Industry discussion around the implications of the Financial Services Board’s (FSB’s) Retail Distribution Review (RDR) white paper has spanned more than two years. One can be forgiven for wondering if we will ever get to implement this crucial part of our country’s future financial market conduct regulation.

The RDR update released during December 2016, however, brought home the reality that the FSB is very much switching into implementation mode on this key piece of regulatory reform. Advisors who have not seen this update can find a copy of the paper on the FSB’s website. A number of the insurance-related proposals (targeted for ‘Phase 1’ implementation) are currently making their way through the draft regulation process, to be promulgated and implemented over the course of 2017.

More importantly though, the RDR update document contains feedback on the ‘Phase 2’ proposals, mostly aimed at the investment management and advisory industry.

Areas that will change for investment-focused independent financial advisors (IFAs)

The RDR update document confirms a number of areas where the FSB and industry have reached agreement on many of the original investment proposals. The debates on these proposals have been settled, and all that is left is for these proposals to be formalised in regulation. We would urge financial advisors to investigate the extent to which the following proposals will impact on their business, and to start planning how to deal with these changes:

• All platforms will be compelled to offer only clean share classes (i.e. no more fund rebates and no more all-in priced fund propositions).
• Investors will have to agree to all advisor fees in writing and these will be recovered by redeeming assets from an investor’s investment account.
• Product commissions from insurance-wrapped investment products or structured products will not be permitted.
• ‘Hundred percent allocations’ to investors will no longer apply when there are upfront advisor fees payable on a lump sum investment.
• Advisor trailer fees will no longer be paid from the annual management fee of unit trust funds, both domestic funds as well as offshore domiciled funds.
• Stockbrokers and financial advisors will not be permitted to share brokerage or annual management fees.

The feedback document also indicates that we could see draft regulation and implementation in 2018. We expect implementation to focus on new business first, with firms probably receiving a two- to three-year ‘grandfathering period’ to deal with legacy, non-compliant assets.

A new debate emerges: a product supplier agent of an investment manager

Perhaps the most important new take-away for investment IFAs from the December 2016 RDR update, is that the FSB is quite concerned that certain business arrangements between fund managers, unit trust management companies and financial advisors are structured very tightly. So tight, in fact, that one can make a case that these advisors are ‘agents’ of a fund manager or of a unit trust management company.

In its RDR update, the FSB, for example, suggests that white label unit trust funds for financial advisors would in future only be allowed for product supplier agents (PSAs). The concept of a PSA is well defined in RDR documentation, and much of the debate over the past two years centred on defining the operational limitations of a PSA for the insurance and banking industries. The proposed limits include:

• PSAs may only provide advice under the brand of the parent product provider.
• PSAs may only sell products from their parent product provider.
• PSAs have limited access to third party products, and only for cases where their product provider parent does not have a comprehensive product range.

Applying these insurance/banking guidelines for PSAs to the investment industry makes for a very difficult fit and results in a number of unintended consequences. Whilst the consultation on this matter is at an early stage, it is clear that such a proposal would have a substantial impact on many of the well-established, investment-focused IFA firms in South Africa, particularly those who employ both a Cat 1 advice and Cat 2 investment management licence in their business. We expect a robust debate on these matters, and would urge financial advisors to become part of this very important discussion about their future.

Conclusion

After two years of discussions, RDR is moving into implementation. For investment advisors, now is the time to:

• Evaluate which areas in your business are impacted by the move to customer-agreed advice fees, and to start planning for this impact
• Become part of the discussion about when an IFA becomes a PSA of an investment manager, and what the implication are

Investec Asset Management is very involved in the FSB’s RDR feedback. We would like to encourage advisor participation in our regulatory feedback sessions, as this helps us to represent the views of the independent investment advisor community to the regulator.

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