2016 FAIS Conference Feedback

When I was asked to write something for the Communicator on the 2016 FAIS conference, that took place on the 14th March 2016 in Pretoria, I was wondering for quite some time, where does one start? We are living in an era of so many uncertainties and constant changes, not to talk about the challenges at all. It made me think of the saying: Only one thing is certain; things will change. Even though this might be true, what is also true is that the more things change, the more they tend to stay the same.

Human behaviour does not change that easily. We just have to think back to the recent past with regards to the implementation of the FAIS Act. Many advisors have called it a day and indicated that the industry does not hold a future for them. We went through a period of constant resistance to this change, but ultimately everyone in the industry had to comply or move along somewhere else. Nowadays things like RE examinations is part of the daily operations, things like fit and proper requirements for representatives, FSP’s, key individuals and compliance officers are normal practices in most companies.

Just when we thought that we have settled in, change is on the horizon again. Today we are confronted with even more things that will change over the next few years. We have the implementation of Twin Peaks, RDR, CPD, Binder agreement changes, to mention but a few of the big changes to be implemented. There is talk about the disappearance of FAIS Act that we just got used to.

Let me give a few highlights or for some maybe lowlights of what lies ahead for all of us. It will once again be adapt or die. You will have to adopt, adapt or move along, once again. More prove that the only constant in our daily world of work in this industry is change.

The first topic of discussion involved the future of market conduct and supervision and what it means for FAIS, our favourite for the last 12 years or so presented by Caroline da Silva (DEO FAIS). It was highlighted that we currently have a backward looking supervision element that is compliance based. Once size has to fit all, it does not matter if you are a small, medium or large enterprise. In dealing with supervision, it had an industry silo approach at the FSB. Despite all the rules, the FSB still experience too many examples of poor customer outcomes. The whole focus is not customer centric. The FSB acknowledges that they are not managing conduct and integrity risks proactively.

 

National Treasury indicated in February 2011 that they want “a safer financial sector to serve South Africa better”. You can look forward to a more intensive and intrusive approach from the Market Conduct Regulator that will be risk-based and proportionate with an outcomes focus. They will follow a more forward-looking, pre-emptive and proactive approaches to market conduct.

It was announced that the FSB would become the Financial Sector Conduct Authority (FSCA) with the main focus of protecting financial customers once the new Twin Peaks Model for Financial Serves are implemented. It was emphasised that firms will have to demonstrate their delivery on the TCF outcomes. The regulatory framework will also be tiered, based on the risks to the customer outcomes. A centralised conduct profile of entities and groups would be build up over time with a visible element of enforcement.

The FSB indicated that they need to move away from a compliance “tick-box” culture that developed since the implementation of FAIS. There would be an increased scrutiny on the way that firms develop products and the product provider oversight of their chosen distribution channel.

Some of the changes that will be the result of the implementation of FSCA is among others:

  • Centralised capacity along functional lines.
  • IT upgrade to support efficient business processes enabling them to analyse and identify risks.
  • Judgement based supervision with specialist support teams to develop skills
  • Enhanced checks and balances and
  • Robust mechanisms for consultation and cooperation.

“RDR is an example of this more interventionist approach to market conduct regulation, to ensure that financial products are distributed in ways that support the delivery of TCF outcomes.” (Da Silva).

Manasse Malimabe (HOD FAIS Compliance) spoke next on the Advisor categorisation.

He discussed the confusing terminology that was suggested or used. The suggestion is that the main test of Independence of a financial advisor should be the extent of product supplier influence on the advisor. Focus areas of potential conflict would include:

  • Production and sales targets
  • Ownership or other interests
  • Binders and outsourcing (Stricter conflict controls needed)

They suggested two licence categories:

  • Registered product supplier agent
  • Registered financial advisor

An advisor cannot be both. There needs to be further work done on the customer facing labels and supporting descriptions.

The product supplier agent replaces the suggested “tied adviser.” They are not licensed in their own right but provide advice on the licence of the product supplier. The supplier is fully accountable for them. They may provide advice only on the products of their product supplier or group which would include “external” investment products on their own supplier’s LISP platform. Allowing agents to be juristic entities for the group structure purposes is still under discussion, but they will have branding restrictions.

The registered financial adviser will replace the suggested “multi-tied” and “IFA” categories. They will be licenced in their own right to provide advice, provided that the advice firm is not also a product supplier. The Licence holder will be accountable for the advice provided, although applicable RDR product supplier responsibilities might also apply. All the conflict of interest requirements must be observed with to mitigate the risk of different levels of influence by the suppliers. They will be allowed to describe their advice as “independent” as long as no binder or outsource arrangement or ownership interest either way exists, that might influence the advice given.

