A matter of timing

The Financial Services Board published its Retail Distribution Review discussion document in November 2014. Its overarching slogan for regulating 'conduct of business' in financial services is 'Treating Customers Fairly' - another phrase lifted straight from the British regulator. The RDR put forward a total of 55 specific regulatory proposals, to be implemented in phases. A subset of 14 RDR proposals was identified for implementation in 'Phase 1.' The implementation window for these Phase 1 proposals was expected to be between the close of the period for comment on the RDR (March 2015) and the effective date of the Financial Sector Regulation Act. At the time the RDR was published, that effective date was expected to fall in the second half of 2015. This timing has shifted and a revised version of the FSR Bill was tabled in Parliament on 27 October 2015, with promulgation expected in late 2016.

The FSB told Compliance Matters this week: "The original intention was that the majority of the Phase 1 RDR proposals would be implemented between July 2016 and the end of 2016. These timelines have been pushed out by approximately six months, with implementation now targeted from 1 January 2017 onwards. The reason for the shift is to align with changes in the timing of Parliamentary processes for other key items of legislation.

"As there are still some uncertainties on these legislative timelines, we have not published details on our website. We have, however, informed key industry stakeholders, including all affected industry associations, of the expected revised timelines. We expect to start consulting on details of the Phase 1 proposals during August 2016. We also intend to publish a full status update on all RDR proposals by the end of this year."

What is in Phase 1?

The Regulatory implementation of Phase 1 proposals is happening in the following steps, according to the FSB's status update paper from November. They are linked to various changes in legislation but must all be given regulatory effect.

• Amendments to the conflict of interest provisions of the Financial Advisory and Intermediary Services (FAIS) General Code of Conduct to confirm that representatives may not be appointed to more than one financial service provider (FSP) for the same product category.
• Strengthened requirements for product replacements, in particular RA transfers, S-T insurance cover cancellations and specific requirements and definitions for long-term risk policy replacements.
• Revised FAIS 'fit and proper' requirements for key individuals (KIs), in order to demonstrate that the KI has the necessary operational ability to carry out their responsibilities.
• Prudential Standards under the new Insurance Act.
• Amendment to the Long-Term Insurance Act's definition of “representative” with regards to the services a representative may perform as an intermediary in respect of another insurer’s products.
• Strengthened conduct standards and systems requirements for outsourcing arrangements.
• Requirements for handling of requests for customer information from an adviser with whom the insurer does not have an intermediary agreement.
• Requirements for insurers to monitor and take prescribed steps in respect of long-term risk policy replacements, including definition of “replacement” for these purposes.
• Amendments to ensure that commission basis and causal event charges for variable increases on legacy investment policies are aligned with those for new policies.
• Requirements in respect of cover cancellation by S-T insurers, confirming how long insurer stays on risk.
• Amendments to binder regulations to clarify types of binders advisers may enter into, strengthened conduct standards and binder caps.
• Removal of 22.5% commission cap for credit life group schemes with “administrative work.”
• Regulations to give effect to the repeal of s8(5) Short-term Insurance Act as well as consultation on an appropriate fee mechanism to replace the s8(5) fee which mechanism will ensure customer consent as well strengthened disclosure standard.
• Determination by the Registrar, indicating certain practices that the Registrar regards as not being substantially in accordance with the commission regulations, and thus not consistent with the principle of equivalence of reward.
• Conduct of Business statutory returns for Insurers, which are designed to provide a wide range of statistical conduct indicators, include reporting on both new business arising from replacements (i.e. reported by the new insurer) as well as policies terminated as a result of replacement (i.e. reporting by the original insurer).
• FAIS Conduct of Business statutory returns, designed to replace and enhance current FAIS Compliance Reports, by including (amongst a wide range of other information) replacement advice details and volumes.
• Publication of binder thematic review, confirming the insurance supervisor’s conduct expectations. The insurance supervisor is the FSB, which regulates all non-banking financial business.
• Information request on aspects of binder arrangements, including binder fees and binders entered into by L-T advisers and S-T personal lines and commercial lines advisers.
• Technical work and consultation on the part of the insurance supervisor to inform caps on binder fees and outsourced policy administration fees.
• Review of tied adviser remuneration practices to inform final Equivalence of Reward standards, with notices to be issued by Registrar to entities not complying with Equivalence of Reward directive.

TCF outcomes

As in the UK, the 'treating customers fairly' philosophy is designed to produce six 'outcomes' (or, in reality, follow six principles). These are:

• Customers can be confident that they are dealing with firms where TCF is central to the corporate culture.
• Products and services marketed and sold in the retail market are designed to meet the needs of identified customer groups and are targeted accordingly.
• Customers are provided with clear information and kept appropriately informed before, during and after point of sale.
• Whenever advice is given, it has to be suitable and take account of customers' circumstances.
• Products perform as firms have led customers to expect and service is of an acceptable standard and as they have been led to expect.
• Customers do not face unreasonable post-sale barriers imposed by firms to change product, switch providers, submit a claim or make a complaint.   

A changing market

Jacques Coetzer, the general manager of Sanlam Broker Distribution, recently spoke to FA News about how to survive after the RDR: "In an RDR world, the better the match between a value proposition and client selection or segmentation, the more competitive a broker is likely to be. As you engage in client segmentation, you may decide there are certain clients you cannot continue to...service. If you have decided to focus on wealth management for clients who are approaching or are already in retirement, for example, clients in the accumulation phase may no longer fit your value proposition. It is important that these clients are not left out in the cold.

"You could create distinctive value propositions for different areas of your business. You could then channel separate resources to each, with the aim of servicing more than one client segment. You could refer clients who are not aligned with your value proposition to another brokerage. Another option is self-service – there are many options for clients to ‘go it alone’ and do their financial planning and product selection using various online programmes and tools. It is crucial, however, that the transition is handled with the utmost sensitivity, to ensure that no client is left feeling let down. The old adage still rings true: it takes ten clients to get one good message into the market, but it takes one client to get 10 bad messages into the market."