Regulations and the law of unintended consequences
Recently, I wrote about how the revised Policyholder Protection Rules for life insurance were causing headaches for providers of group life cover, because the revised rules had been drawn up more with the individual consumer in mind than employers buying group cover for their employees.
This is the problem with regulation: the intentions are always good, but even the best minds in the world may not envisage all the consequences and knock-on effects.
Much is happening at the moment in the realm of financial services legislation. The revised Policyholder Protection Rules came into effect at the end of last year, and we have the so-called default retirement fund regulations coming into effect on March 1; the Conduct of Financial Institutions Bill, due to be tabled in Parliament its final form by the end of the year; and the implementation in phases of the Retail Distribution Review, which will change forever the way advisers sell you financial products.
There have also been amendments to the regulations under the Financial Advisory and Intermediary Services (Fais) Act, with new fit-and-proper requirements for advisers.
All these are taking place under two big shifts in the regulatory regime: a structural shift to “Twin Peaks”, whereby financial institutions’ risk control and capital requirements fall under the Prudential Authority and their market conduct falls under the Financial Sector Conduct Authority; and a shift in legal mindset, from rules-based regulation to principles based regulation epitomised by the Treating Customers Fairly approach.
Ironically, rules are proliferating. And unforeseen consequences are beginning to pop out of the woodwork.
The default retirement fund regulations under the Pension Funds Act were introduced primarily to improve working South Africans’ outcomes when they retire.
Pension funds have been required to implement a raft of options for their members, both for the accumulation phase, when you are working and saving for retirement, and the drawdown phase, when you retire and decide on how best your savings will fund your retirement.
For both phases, pension funds must have in place various default and fund-endorsed investment options. The “default” options are those you default into if you do not make an active choice. Funds must also offer benefits counselling when you join a fund, resign, or retire.
Derek Smorenburg, founder of the South African Independent Financial Advisors’ Association (Saifaa) recently enlightened me about unforeseen consequences the regulations will have for advisers.
Advisory firms typically have a carefully-selected range of financial products they offer their clients, which have been subjected to a rigorous due-diligence process.
The advisers know these products thoroughly and, as such, are well prepared to advise you on them.
Let’s say you are retiring and are looking at different annuity (pension) products. Your pension fund must offer you a trustee endorsed annuity if you do not elect to buy one on the retail market.
This annuity (or annuities, as the fund may offer several trustee-endorsed products), which may be “in-fund” or “out-of-fund”, depending on whether your savings are retained in the fund or not, may be attractive in that you may not have to transfer your savings out of the fund (which incurs costs) and the annual costs may be lower than a retail product.
This leaves your financial adviser in a fix. He now has to familiarise himself with the trustee-endorsed products your retirement fund is offering in order to properly advise you on what is best for your circumstances.
Imagine that your adviser has 20 clients approaching retirement, and each client’s pension fund has two trustee-endorsed annuity products on offer. While there may be some overlap, that’s a large number of extra products to familiarise yourself with.
I wonder how many advisers have considered this scenario?
They may be well advised to attend a Saifaa workshop later this month examining how they should be dealing with the newfound options open to their clients under the new regulations.
Some questions to be tackled in the workshops are:
What retirement benefits counselling and guidance services will be offered by funds?
What are the default products and services that retirement funds will be offering members, and what advantages will they have over retail products?
Will members be able to consult or appoint their own independent advisers in the event they enrol in these default options?
What are the total costs of the options, including administration costs, asset management costs, including possible performance fees, and advisers fees?
The workshops will be held at Allan Gray venues on Monday, May 20 (Cape Town); Wednesday, May 22 (Johannesburg – sold out); and Friday, May 24 (KwaZulu-Natal).