfront, it doesn’t allow the advisor to build equity in the business.  It becomes a cash flow business, in which they build equity, so the RDR shifts that, so the advisor is valued.  Their value is understood by the customer and they are able to build equity in the business, over time.

ALEC HOGG:  Who were your role models around the world?

CAROLINE DA SILVA:  We have learnt from a number of countries around the world that have introduced RDR.  We’ve been a bit slow in doing ours, which has its advantage, in that we’ve learnt from what they’ve done wrong.  In the U.K., for example, which is often the market that’s quoted, they’ve released the impact results at their RDR very recently and it’s achieved, very much what they hoped it would achieve.  Lower costs for customers, it hasn’t resulted in the advice cap that the advisors feared, they didn’t see a huge flood of outgo of advisors and, where they did, they’re coming back, so we’ve learnt from those markets.  We’ve done things differently in RDR, understanding the uniqueness of the South African market, but also learning from global practice.

GUGULETHU MFUPHI:  From a business confidence level, will this also see an improvement?

CAROLINE DA SILVA:  Well the RDR was published in December last year, for comment by the industry and we have been very pleased that the response from the market has been overwhelmingly positive.  Obviously, you have some concerns about the level of change, and from the small independent advisable impact need, but overwhelmingly the market has been very confident about the change that RDR will bring.

ALEC HOGG:  Well, that’s good news that you’ve managed to take a very tricky subject, where there were massive conflicts of interests in the past, and anybody who dug into it knew that, and come to a conclusion that looks to be working elsewhere and perhaps in this country as well.  Are you not still finding criticism from the product suppliers, and I say this because in the 35 years I’ve been doing this job, I’ve always been told that products are always sold not bought, if they aren’t going to be sold and incentive to sell them is a lot lower?

CAROLINE DA SILVA:  Well, the incentive to sell them is not really a lot lower because they’re still allowed to pay commissions to brokers in the risk space.  In the investment space, we started to see a shift a number of years ago anyway, to advice be driven and no commission and it didn’t affect sales in that market.   The product suppliers are now busy submitting all their comments to RDR, but if you just read the reviews or the press, they put in.  You can see that their response have been overwhelmingly positive because RDR does focus on a very stable market and on the sustainability advice, into the future, which is, of course, driven by the intermediary or the advisor.  So far so good, but the comments are due in by March this year, and then we’ll start on the further consultation period with the market, to make sure what we do, doesn’t have any unintended consequences.

GUGULETHU MFUPHI:  Does this also highlight the ‘treating customers fairly’ campaign?

CAROLINE DA SILVA:  Absolutely, well market conduct does, so market conduct, the entire premise of market conduct is based on treating customers fairly.  Those principles of ‘treat your customers with due care and skill’ and ‘make the customer understand the product that they’re delivering’.  Market conduct policy, which will drive all our legislation into the future, under the market conduct, would be based on treating customers fairly, and RDR is just one example of market conduct change.

GUGULETHU MFUPHI:  Caroline, thank you so much for time today.

CAROLINE DA SILVA:  It’s a pleasure.

GUGULETHU MFUPHI:  That was Caroline da Silva.


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