The reforms will replace commission payments with fees for advice, similar to legislation introduced under the RDR in the UK. The first phase is expected to land early next year.
There are 55 proposals listed as part of South Africa’s version of RDR, some of which are in the early stages.
The new rules will make it clear which advisers are independent or ‘tied’ to product providers.
Gerhardt Meyer, head of legal for Old Mutual South Africa (personal finance), said product suppliers have enough time to implement the changes, provided they act soon.
“There are varying levels of concern around individual proposals, which indicate that levels of readiness also differ"
“Providers may run into trouble if they do not start working on changes soon, even without the final details in place, as many use very old systems that will require time to be updated,” he said.
With the South African Government looking to ensure all segments of society can afford financial services, Meyer said commission was likely to remain intact for low-income investment products.
“What is important is that enough providers can survive post-RDR in the low-income market to ensure there is ongoing and improved access to financial services,” he said.
No official legislation has been drafted, and Meyer said the proposals did not contain a huge amount of technical detail at present, adding that firms were now being invited to discuss the new standards.
“Most providers are busy analysing their current processes and systems,” he said. “There are varying levels of concern around individual proposals, which indicate that levels of readiness also differ.
“Not all providers will be happy, as some proposals set out to stop certain practices that are currently legal and offer them material income.
“It will be important for providers to go to market with life insurance products that allow the facilitation of advice fees as a percentage of the premium, rather than to simply pay commission.”
Life insurance ‘risk’ products would need to facilitate ongoing commission, which Meyer said is currently not always possible.
He advised expats in South Africa to negotiate a suitable fee for their individual circumstances, rather than paying a standardised ongoing commission level.
This, Geyer said, particularly applies to short-term investments because it is likely to result in better value.
Meanwhile, the chairman of the South African Independent Financial Advisor Association, Derek Smorenburg, said the majority of IFAs were not prepared for the changes and did not yet have the processes and structures in place to embrace RDR.
With a large proportion of advisers dependent on upfront commissions from life assurance policies, Smorenburg said reducing this current level could mean some independent firms would choose to become tied to providers to help foot the bill for compliance costs.