In Part 1 on Advisor Categorisation we looked at the labels or titles that advisors will be allowed to use and we looked at what products PSAs and RFAs can provide. In this article, Part 2, we’ll look at proposed restrictions on licensing for both Reps and KIs. We will also consider what happens if an advisor moves from one FSP to another and discuss the clients’ ability to “switch off” product commission. Lastly, we will refer to the Regulator’s expectations of product suppliers.
Can I be a Rep on more than one FSP licence?
The Regulator’s position is that advisors may not be representatives on more than one FSP licence, subject to two exceptions: (1) if it is for advisor development (e.g. an advisor needs to build up experience in a product category), or (2) the second licence is part of the same financial group structure. Despite these exceptions, no advisor may be Rep on a PSA licence and at the same time be a Rep on an RFA licence.
We find this rule and these exceptions limiting. It is quite common and acceptable to be Rep on two licences while giving effect to a planned succession plan or business buyout (i.e. purchase of client base and revenue stream). Therefore, we would like to see circumstances like these also fall under the exceptions that are allowed.
From a business structure perspective, it sometimes makes sense for different parts of an owner’s business to be in different FSPs (e.g. ST in one FSP and LT/investments in another FSP, or Cat I/Cat II). Therefore, again, we would like to see these circumstances added to the list of exceptions that are allowed.
So, if I can’t be a Rep on two licences, can I be a KI on two licences?
The FSCA has proposed that, similar to Reps, a KI should be prohibited from being on more than one FSP licence, unless the two FSPs are in a group structure. The regulators are concerned about some questionable practices in the industry, especially what has become known as the practice of “Renting a KI”. They are worried that external KIs do not provide meaningful KI oversight. In addition, they highlight problems with span of control/oversight, where the same individual is appointed as KI for multiple FSP licences.
There are many new FSP licence applicants that lack the necessary experience as a KI and if they cannot rely on an external KI when applying for their licences, then they face a huge barrier to entry.
In our view, if the KI is qualified and able to perform the functions, then we do not see a problem with the function being outsourced. If external KIs are not providing meaningful oversight, then a blanket ban is not the solution. We believe that the regulator can interrogate its systems and question KIs to ensure they perform their required regulatory functions effectively. And, they should take action against those who do not do what they should.
What if I move from one FSP to another?
It is quite common for advisors to change their contractual relationships with the advice firms and/or product suppliers they represent – e.g. where they, as Reps, move from one firm/FSP to another. Under these circumstances, one wants to know what happens with servicing existing clients and whether the advisors who moved can still receive ongoing remuneration linked to the products they sold at their previous firm.
The general rule when moving from one FSP to another is that the advisor may only advise on the products permitted/sold through the new FSP. In the context of a PSA group, this means that the “old” or existing products must form part of the new Product supplier’s range, otherwise the Rep may not advise on them. In the case of RFAs, it means that they must have a broking agreement in place linked to the old/existing products.
At a practical level, this limitation means that advisors cannot advise clients to increase/decrease cover on old/existing policies that were sold under the previous FSP licence, nor can they advise clients to replace the old policies.
Advisors will however be allowed to access factual information on existing products of a former product supplier.
Another key consequence of this new dispensation is that commission payable on the old product cannot continue to be paid to the advisor who sold that product unless those products also form part of the new PSA group’s product range or, in the case of a broker, the new RFA has a broking contract with that old product supplier.
Where a broker (who ran a licensed FSP) joins a PSA group, it has been common to allow that broker to keep the old RFA FSP open. This practice will be disallowed.
Should clients be able to redirect or stop product commissions?
The Advisor Categorisation paper proposes that policyholders who no longer receive ongoing service from intermediaries should be able to redirect ongoing commission away from intermediaries whose services they may not want or need. Also, they should be allowed to instruct insurers to stop paying ongoing commissions.
We support the principle of no service, no pay, but we do not agree that clients should have the unilateral power or discretion to instruct insurers to stop paying. Where advisors have delivered a service and agreed commission payment terms with clients, then clients should follow through on the agreement. So, we believe that it is important to protect advisors from clients/policyholders who want to avoid paying advisors what is due to them. In our view, this could be in the form of an agreement (SLA) between client and advisor, whereby advisors can recoup outstanding commission if clients seek to prematurely cancel the payment.
More responsibility from product suppliers
The FSCA wants to ensure that product suppliers accept responsibility for the advice of their PSA agents, and also some degree of responsibility for RFAs.
They accept that product suppliers are not directly responsible for the advice provided on their products by RFAs. But, they say that in terms of Treating Customers Fairly, product suppliers cannot abdicate responsibility for poor customer outcomes that may arise from the conduct of RFAs or any other model used to distribute their products. Effectively, the FSCA wants product suppliers to do some form of due diligence where they have RFAs distribute their products. If this proposal is accepted, we can expect to see stricter vetting requirements being introduced by product suppliers before they issue broking contracts.
A lot to think about
Advisor Categorisation is more than just labelling. In fact, WHAT you are called, is perhaps the least important thing. For us, it is about WHY you are in this business. It is about what you want to do for clients and how best to achieve that. Some business models and structures will enable you to achieve your objectives and others will prevent you. So, in planning for your own futures, there is a lot for advisors to think about.