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Updates on the RDR phase one was discussed. 14 proposals were proposed to be implemented using current regulatory framework before the implementation of the Financial Sector Regulation (FSR) Act was as follow:

  • FSR Act tabled in Parliament October 2015 expected date late 2016 for implementation
  • RDR phase 1 now proposed for July 2016 with some dates still subject to consultation
  • Proposal VInsurer tied advisor may no longer provide advice on another insurer’s products will continue, with allowance of a gap fill where the insurer’s license does not allow it to offer particular types of products. Fit and Proper requirements still apply.
  • Proposal YAdvisors may not act as representative of more than one juristic intermediary (advisory firm). The same entity will not be allowed to hold more than one FSP License. KI fit and proper operational requirements and supervision of KI’s will be tightened to prevent “rent a KI” models.
  • Proposals Z and AATighter controls are being considered for outsourcing by insurers to advisors.
    • Adviser who holds binder to “enter into, vary or renew” policies may not also earn outsourcing fees for policy administration – this is implicit in binder function
    • Other advisers may not earn outsourcing fees for policy administration unless parties prove administrative efficiency that enables “real time” data capture – through direct capturing on insurer platform
    • Fees for such outsourced policy administration will also be capped, after further consultation on cap level – initially proposed as 2% of premium
    • Conduct standards for outsourcing to be strengthened to further minimise conflicts and quality of insurer oversight
  • Proposal FF - General product supplier responsibilities in relation to receiving and providing customer related data
    • Product supplier access to data held by advisers – to be addressed through Proposals relating to product supplier responsibility. Will require reasonable co-operation from advisers.
    • Product supplier access to data held by binders and outsource parties – addressed through binder and outsourcing requirements
    • Adviser access to data held by product suppliers: Where customer authorised by customer-supplier must either:
      • Comply with the request; or
      • Decline request, but provide info direct to customer with a fair and objective explanation
  • Proposal OO - Product supplier commission prohibited on replacement life risk policies
    • Commission related interventions will be deferred
    • In interim – strict replacement monitoring obligations to be imposed:
      • clear definition of “replacement” for these purposes
      • a new insurer may not release commission or any other fees until it has confirmed in writing (with a copy to the insurer) that replacement advice record meets specific requirements
      • failure to report replacements attracts commission clawbacks; appropriate regulatory action; extended cooling-off periods
      • statistical reporting on replacements will be required by old and new insurers and advisers
      • supervisory scrutiny of replacement controls will be strengthened
  • Proposal PP - Commission regulation anomalies and early termination values on “legacy” insurance policies to be addressed
    • Changes to long-term insurance commission regulations to remove anomalies relating to variable premium increases on legacy policies will proceed as proposed
    • Engagement with the long-term industry to further improve early termination values will also proceed as proposed.
  • Proposal QQ - Conflicted remuneration on RA transfers to be addressed
    • In the longer term, concerns are to be addressed by reduced early termination charges, prohibition of commission on new policies
    • Concerns remain so in the interim revised replacement standards will enhance disclosure requirements on transfers of RAs, preservation fund policies and living annuities – including for prescribed transfer documents to be signed off by trustees, where applicable
    • New: FSB recognises that prohibiting commission on conventional life annuities (if they are classified as investment products) may have unintended consequences. Ongoing advice fees will be difficult to justify, discouraging recommendation of these products. The position will be reconsidered.
  • Proposal RR - Equivalence of reward to be reviewed.
    • Full implementation at individual adviser level to be deferred to later phases of RDR, together with long-term insurance risk product commission model
    • But the FSB is becoming increasingly concerned regarding abuses– particularly since prohibition of sign-on bonuses
    • In interim, current LTIA mechanisms for Registrar to determine practices that are not in line with the equivalence principle
      • substantial non-cash incentives
      • lump sums paid as retention bonuses, restraints of trade or similar arrangements that may be disguised production incentives
    • A review of existing tied adviser remuneration models will be undertaken to inform the final equivalence of reward model.
  • Proposal UU - Remuneration for selling and servicing short-term insurance policies
    • RDR does not propose that insurers will move to up-front remuneration of advisers – will still be as-and-when premiums are received– what about selling without servicing
      • Immediate concern is the s.8(5) fee under the STIA – currently no customer consent and purpose of fee unclear – inconsistent with RDR principles
      • Section 8(5) of STIA was repealed but repeal not yet effective
      • Fee to be replaced by advice fees but an alternative mechanism requiring customer to agree on fee – and its purpose – in advance
      • Charging of these fees (and their purpose) and related disclosures will be monitored
    • Proposal VV - Conditions for short-term insurance cover cancellations
      • Intent is to proceed with the proposal, with some changes:
      • Cancellation by intermediary: Clarify that explicit consent by each customer is required – considering a review of standards where adviser holds a discretionary mandate
      • Cancellation by Insurer: Insurer remains at risk for shorter of:
        • 30 days after insurer receives proof that customer is aware of cover cancellation; and
        • the period until insurer receives proof that customer has a new cover
    • Proposal ZZ
      • Very divergent feedback received – FSB intends to proceed with binder caps, but with further technical work to finalise levels of caps
      • Conduct standards for binders – especially with advisers – to be strengthened. Focus on improved insurer oversight and operational efficiency.
      • Considering disallowing binders with advisers (as opposed to underwriting managers) for purposes other than the “entering into, vary or renew” and “claims settlement” binder functions
      • Questions re. appropriateness of binder agreements with advisers for S-T commercial lines business generally: – service efficiency gains not ; unclear whether sufficient specialist skills to mitigate underwriting and reinsurance risk; caps to mitigate conflicts difficult to set
    • Proposal BBB - Outsourcing fees for issuing insurance policy documents
      • This proposal is to be withdrawn
      • This service is only operationally justified where a binder to “enter into, vary or renew” is in place or an outsourcing agreement for policy admin with “real time” data exchange
      • In both these cases, issuing policy documents will be incidental to the binder / outsource activities

