Commissions for selling you investments to go
The Financial Services Board (FSB) has taken the first step towards scrapping commissions on investments – and, as a result of these commissions, the severe penalties that can be imposed on you when you break contractual investments such as retirement annuities (RAs) and endowments.
Yesterday, it published the muchanticipated Retail Distribution Review (RDR) discussion paper, which contains 55 far-reaching proposals, including banning financial institutions from paying commissions on investments and allowing advisers to charge only advice fees for these products.
The proposals are aimed at eliminating conflicts of interest that can result in your being steered into inappropriate financial products and ensuring that you know what you are paying for when you receive advice and services.
If implemented, financial advisers will be forced to detail for you the services they offer and the charges for these services.
The RDR has implications for investment products, life policies, short-ter m insurance policies, investment platforms and entities that compare financial products.
Numerous financial sector laws and regulations will have to be amended over the next few years to implement the proposals.
The proposed changes are in line with the Treating Customers Fairly regime adopted by the financial services regulators, which aims to ensure that you are given appropriate advice and that products meet your reasonable expectations.
NEW INVESTMENT PRODUCTS
Jonathan Dixon, the deputy executive officer in charge of insurance at the FSB, says the proposal to prohibit product providers from paying remuneration in any form to advisers or brokers for selling investment products will apply to new investments and to voluntary increases in contributions to existing life assurance RA and endowment policies.
It will not apply to increases agreed to in contracts taken out before the date on which the proposals are implemented, which is expected to be in mid-2016, he says.
If implemented, the proposal should put a stop to the penalties that assurers impose on your savings in RAs or endowments, because life companies charge these penalties to recover the commission they pay to advisers upfront – or before you have paid your contributions.
Currently, the penalties on life assurer’s RAs and endowments taken out after January 1, 2009 are limited to 15 percent and 20 percent respectively, and a sliding scale reduces the maximum penalty to zero. On older policies, the penalties are as high as 30 percent on RAs and 40 percent on endowments.
Dixon says the FSB hopes to introduce other regulatory changes that will reduce the penalties on policies taken out before 2009.
The only exception to the proposal to ban commissions on investment products is to allow commissions on investment products aimed at low-income earners. This exception is intended to ensure that advisers continue to advise on products that meet certain standards of simplicity and value, the RDR discussion document says.
The discussion document proposes that the new commission rules should also apply to older life assurance policies that allow you voluntarily to increase the premiums on an ad hoc basis. This is to prevent advisers from being biased towards increasing the premiums on these policies, rather than recommending new policies that would be in your interest.
NEGOTIATED ADVICE FEES
If the proposals are implemented, your financial adviser will have to negotiate with you on the advice fee to be paid for advice on an RA, endowment, unit trust or other regulated investment.
The product provider will be able to deduct the agreed fee from your investment contributions, or from your savings – for example, by selling units in a unit trust fund – and pay it over to your adviser.
The RDR discussion document says the cost of investment products sold after the proposals have been implemented will have to be reduced by the amount of the commission currently included.
Another RDR proposal, aimed at ensuring that you pay an advice fee that is commensurate with the service you receive, is to set standard services for which you can be charged. The document also proposes standardising the methodologies used to determine advice fees.
The services for which you can be charged for financial planning and planning your risk cover will also be standardised, and you will have to agree to the fee, how it is calculated, how it is paid and the scope of the planning it covers.
The RDR document says the FSB will not prescribe the amount your adviser can charge, but it may publish benchmark guidelines on the fees that can be charged.
The FSB is likely to prescribe what needs to be disclosed about fees to you, the document reveals.
It proposes that ongoing fees be charged only where you have agreed to pay for ongoing services.
The FSB will draw up “conduct standards” aimed at preventing advisers from churning your RA with a life assurer (that pays upfront commission) to one offered by a unit trust company that pays commission when you pay your contributions. These standards will include what must be disclosed to you to ensure that you are aware of any penalties that may be imposed and any new advice fees that you will be expected to pay.
Currently, the Pension Funds Act prohibits the payment of commission on a transfer from one life assurer’s RA to another; advisers can earn only an advice fee.
You have until March 2 next year to comment on the RDR proposals. Email FSB.RDRfeedback@fsb.co.za