The Retail Distribution Review Paradox

Philip Tomlinson, CEO Different Life, looks at the paradox created by RDR and offers a solution.

The FSB’s Retail Distribution Review (RDR) is intended to provide a framework for accessible, high-quality financial services advice that is free from conflicts of interest. It will have widespread implications for the distribution of financial services products, but it might not achieve its objective of quality financial advice for all.

At the heart of RDR is the advisers’ obligation to give the best possible advice, appropriate for a client's needs and free from any conflicts of interest, whether they are independent or tied. RDR gives significant additional responsibility to both intermediaries and product providers to improve structures, transparency and disclosures and while this may mitigate conflicts of interest, it will not address the underlying issue of the cost of advice: a necessary luxury which remains unaffordable to the majority of South African consumers.

At Different Life, while we welcome the move to greater transparency, we do have some misgivings about potential unintended consequences. Our issue centres on the cost of providing the advice and the implications for customers.

There is a polarisation within the South African insurance industry between the provision of comprehensive, full needs analysis advice, as prescribed under the Financial Advisory and Intermediary Services (FAIS) regulations, and no advice at all – with nothing in between. It’s like having to choose between a Rolls Royce and roller skates.

Like the Rolls Royce, the comprehensive advice model contained within the FAIS legislation is excellent. But like the Rolls Royce, comprehensive needs analysis and the full, person-to-person advice process is expensive to undertake and, combined with the cost of extensive compliance, takes the only advice on offer out of financial reach.

For the majority of the market this model is unaffordable on a “cash for service” basis. Yet if financial advisers are not paid explicitly for their advice, they need to turn to product providers to cover this expense through up-front commissions: the proximate cause of the very conflicts of interest the regulations are attempting to eliminate.

That the financial services industry is not providing quality, accessible advice is ultimately a symptom of the high cost of the advice model. Paradoxically, while the RDR is trying to solve the quality and access issues, it is in fact rendering advice more costly by increasing compliance costs and therefore addressing quality only at the cost of affordability and access.

We don’t believe that anyone should be deprived of life assurance because advice is not accessible and affordable. There is an opportunity here for technology to close that gap, with automated systems augmented by limited personalised advice from an adviser. Technology enables the direct life assurers to bring quality products to the market, without the interaction cost of face-to-face engagement and paperwork. An automated offering would free highly qualified financial planners to focus on their core competency of providing quality advice to clients, rather than fulfilling the role of (overpaid) administrators and data-capturers.

Another important advantage of technology is that the automated processes will always be 100% regulatory compliant, documented and auditable – with the marginal costs of signing new business stripped almost to zero. Clearly, this creates an enormous cost saving. In this way, we can cost-effectively reach those consumers who are currently massively underinsured.

The regulations which aim to ensure that South Africans have access to quality financial services advice in reality could have the opposite effect. Technology can serve to substantially redress this imbalance and ensure greater access for all.