Guy Holwill, Fairbairn Consult
The last big regulatory wave was FAIS in 2004. Since then, we’ve had a few ripples like Commission Regulations, Conflict of Interest, Regulatory Exams (RE), and Treating Customers Fairly (TCF).
But we are now looking at a tsunami of change – the combination of the Retail Distribution Review (RDR), Anti-Money Laundering (AML), the Conduct of Financial Institutions Bill (CoFI), and the Protection of Personal Information Act (POPI).
These regulations are being implemented with the specific intent of changing the industry. Therefore, it is important to understand the impacts so that you can position yourself to thrive under the new regulatory dispensation.
Firstly, we will look at the essence of the different regulations and then consider the impact on the different parts of the industry.
RDR: These proposals are multi-faceted and will impact our industry in different ways. The most important of these are:
1. Adviser Classification
You will be classified as either be a Registered Financial Adviser (RFA) or a Product Supplier Agent (PSA). This is straightforward for most advisers, but there are a few surprises like advisers working under a Cat II license, who will be classified as a PSA and will not be allowed to advise on investments other than their own portfolios.
As per the update to the FAIS General Code of Conduct in 2020, you can only use the “independent” designation if you are not in the same group of companies as a product supplier and you do not receive any payments other than commission (no binders, rebates or outsourcing).
2. Product Restrictions
If you are a PSA you are restricted to your group’s products. This is already effective for insurance products, but the impact will amplify when you are restricted to your own investment products. This will include being restricted to your own single or multimanager funds, model portfolios, and share portfolios.
3. No rebates – of any kind
Many advisers have moved on from dirty class funds with rebates but have replaced this by pricing a rebate into their model portfolios through a Discretionary Fund Manager (DFM). If you have done this, you should be disclosing this Conflict of Interest to your clients and that you cannot use the “independent” designation.
4. Fee for service
This is actually what RDR is about. Advice fees are where an adviser is paid by their client for services rendered, in the same way as a doctor, lawyer, or accountant – i.e. R3,000 to do XYZ or R1,000 per hour.
AML: As an FSP you have two responsibilities in terms of AML. The first is that product providers require you to gather certain information about the client, and the second is in your capacity as an Accountable Institution. This is the real problem for smaller brokerages because you need to have your own systems where you can demonstrate that you have screened and risk-rated clients before you enter into a business relationship – i.e. before you give any advice. We saw the first fines in 2020, and you can be certain that there will be many more for brokerages that have not built these systems.
CoFI: This changes FSPs into Financial Institutions, with different licences to do different things. Most of this will be straightforward for big companies that have systems and controls in place. However, for some smaller brokerages, CoFI is going to be a huge challenge because you will be required to demonstrate that you have all the operational systems and processes to comply with regulation, give advice, manage client information, etc. In addition, you will be required to demonstrate that you have sufficient operational capital in your business.
POPI: Like AML and CoFI, POPI will require all FSPs to build systems and processes to manage and protect customer data. Once again, it will be the smaller brokerages that will find this the most difficult, because they do not have the skills and resources to implement these systems.
Secondly, let’s have a look at how these regulatory changes will impact the different parts of the industry and what shifts are likely to happen to the current landscape.
Independent Registered Financial Advisers = IFA
Some IFAs will make the changes required to be able to operate as an independent financial institution. But many will find that the compliance burden is too much, and they will move to bigger brokerages so they can spend more time with clients and free up capital that will otherwise be required in their own brokerage.
Networks = Registered Financial Advisers = RFA
Networks are brokerages with their own FSP that can provide advice on whatever products their license permits without being limited to offering products of any particular product supplier. Almost all big brokerages are associated with a product provider in some way. Some are owned by a big financial institution, while others have a product provider such as a DFM in their group. Because of their link to a product supplier, the FSCA will scrutinise these businesses to ensure that clients are actually receiving unbiased advice.
Due to their scale and shareholding, these businesses have the capital and resources to create the operational abilities to comply with all the regulations. This means that the advisers can spend more time with clients while management looks after the regulatory aspects.
Banks = PSA and/or RFA
Banks are all vertically integrated businesses with product suppliers in their group of companies. If the advisers operate under the licence of one of these providers, they will be classified as PSA. If they provide advice under a separate FSP, and they can demonstrate that they are not being influenced by the product supplier, they will be classified as RFA.
Tied Agencies = PSA
Tied agencies will feel the impact of the product restrictions, especially around investments. Tied advisers will need to be able to express their value in ways that go beyond the products.
Various regulations are going to make it increasingly onerous for IFAs to run their own FSP. Some IFAs will move to bigger Networks to reduce the compliance burden, while still enabling them to offer clients best of breed products from across the market.
At the same time, RDR will make some advisers leave tied agencies or banks to get away from the product restrictions. Until now, these advisers would have opted for broking, but they are more likely to join Networks to avoid the increased compliance.
It is for these reasons that new businesses such as Fairbairn Consult have emerged and are growing very rapidly.