The following are the main regulatory instruments to be used to give effect to the updated Phase 1 approach above:

  • Revised Regulations under new Insurance Act, LTIA/STIA
  • Consultation March 2016; implementation July 2016
  • Revised Policyholder Protection Rules under LTIA and STIA
  • Consultation April 2016; Implementation July 2016
  • FAIS Fit & Proper requirements
  • Consultation March 2016; Implementation July 2016
  • FAIS General Code of Conduct changes
  • Consultation April 2016; Implementation July 2016
  • Directive to be issued by L-T Registrar regarding equivalence of reward
  • Consultation early Q1 2016; Implementation immediate (with transition measures)
  • Despite overall implementation target date of July 2016, implementation of some specific measure will be consulted on – together with transition measures where necessary to allow for changes to business models and systems
  • In addition to regulatory measures – various supervisory activities include:
  • Binder thematic review and consultation on caps
  • New conduct of business returns for insurers and FAIS licensed FSPs

There were a number of other items discussed, like the revision of the Fit and Proper requirements, revision of the professional indemnity requirements, complaints management requirements, advertising and marketing requirements, private equity code of conduct, compliance officer regulatory examinations, implementation of recommendations made by the International Standard Setting Bodies, as well as new competency models.

The FSB also indicated that after twin peaks, that the licensing process will also be streamlined. Companies that would resort under different division will in future only have to complete one application for all the necessary processes or functions that they perform.

Discussion on RE Level 2 and CPD followed after the feedback from the supervision department. The FSB is considering various options in this regard that need to be practical, precise and cost-effective. The lever 2 examinations and CPD should take into account the new RDR requirements. The current proposal is that the product providers must conduct the product training and assessment for the level two RE. This training should be risk-based and proportionate to the categories of business the advisors do.

The CPD implementation should also be cost effective, practical and precise. There is an indication that this might be done via Industry specific professional bodies, but we will have to wait and see what will happen in the near future.

There are quite a number of processes that the FSB are busy with. We just need to prepare ourselves that these changes will come, and the big question remains, are you ready for change?

I suspect that the next two significant changes will be the implementation of RDR and the new FSR Bill, which will path the way for the changes in the FSB mandate to become the market conduct regulator in future under the Twin Peaks model.

It is proposed that the Financial Advisers and Intermediary Services of the future will fall into two tiers:

  • Tier one – Complex Products (NQF 7 – 10 qualifications needed)
  • Tier Two – Simple Products. (NQF 4 – 6 qualifications needed)

A proposal is considered that there will be compulsory membership of a Professional Body for all staff in the industry.

I trust that this brief summary of the day’s events will give you an insight into the future of our industry in South Africa.

Written by Wynand Louw (FIISA)

Aquilla Financial Solutions