‘Financial advisers should disclose links to product providers’

If your financial adviser is not entirely independent, he or she will, in future, have to inform you of this. Laura du Preez reports on the Retail Distribution Review discussion document.

Financial advisers may in future have to tell you whether they are tied to a financial institution, can sell the products of certain financial institutions only, or are independent and can advise you on a range of financial products.

These proposals are contained in a far-reaching review of how financial products are sold to you, the Retail Distribution Review (RDR).

More than 50 proposals are contained in the RDR discussion document released by the Financial Services Board (FSB) yesterday.

The FSB is proposing that financial advisers classify themselves as tied agents, multi-tied agents, or independent, and must be upfront with you on exactly how independent they are.

Short-term insurance brokers will likewise have to classify themselves as tied insurance agents, multi-tied insurance brokers, or independent brokers.

Advisers who provide advice on health services only will have to classify themselves as tied health benefit agents, multi-tied health benefit brokers, or independent health benefit brokers.

Independent financial advisers won’t be obliged to offer advice on every available financial product, but they will have to provide advice on a range of products.

The RDR document calls for suggestions as to how extensive that range of products should be and the number of products required within each product type or category.

The RDR discussion document says the FSB will consult on how many investment platforms and the range of investment portfolios or portfolio types about which an independent adviser should be able to give you advice.

It also calls for input on whether independent financial advisers should be allowed to select a range of products, the criteria used for selecting the product range and the circumstances under which an adviser should have to give advice on products not in that range.

The FSB will also obtain input on how many products an independent shortterm insurance broker and an independent health benefit broker should be able to offer and whether advisers who offer only life assurance products, but not investment products, should be able to call themselves independent advisers.

Independent brokers will also have to meet certain criteria that prove their independence from product providers.

An adviser will not be able to call himor herself independent if he or she: has any form of employment with, agency contract with, is a representative of, is an outsourced services provider to, or has any other mandated relationship with a financial services company that sells financial products, the proposals suggest.

In terms of the proposals, any adviser who is a direct or indirect owner of a financial product provider won’t be able to call themselves independent, nor will any adviser who is in any way “influenced” by a product provider.

The proposals suggest disqualifying advisers who are subject to any sales or production targets set by a product provider, or who, in any other way, are able to earn more remuneration from one provider than another, from calling themselves independent.

Independent financial advisers will be required, “at appropriate times”, to disclose to you the range of products and providers on which they advise, as well as a breakdown of the products of each provider they recommended over a certain period, such as the past 12 months.

LIMITS ON INCENTIVES

Multi-tied agents will be subject to standards that limit incentives that could result in a bias towards the products of a particular financial institution, and they will have to keep records of the products they recommend and their motivation for these recommendations, the RDR document proposes. Tied agents will have to disclose to you the product supplier or group of suppliers whose products they can offer you.

All three types of advisers will be able to act as financial planners if they meet certain “fit and proper” standards, which will include a level of competency.

The definition of financial planning may be standardised, the RDR document proposes.

Financial planners will have to tell you what qualifications they have and give you details of the scope and purpose of a financial plan they can give you.

Tied agents will be able to give advice as representatives of financial services providers (FSPs) licensed under the Financial Advisory and Intermediary Services (FAIS) Act.

Financial product providers will be responsible for the advice that their tied agents give.

Independent financial advisers and multi-tied agents will have to obtain their own FSP licences under the Act, or they can act as representatives of licensed advisory companies who are authorised to operate as independent advisers or multi-tied agents respectively, the RDR proposals suggest.

Product providers and multi-tied agents will be jointly responsible for the conduct of multi-tied agents, and product providers will be expected to provide a certain level of training and to determine whether the adviser is fit and proper and has adequate governance measures in place.

The RDR document proposes that product providers monitor a multi-tied agent’s compliance with the aims of the Treating Customers Fairly principles.

Product providers that pay commission or facilitate the payment of fees to an independent financial adviser will be expected to monitor the fees the adviser earns and identify activities that may result in your not being treated fairly.

An adviser who qualifies as an independent financial adviser on investment products can offer advice as a multi-tied agent on life assurance, health products and short-term insurance, as long as the adviser discloses that he or she is doing so as a multi-tied agent.

The FSB says certain ownership structures perpetuate conflicts of interest for financial advisers, and it will fasttrack consultations on these issues, and if necessary, issue additional prohibitions or controls.

Other proposals in the RDR discussion document are:

Tied insurance agents will not be able to advise on the products of another insurance company;

An adviser will not be able to act as a representative of more than one FSP;

It will not be possible for an advisory firm to be a representative of a licensed FSP and have representatives itself – that is, there cannot be representatives of a representative; and

To limit conflicts of interest, product providers will be able to outsource only certain functions to advisers.