The Retail Distribution Review (RDR) is designed to benefit customers, financial advisers and the greater financial services industry. It offers a new approach to market conduct regulation that is pre-emptive and proactive, avoiding the reactionary approach of past regulation. It addresses the cause of complaints and poor outcomes at the source, says Jonathan Dixon, deputy executive officer of insurance at the Financial Services Board (FSB).
Unlike regular “tick-box” compliance, RDR focuses on the delivery of outcomes. It instils a Treat Customers Fairly (TFC) culture in financial services businesses, says Dixon. Existing arrangements have failed to deliver fair outcomes to customers. Customers are unaware of or don’t understand the services they can expect from their financial advisers, he says.
“We want customers to be better able to understand and compare the nature, value, and cost of the device and other services they receive,” says Dixon. Quality, professional, financial advice is critical to deliver on the TCF outcomes. RDR supports sustainable business models and financial advice, says Dixon.
Many of the wholesale market reforms are being addressed. Changes are being made because the current, complex distribution landscape is “fundamentally flawed”, says Dixon. It creates risks, not only to the delivery of fair customer outcomes and effective supervision, but also to the sustainability of financial advisers, he explains.
The current intermediated business model is equally bad for consumers and financial advisers, which is why a new model was necessary, says Dixon. The value of financial services advisers is not properly recognised and they are remunerated poorly, he explains.
The regulatory burden is stunting small- and medium-sized businesses.
With RDR, three-sector performance is required. This means it should address the types of services provided by intermediaries, product supplier and intermediary relationships and remuneration, says Dixon. Many financial advisers will have to take the opportunity to review their business models and consider the extent to which the business models align within the interest of customers. The core value proposition of financial advisers is the delivery of professional advice and service. The proposed reforms of the RDR provide the framework and opportunities to build a sustainable financial advice business, he says.
Feedback on RDR indicates general support for the objectives of the review. However industry commentators differed on the best way to achieve these objectives, says Dixon.
Strategist and economist at Investec Asset Management, Nazmeera Moola, says that South Africa is at a “critical juncture” and overregulation should be dealt with. “The regulatory burden is stunting small- and medium-sized businesses,” she states.
Considering the period of 1 March 2013 to 31 July 2014, government published 2 985 notices. Of these notices, 1 120 applied to Transnet. “How do you run a business wen 1120 notices affect your business on a monthly basis?” asks Moola. The FSB was behind 200 notices, Sars supplied 138 notices and the department of trade and industry produced 456 notices. “The idea of regulating your way to a good business is ridiculous,” she says.
There are good intentions behind the proposals, however the execution is poor because there are skills shortages at local government level that make it difficult to enforce these regulations.
The amount of regulation and compliance has reached fever proportions, says Glenn Silverman, chief investment officer at Investment Solutions. Regulations have had a huge impact on company finances as more compliance staff are required. “The regulatory environment is very tense,” says Silverman. “How is much more regulation going to help anyone though?” More resources will have to be diverted away from hiring staff to comply with regulation. This is impacting on the country’s economic growth and the growth of businesses. “There is a need for regulation, there is no dispute about that. But there needs to be a balance or growth and employment opportunities,” adds Silverman.
This article was featured on Finweek.com.