RDR: What Does the Landscape Look Like Six Years Down the Line?
When the Financial Sector Conduct Authority (FSCA), then the Financial Services Board, first released 55 proposals around Retail Distribution in 2014, the initial reaction was characterised by uncertainty and concern. Since then, however, most Financial Services Providers have proactively embraced some of the elements that were suggested even while no draft legislation for the investment sector has yet emerged.
The phased consultation might feel protracted to some advisers, naturally wanting clarity in order to understand the impact that the proposed regulations will have on their business models. The latest discussion document and status update released at the end of 2019, still does not offer any indication on the timeline for a transition or whether a vested approach would be taken. What the document does show, is that industry input is being carefully considered before final decisions are made.
In a recent interview for INN8 Connect, a thought-leader hub provided by the adviser-inspired independent investment platform solution, CEO Mickey Gambale argues that the collaborative and considered approach adopted by the FSCA does not mean that the Retail Distribution Review (RDR) discussion has lost any of its teeth.
“I must commend the then FSB that they didn’t take the stick approach. They engaged and really listened, so kudos to them,” he says to Georgina Smith, INN8’s Head of Distribution, during the discussion.
“They realised that South Africa is a unique market with unique circumstances. This does not mean that RDR has lost its teeth. Not at all, in fact, what we have been seeing is that a lot of the principles that were going to be driven by regulation, have since been realised by natural market forces.”
Gambale says that there are still some left-over waves that have to be navigated to ensure that any regulations implemented achieve the ultimate objective that RDR has as its goal: “The regulator wants to make sure that the consumer knows exactly what they get. When someone invests, they are buying a promise of future delivery and it can become very complex. What the FSCA wants is transparency and clarity.”
Demarcation of the playing field
One of the most-discussed topics under RDR is adviser categorisation. The clear indication in the latest discussion document is that the FSCA is leaning towards an either/or model of product supplier agents (PSAs) and registered financial advisers (RFAs).
“The notion of multi-tied advisers, that was included in earlier discussion documents, has all but disappeared, and the regulator seems to be going very black and white here,” says Gambale.
He says that current tied advisers might see this as a disadvantage, to be limited as a PSA in what they can offer. Gambale uses the metaphor of a beach to explain the choice that needs to be made.
Do you remain in the space where risk is shared and the larger product groups can assist you and provide support? In other words, do you swim between the flags where lifeguard support is provided?
“Or, if you’re going to be an RFA, you could swim out into the rest of the ocean, which could be quite dangerous and daunting?”
Those who remain within the demarcated space of PSAs won’t be able to venture out into the ocean to find the product that their client might need, but that is not available within their home group’s portfolio. How to fill this gap, still remains a contentious issue in the discussions around RDR.
The FSCA’s latest indication is that it is convinced that the referral and lead mechanism that it proposes will allow sufficient flexibility to ensure fair customer treatment in PSA advice models.
Once a PSA explains to their client that they are not in a position to recommend a particular ‘whole of market’ product or service, the proposed mechanism will allow a PSA to refer the customer to a product supplier or service provider outside their home group provided that the supplier has been pre-selected by the PSA’s home product supplier as eligible for referral.. Further proposed conditions for the mechanism are set out in the discussion document.
Also evident in the latest discussion paper is that RFAs should be careful if they naturally recommend the offerings of a particular product or service provider above others. This would not automatically trigger re-classification as a PSA channel, the FSCA states, but the RFA would need to be able to satisfy the regulator that there are no incentives in place that create the risk of biased or conflicted advice.
“So, if you want to remain independent, you’re going to have to show that independence and structure it properly so that it does not simply look like form over substance,” says Gambale.
Market acceptance of a referral model
Advisers are naturally cautious or sceptical about the suggestion from the FSCA that where a PSA can’t offer the product that their clients need, they could refer their client to another adviser firm to assist.
“I, for one, if I was a financial advisor, would be nervous to refer my clients out somewhere,” says Gambale. “I’d be fearful of losing the client.”
Smith equates the proposed model to that which is used in the medical world where the relationship remains with the original doctor, even though patients are referred to specialists for their specific medical needs.
“I think the model can work, but I can understand the anxiety that people will feel about possible poaching of clients,” she says.
Steering clear of rebates
While discussions are still developing around many of the original proposals of RDR, Gambale is quite certain that it is time for investors to realise and acknowledge that rebates are a thing of the past.
“If I were to give one piece of advice to financial advisers out there that still earn or have business models that work off rebates, I would really caution around this,” he says. “If that is a business model that you still employ, be careful.”
Gambale says that whilst you could try and dress it up slightly differently, it goes against the principles of what RDR is trying to achieve and you will be found out.
Increasing ease of movement
Another topic that has come to light in the RDR process is to increase the ease with which financial advisers would be able to move from one Financial Services Provider (FSP) to another. Essentially the FSCA wants to ensure that clients have the option to remain with their adviser even if the adviser decides to move to a new FSP or product group.
“This will bring competition, no doubt,” says Gambale. “It will also bring risk for business owners who own franchises, but ultimately that freedom of movement is going to result in better client outcomes. I think you will see advice and investment innovation as a result.”
For more information on RDR and what it means for both advisers and clients, INN8 has two webinars available on its INN8 Connect platform.
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