Edition: Dec 2014 - Feb 2015
Long haul gets under way
A shake-up on fees and commissions is inevitable. How it will be done, and who will be affected, will take a while to resolve.
Now begins the intricate process, euphemistically described as consultation, for getting the Retail Distribution Review into workable form. Its blunt instrument is to ban the payment of commissions by product providers to intermediaries in the sale of investment products, and to replace commissions with an advice fee explicitly agreed upfront with the customer.
Because the RDR can disrupt the guts of the investment industry, and particularly afflict financial advisors, the ultimate shape had better serve its noble objectives than allow unintended consequences. The former includes fairer treatment of customers. The latter might include higher compliance costs and shrinkage in the purchase of savings products.
The long-anticipated RDR draft, published as a discussion document by the Financial Services Board, contains 55 specific proposals. The paper is open for comment until March 2. Key stakeholders, says the FSB, will then be invited to "participate in specific consultation structures that will be put in place to develop final legislative and regulatory changes".
That's all well and good, provided the consultation participants put customers’ interests above their own. Otherwise the process can become bogged in an argy-bargy of trade-offs for FSB determination. Key principles, like the avoidance of interest conflicts and customers not paying for services they don't get, are all sweetness and light. But the devils will be in how they're framed and implemented by regulation.
The RDR envisages a more proactive and interventionist regulatory approach to addressing such risks as mis-selling, the FSB explains, by "changing incentives, relationships and business models in a way that supports the consistent delivery of fair outcomes to customers". Amongst other things, the RDR is looking for:
- Delivery of suitable products and fair access to suitable advice;
- Customers being able to understand and compare the nature, value and cost of advice;
- Standards of professionalism in financial advice and intermediary services to build consumer confidence and trust;
- Customers and distributors benefiting from fair competition, for quality advice and intermediary services, at a price more closely aligned with the nature and quality of the service.
A number of countries have had an RDR in place for several years, so there is experience for SA's guidance. Not all of it is good.
In the UK, it's been on the go since 2006 when it was first suggested that advisers charge fees to clients rather than paid commissions by providers. This was met with incredulity, advisers arguing that most clients preferred the commission method. Three years later, wanting to prevent advice from being presented as impartial when it wasn't, a blanket ban was placed on commissions. This was met with anger from advisers who complained that their main revenue source was being wiped out.
More recently attention has turned to other benefits, like hospitality, that might influence advisers’ choices. A leading advice network was fined £1,6m for soliciting payments in exchange for appearing on a product panel. Also opened up is objections from fund managers that investment consultants, accused of rampant interest conflicts, have become too powerful in determining how pension funds invest.
In SA, with all the transparency and comparability of charges that the RDR proposes, the need for improved financial literacy is accentuated if consumers are to understand what advisers tell them. Success will also rely on the extent to which consumers prefer fees, seen as payments from their pockets, to commissions seen as payments by product providers.
Good progress at OPFA
Hand it to Muvhango Lukhaimane, the Pension Funds Adjudicator, that the 2013-14 annual report for her Office shows the historical backlog to have been cleared. More than this, she notes, new matters were handled within a time period more in line with what its mandate requires when referring to "expeditious".
The bare statistics show that slightly over 5 400 new complaints were received (a 4,7% increase on the previous year), and 6 643 (a 22,3% decrease) were finalised. The decrease is due to the number of outstanding complaints finalised in the previous period.
While the Pension Funds Act prefers that complainants approach their funds before approaching the OPFA, Lukhaimane considered this to be undesirable as it would have resulted in unnecessary delays and hence in prejudice to complainants: "This conclusion is based on the evidence of the often fractious relationships between employers and members of pension funds upon termination of service, complainants often citing verbal responses received from uncooperative funds and administrators, and consideration for the financial circumstances of most complainants (who are) often unemployed and indigent".
During the reporting period, 3 651 determinations were issued and 115 settled through conciliation. There were 14 appeals lodged against determinations, one being the appeal to the High Court of Gail le Grellier and three other trustees of the IF umbrella funds over a R20m liability for payment to rebuild the funds’ databases (TT March-May). Unlikely to be heard before March, the outcome could have major impacts on trustees’ duties and pockets (TT Dec '13-Feb '14).
Usefully provided in the report is a summary of important determinations. They range of allocation if death benefits to supremacy of fund rules, and should be essential reading for all trustees and principal officers; better still if they're also included as case studies in the proposed training courses to enhance professionalisation.
