What is the new Twin Peaks legislation about?
The new Twin Peaks legislation for the Financial sector involves 2 main objectives:
- strengthening the markets through improved conduct regulation
- Building a more resilient and stable financial system in South Africa
In the financial sector the Twin Peaks legislation model of regulation will involve the creation of the Prudential Authority (a prudential regulator in the South African Reserve Bank SARB) and the Financial Service Board FSB will become the Financial Sector Conduct Authority (the dedicated market conduct regulator).
The Prudential Authority will be responsible for oversight of the soundness and financial safety of financial institutions (incl. banks, insurance and financial services). The Financial Sector Conduct Authority will be required to protect financial services customers and improve the way providers do business.
What is TCF (Treating Customers Fairly)?
TCF is new legislation in the financial services sectors (banking, insurance, investments, etc) underpinned by 6 consumer outcomes that ensure fair treatment of customers. (see the 6 outcomes here)
The main aim of Retail Distribution Review RDR is to improve professional standards in the Financial Services industry
The implementation of the new RDR by the FSB (Financial Services Board) is designed to increase confidence in customers of fair treatment during the purchase of financial products. TCF outcome 4 namely“Where advice is given, it is suitable and takes account of customer circumstance.” is the core principle of the RDR (Retail Distribution Review)
The RDR will impact the way Financial services conduct business in numerous ways. These include the introduction of fee-based advice, the elimination of commission, instituting exams (demonstrating professionalism) and unbundling the investment value chain (advisers, platforms and fund managers).
Key possible impacts of the Retail Distribution Review are:
- Clients will become aware of the costs along the entire value chain
- More passive investment solutions will become available
- Independent financial advisers will face higher compliance cost
- There is likely to be a reduction in the number of advisers
- Banks may begin moving out of independent advice into tied/multi-tied
- Banks may begin restricting advice to premium customers only
- Non-advice online tools provided by larger financial institutions will increase
- High price competition between platforms
- The “traditional” selling of financial products will be replaced by “financial planners”
- Price comparison between local and offshore options
In the new Retail Distribution Review RDR landscape advisers will need to clearly demonstrate the value of the services they provide to their clients.
Unfortunately many aspects of financial advice are fairly intangible, and as the results of the advice only become clear in the future. Qualified advisers are able to guide their clients through the multitude of decisions they face over their lifetime. They provide services and expertise that go beyond finding the right type of investment strategy, or products. Advisors help prevent clients from making high emotion mistakes in the moment, and mitigate other negative influences. They keep clients on track to achieve their short, medium and long-term financial goals.
Essentially the new Retail Distribution Review RDR requires advisers to demonstrate the value of their services.
The Retail Distribution Review RDR principles:
- Remuneration should not create conflicts of interest that impact the delivery of suitable product advice, and fair customer outcomes.
- Remuneration must be reasonable and based on the actual services delivered.
- Remuneration structures need to find a balance between supporting service delivery and fairly compensating intermediaries for services rendered.
- Ongoing fees/commission can only be paid if ongoing advice and services are delivered. All fees must be motivated, disclosed and specifically agreed to by the customer.
Twin peaks legislation, RDR and TCF combine together to help strengthen the markets and build a more resilient and stable financial system in South Africa.