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RDR: ‘Structural change needed for sustainable financial advice’

FSB’s Caroline da Silva on the way forward.

SUN CITY – In the face of socio-economic, political and technological threats, financial advice in its current form will not be sustainable unless there is some kind of structural change, the Financial Services Board (FSB) has said.

Referring to the need for the Retail Distribution Review (RDR) during a presentation at the Momentum Risk Summit, Caroline da Silva, its deputy executive officer, said the FSB recognises that advice needs to be sustainable to ensure fair outcomes for customers.

“We want RDR to shape an environment that ensures that fair and affordable advice is available to all and in order to ensure that we have to make sure that advisors are sustainable and that advice is sustainable.”

RDR aims to make advice more affordable, accessible and fair to customers and wants to make advice sustainable by highlighting its value to the customer, she said.

RDR is expected to fundamentally change the way advisors are remunerated and ensure that customers are treated fairly, but there are some concerns about its broader impact, for example on smaller independent financial advisors.

Phase one of RDR, which included 14 proposals, was supposed to be implemented in July (this month), but because the Financial Sector Regulation (FSR) Bill and Insurance Bill were delayed until later this year, the implementation of these proposals also had to be postponed and is now expected to only take effect early next year.

The FSR Bill will give effect to a “Twin Peaks” model of financial sector regulation. When it is introduced the FSB will effectively close down and open up the next day as the Financial Sector Conduct Authority (FSCA). All its prudential work will move to a Prudential Authority at the Reserve Bank and it will become a “focused and dedicated conduct authority”.

While there will be a lot of interaction between the two authorities, the FSR Bill will also require the FSB to do things differently, Da Silva said.

“We can no longer be backward-looking, compliance-driven, tick the box, rules-based. We have to shift so that we are forward-looking. We have to anticipate poor outcomes in the industry and how do we do this? How do we become forward-looking and therefore pre-emptive and proactive to stop harm before it occurs? It means we have to do things very differently. We have to really understand your [the financial advisor’s] business. We have to really understand the flow of money.”

Da Silva said an outcomes-based focus also meant that rules would have to be overlain or replaced with principles that ensure good outcomes to customers. Despite numerous laws and rules the outcomes for customers have not necessarily been as good as it had hoped.

She said very often critics argue that the legislation creates barriers to entry, which could hinder growth and transformation. One of the mandates for the new Financial Conduct Authority is one of inclusion.

Against a background of a principles-based approach, Da Silva added that it is important for the FSB to take a comprehensive stance and to apply it consistently in an effort to avoid any confusion in the industry.

She stressed that it is important for financial advisors to have certainty in order to do their business well.

“We don’t want RDR to create uncertainty. We want you to have an understanding of where we are going and how we are going to achieve it.”

Once the FSR Bill is in place, phase two of RDR will proceed.

Phase three will be implemented once the Conduct of Financial Institutions Act, which is essentially a market conduct act across all sectors including risk and investments, is passed.

“When the Conduct of Financial Institutions Act is passed, Fais [the Financial Advisory and Intermediary Services Act] will fall away, the Insurance Acts will fall away, the Collective Investment Schemes Act will fall away and you will have one piece of law that you need to comply with.

“We are aiming towards some simplicity and consistency that is comprehensive.”

Depending on the Parliamentary process, the introduction of phase three is expected to start in two to three years.

* The journalist attended the summit as a guest of Momentum.

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“…Despite numerous laws and rules the outcomes for customers have not necessarily been as good as it had hoped…” So the solution is to pass another law and its attendant regulations?

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