At the recent Discovery Financial Planning Summit Jonathan Dixon from the FSB shared some initial feedback after the industry submitted input/commentary on the RDR discussion paper.
The FSB received close on 70 written submissions in response to the RDR paper and have already started to analyse the inputs received. Given that the proposals are the most significant in the advisory space over the last 10 years, we believe that the volume of input is a good sign. To take this work forward the FSB is establishing 6 work streams (see below), and will be conducting more consultation and technical work on a number of the proposals:
- Adviser categorisation
- Long-term risk
- Short-term insurance
- Sales execution & other intermediary services
- Low-income market
Masthead is staying close to developments and we have offered our involvement in four of these work streams.
Some key specific bits of feedback from the FSB that stand out for us are:
Scale of change
There are concerns about the scale of change and the potential impact on the distribution landscape and whether all the changes will actually result in better outcomes for customer post-RDR. It’s always easy to criticise change, but the FSB has reiterated the need to phase-in change in order to avoid disruption and have also committed to take on board the lessons (positive and negative) from the UK.
There has been strong feedback that freedom from product supplier influence probably outweighs the range of products/product suppliers that advisors offer to customers when measuring independence of advisors. Many commentators feel that there is no need to specify a minimum number of products/product suppliers. Appropriate upfront disclosure should rather take care of such matters.
Life risk commission
Some of the views coming through the feedback to the FSB include that, if there should be a split between upfront and ongoing commission, the upfront portion should be higher than the 50% proposed in the paper. At the same time, many commentators are unsure whether customers will actually pay advice fees for advice on risk policies. Masthead’s view is that, irrespective of any regulatory changes, this is where advisors should start (or continue) tangibilizing their value propositions to customers.
The FSB acknowledges concerns in the feedback about the impact that a change in upfront commission can have on sustainability if commission changes are introduced at the same time as all the other reforms.
As far as replacements go, there was feedback supporting a banning of commission and there was feedback from people opposed to it, so very diverse views. There’s no doubt that there are unscrupulous advisors who have sold new policies to customers for the commission. But equally, there are numerous customers who have received good advice to change their existing policies into something newer and more appropriate. So the challenge the FSB has is to regulate in a way that doesn’t throw the good out with the bad.
The FSB has also reiterated that the final RDR proposals will be phased in and they have, going back to the RDR discussion paper, talked about introducing change in 3 Phases:
Phase 1 – these are the “priority proposals”, targeted for introduction by the end of 2015.
Phase 2 – these are changes that can be implemented after the Financial Sector Regulation Act (which gives birth to Twin Peaks) comes into effect, and should be during 2016. This is where the current Reserve Bank will effectively become the Prudential Authority (overseeing the financial soundness of financial institutions) and the FSB (probably to be known as the Financial Sector Conduct Authority) will look after the market conduct of financial institutions.
Phase 3 – these are changes that are dependent on the Conduct of Financial Institutions Act, due sometime in 2017. This Act will help to fully embed TCF principles through existing laws.
So, what should you be doing in the meantime?
There is still a lot of detail to be resolved in relation to the RDR proposals, and that means that there is still a lot of uncertainty. This makes it difficult to make firm decisions and to take very specific courses of action. When we ran the RDR sessions earlier this year, we felt strongly that advisors (as business owners) should be taking a forward-looking view. And, we feel that they should be asking themselves the questions as to whether they want to be around in 3 years time – if the answer is yes, there are a number of other questions to be answered, mainly linked to your business. We recognise that the answers may be complex, but that doesn’t mean the questions shouldn’t be asked.
However, there are certain things that are not going to change and that’s where advisors can start working, for example:
- Show the value that you add to customers – this is about tangibilizing what you do. Having a value proposition and communicating with customers goes a long way to addressing this.
- Get into the habit of annual reviews – apart from the need through regulation, they help to cement the customer experience. On-going service and advice means on-going fees.
- If you don’t do it already, then look to build capital value in your business – this comes from annuitised/ongoing revenue, so focus on the above value-adds to customers and look to “charge” for them.