Earlier this week, International Adviser reported that the FSB has unveiled a new regulatory framework for insurers and financial advisers including a comprehensive list of commission caps as well as a ban on upfront commission.
The Financial Sector Regulation (FSR) Bill, published in October 2015, sets out how the current commission system in South Africa will be replaced with a fee-based model similar to the UK.
50% commission cap
Brian Foster, co-founder of BeyondRDR, a consultancy firm which helps financial advisers in South Africa adapt to the country’s regulatory overhaul, said the latest update published last month reveals that the ban on upfront commission will involve restricting payments to 50% of the maximum cap, with the remainder paid on an “as and when” basis.
“This moves the remuneration more toward servicing, and will be phased in, in an attempt to deliver some future sustainability into adviser models.
“The FSB sees a distinction between advice, which is a service to the customer and which should be paid for by the customer, and sales and administration performed on behalf of the product supplier, and which can be paid for by the provider,” he told IA.
The regulator has said it is looking to bring in the first phase of the RDR legislation by the first half of this year.
Foster, whose firm is currently running an online course on understanding RDR in South Africa, said the regulator will impose a blanket commission ban on all investment-related business.
“This was expected and is no surprise. Advisers will need to agree fees for advice and intermediary services with clients directly, although it is anticipated that the fees can continue to be paid from within customer portfolios on a basis agreed with the customer,” he explained.
Commission on risk products
However, for risk products, advisers will still be able to receive commissions from product providers for selling and administering risk policies, but will need to agree fees for advice separately, adds Foster.
Although commissions will still be available for replacement business, the level of scrutiny on replacements will increase, he said.
“The FSB has made it clear that product suppliers are to take more responsibility for monitoring advice processes, and this is especially true in the area of replacement risk policies where it has seen abuse of the commission system.
“The FSB sees a distinction between advice, which is a service to the customer and which should be paid for by the customer, and sales and administration performed on behalf of the product supplier, and which can be paid for by the provider,” said Foster.
‘Twin Peaks’ restructure
Once the FSR comes into force, the FSB faces a ‘twin peaks’ restructure which will see it split into the Financial Sector Conduct Authority (FSCA) – a move that closely mirrors the UK Financial Services Authority’s (FSA) transformation into the Financial Conduct Authority (FCA) in 2012.
Like the FCA, the FSB also plans to shift all of its prudential work on to the Prudential Authority at the country’s Reserve Bank.