“This is an exceptional time for financial regulation, both globally and in South Africa” says Jonathan Dixon, Deputy Executive Officer of the Financial Services Board’s Insurance Division. “We are seeing rapid change in regulation, driven by international developments and lessons learned from the global financial crisis.”
Addressing 1 500 financial advisors and planners at the Discovery Invest Financial Planning Summit, Dixon says that our regulatory framework has not developed as it should have. “It became too rules-based and compliance-heavy, evolving along the lines of sector siloes. Also, it was not clear who the customer was and product providers tended to view the intermediary advisor as their client, when it should in fact be the end consumer. And we were seeing too many examples of poor customer outcomes.”
As part of a new financial landscape in South Africa, Dixon focussed on two key issues which are becoming increasing relevant – Treating Customers Fairly (TCF) and the Retail Distribution Review (RDR).
“The TCF approach will require a paradigm shift” says Dixon. “There will be an emphasis on advisors demonstrating results; we will see a re-balancing of responsibilities with increased scrutiny on the design of financial products and how to best meet customer needs. There will be a new focus on distribution channels and marketing practices. Ensuring fair outcomes for the client is now a joint responsibility for product providers and advisors. And we will also be looking at what is being delivered to the more vulnerable lower end of the market.”
Dixon recommends that financial services firms and advisors prioritise embedding TCF practices into their frameworks, as there will be increasingly harsh penalties for those who do not embrace this approach. “Customers must be confident they are dealing with firms where TCF is central to the corporate culture.”
TCF principles ensure that products and services meet the needs of identified customer groups; that customers have clear information and are kept appropriately informed before, during and after point of sale; that where advice is given, it is suitable and takes account of customer circumstances; products perform as firms have led customers to expect; and that customers can easily change products, switch providers, claim or complain.
Dixon highlights that the primary focus of RDR is to ensure that advice and distribution support the delivery of key TCF outcomes. “The current distribution model has problems regarding mis-selling and poor customer outcomes and is fundamentally flawed in terms of what advisors earn from product providers and the conflicts that can arise. The system is not transparent as commissions on products are often hidden from the client”
While highlighting the flaws of the current remuneration model and how the customer is not always well-served, Dixon acknowledges that advisors themselves are not always adequately remunerated for their advice. “Currently there is no reward for advice if the effort does not result in the purchase of a product and this can pose risks to the sustainability of the intermediary business. The value of intermediary services is not always properly recognised and they can sometimes be paid the same as a call centre type of service. Additionally, the up-front commission model is not ideal as it forces intermediaries to follow a cash flow model rather than an annuity model business.”
Dixon outlined the general principle of advisor remuneration– in that it should depend on activities. “This includes advisors being properly remunerated for advice services. There should be separate charges for financial and risk planning services; up-front product advice; and on-going advice. We do not expect there to be caps or restrictions on income, but we could possibly see some form of “safe harbour” rates. And various payment forms should be negotiable, depending on whether they are flat fees, “trail” fees, % of premium, or time-based.”
Dixon concludes that over the next two years we will have a financial services industry that is forward looking, risk based, and outcomes focussed. “We should see improved customer service as the bar is raised for industry players, enhanced competition on a level playing field, and a simpler landscape for advisors in which they can demonstrate their expertise and value add. Customers will have a real sense of trust in their financial advisors.”
About Discovery Limited
Discovery Limited is a South African-founded financial services organisation that operates in the healthcare, life assurance, short-term insurance, savings and investment products and wellness markets. Founded in 1992 by the current Group Chief Executive Officer Adrian Gore, Discovery was guided by a clear core purpose – to make people healthier and to enhance and protect their lives. Underpinning this core purpose is the belief that through innovation Discovery can be a powerful market disruptor.
The company, with headquarters in Johannesburg, South Africa, has expanded its operations globally and currently serves over seven million clients across South Africa, the United Kingdom, the United States, China and Singapore. Vitality, Discovery’s wellness programme, is the world’s largest scientific, incentive-based wellness solution for individuals and corporates. The global Vitality membership base now exceeds 5.5 million lives in five markets.
Discovery is an authorised financial services provider. It trades on the Johannesburg Securities Exchange under the code “DSY”.
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