DAWOOD SEEDAT: AN APOLOGY
In an article headed ‘Dark places’ (TT Sept-Nov), certain comments were made about Dawood Seedat following his resignation as chief financial officer of the Financial Services Board. Subsequent to publication of this article:
- The FSB conducted two extensive reviews following corruption allegations against Seedat in his personal capacity. No irregularities were uncovered and the FSB has placed on record that "the management of the FSB is confident that neither it, nor any of the entities it regulates, has suffered as a result of any actions of Mr Seedat";
- Darryl Ackerman, the attorney representing Seedat, has pointed out: "Our client to this day has not been charged with corruption and has never been arrested for anything". He also stated "without equivocation that there are no pending investigations against our client (by the National Prosecuting Authority or the SA Revenue Service) and to our knowledge any investigations that may have been undertaken, have been finalised and our client exculpated of any wrongdoing for which he was or may be held criminally accountable".
TT therefore accepts that the comments about Seedat in the article were without foundation. Accordingly, they are retracted and we apologise to him for them.
Latest on PF130
Hunter . . . missing beneficiaries
Coincidentally or intentionally, published at virtually the same time as the OPFA annual report, is a Financial Services Board discussion document on proposed requirements for customercomplaints management aligned to the ‘Treating Customers Fairly' (TCF) framework.
A lengthy and technical paper, it's concerned mainly with insurers. They're encouraged to consider the review's findings and to assess the effectiveness of their complaints management in line with TCF. Where assessments recognise weaknesses, it says, the insurer should proactively consider improvements "in anticipation of stronger regulatory requirements".
There's also special attention to retirement funds and their administrators. This section points out that there are already requirements for funds’ rules to provide for the settlement of disputes between funds and members. Further detail can be introduced through "regulatory enhancements" that the Registrar is to effect.
In addition, it says, these enhancements include the development of a good-governance directive (to replace the current PF130 guidance) and the revision of existing disclosure requirements. Also, for benefit administrators, there's a revision of registration requirements that "can impose explicit obligations in their management of complaints.
The discussion document focuses on TCF Outcome 6 that "customers do not face unreasonable post-sale barriers imposed by firms to change product, switch providers, submit a claim or make a complaint". It found that the current financialservices regulatory framework on complaints management is inconsistent and proposes more comprehensive regulation across different types of financial institutions.
The flip side is that more regulation inevitably comes at more cost but not necessarily with commensurate benefit.
Tucked into the OPFA report is the revelation that more than 50% of the 1 719 complaints, closed as "out of jurisdiction", relate to complaints for withdrawal or to death benefits where the matter had prescribed due to late filing. This, said the Adjudicator, "should serve as an indicator of the likelihood of unclaimed benefits that remain within funds". Indeed it should, for it's the tip of an iceberg. While the OPFA cannot investigate matters that have prescribed, they're referred to the FSB for further intervention. Rosemary Hunter, deputy registrar for pensions at the FSB is onto it. Or trying to get onto it.
For the scale is massive, and the people most affected are those who can least afford it. Hunter told a recent seminar that about R15bn is lying in unclaimed benefit funds overseen by the FSB, and at least a third of it may belong to former mineworkers.
She's looking for "more intrusive ways" to put pressure on funds, presumably to ensure that they (with their administrators, no doubt) exhibit greater enthusiasm and effectiveness in tracing beneficiaries rather than sitting on their hands – and on monies that incur administration fees.
The problem is exacerbated where funds are dormant, perhaps having assets and liabilities but no trustees, or where funds have been moved into umbrellas without up-to-date records and nobody to take responsibility for distributions to former members (let alone bother to trace them). The extent is illustrated by the breakdown, kindly provided by industry veteran Ian Haigh, shown on the previous page (page 23).
For the first time this year in the Actuarial Society of SA, the number of white student members was in a minority. This points to significant change in the profession's demographic face over the next few years, says ASSA president Peter Temple.
At present the society has 950 white student members. There are 959 who're African, Indian or Coloured. These student members have already achieved an undergraduate degree, possibly also an honours degree, and are employed while studying part-time for an actuarial qualification. In addition, universities report that the majority of students in most undergraduate actuarial programmes are now black.
At face value, transformation of the profession can appear frustratingly slow. This is because it can take 10 or more years fully to qualify as an actuary, Temple explains: For this reason it is important to focus on what has already been achieved, the initiatives that have been put in place and what is in the pipeline."
Widespread anger has erupted in the UK over the practice of asset managers allegedly "coercing" pension funds into signing agreements that prevent them from disclosing the fees being charged. Pension schemes argue that the practice is uncompetitive, prevents them from securing the best deals by not allowing them to compare charges, and potentially exposes them to unnecessarily high fees.
One side argues that it should be illegal for fund managers to demand that an investment mandate be kept confidential. Another side is that any company has a commercial right for its commercial contracts to be secret.
To SA ears, it sounds outrageous that such practice is even open for debate.