Summary update on RDR Proposal TT – special remuneration dispensation for insurers and intermediaries who offer savings, investment products at lower income market
By Tyran Naidoo, Compli-Serve SA
In 2014, the FSCA released the RDR proposals. After reviewing these proposals, it is the opinion of the FSCA that some of the proposals would have unintended consequences in the low-income market. In response to this, the FSCA released a Status Update on Proposal TT in December 2019.
The documents serve to propose reforms around special remuneration dispensation for insurers and intermediaries who would offer savings and investment products aimed at the low-income market.
The need for proposals contained in TT would offer an exemption for conditions set out in Proposal TT where it states that 'no remuneration may be paid to any intermediary for selling or servicing of investment products, other than advice fees agreed to by the customer'.
The FSCA engaged with insurers, banks and FSP’s that offer savings and investment products through digital platforms with an automated advice capability to have opinions from these stakeholders to Proposal TT.
Insurers who participated in this exercise presented endowment policies, retirement annuities and tax-free savings accounts. Aimed at the low-income market, these products carry premiums between R250 to R600. The risk on these polices would be low. These products are in most instances linked to relatively low risk, non-volatile underlying investment structures. The general consensus is that these investment products are more suitable for customers.
Insurers raised concerns about the high cost and charges upon early termination of investments by clients in order to access their funds at an earlier period. The insurers will typically offer products at a minimum of 10 years, they believe there may be a customer lack of understanding between short-term savings and long-term investments. The risk of poor customer outcomes made worse by customer sensitivity to financial shocks in the low-income industry. They commented that customers with a lower investment horizon (0-5 years) are better off saving with banks.
The Insurer’s value proposition would be investments with a maturity date of at most 5 years. It will be linked to less volatile investments but would also sufficiently cover upfront expenses 'assuming relatively normal market conditions'.
Insurers have conflicting views over commission caps imposed on the various distribution channels such face-to-face sales and digital platforms where there is no human interaction. One view is that commission must be capped to increase value for money and another view is that the cap should be increased. A special dispensation should be provided once the premium hits a certain threshold in order to promote financial inclusion and avoid an advice gap, the premium cap should also cater for the middle-income market.
Insurers also pointed out that there is limited sale and distribution options of investment and savings under the Tier 2 categories listed in FAIS Board Notice 194. They request a less stringent requirement to limit barriers for entry with regards to advisors. There were concerns around the products listed under Tier 2 as it excludes retirement annuities and investment products.
'FSP’s that offer savings and investment products, such as retirement annuities, CIS and tax-free savings accounts through digital platforms, commented that the products were not necessarily targeted at the lower-income market but are suitable due to their simple products design, low underlying investments with moderate returns due to the low cost of structure and distribution method.'
The products were not necessarily targeted at the lower-income market but are suitable due to their simple products design, low underlying investments with moderate returns due to the low cost of structure and distribution method.
Generally, the FSP’s are opposed to prohibition of commission, the FSCA should set reasonable caps on fees.
FSP’s proposed that these requirements should be relaxed to encourage the sale of a more diverse range of savings products.
It was proposed that fee regulation should include a prohibition of termination costs, cancellation fees and performance fees.
The products offered by these FSP’s have no lock-on periods and no minimum contributions required or monthly contributions of a minimum of R100 or minimum one-off contribution of R5000.
Engagements with the Banking Sector
Banks believe that the most suitable products for the low-income market include savings accounts, notice period saving accounts and fixed deposit accounts are appropriate for customers with a short-term savings goal.
Banks distribute their products through branches and digital platforms where there is little advice necessary. The FAIS fit and proper requirements are therefore less stringent.
Banks are averse to providing advice on savings and investments as it will trigger more onerous FAIS fit and proper requirements. Proposal TT is part of a holistic approach to financial inclusion. The approach includes a simpler distribution model with better value products that are affordable and targeted at the low-income market.
After engagement with stakeholders, the FSCA believes that a special remuneration dispensation is needed to support the need for providing the low-income market with access to saving and investment products.
The FSCA invites input on the following proposals:
- FSCA believes that intermediaries should continue earning commissions for saving and investment products.
- There will be no change to the remuneration structure until all RDR proposals have been finalised.
- Intermediaries that earn a commission on these products will not be allowed to charge an advice fee.
- Commissions will only be allowed where the savings or investment is at a certain threshold suitable to the low-income market.
Proposal TT poses questions for stakeholder input. Comments can be given by using the Feedback Template. Responses should be submitted to FSCA.rdrfeedback@fsca.co.za by no later than 28 February 2020.