Uncertainty over the future of financial advisors in South Africa is gradually lifting - and it’s clear that change is in store.
“It’s inevitable that currently authorised financial services providers are going to have to change their business models to adapt to a revised licensing framework,” says Thulani Dyasi, who works in the Banking and Financial Services Regulatory Practice Group at pan-African law firm Bowmans.
Revised licensing is likely now that the Financial Services Board (FSB) has confirmed its preference for the introduction of two categories of financial advisors - Product Supplier Agents (PSAs) and Registered Financial Advisors (RFAs).
“In its Status Update of December 2016, the FSB confirmed that this two-tiered model is indeed its preferred approach,” says Dyasi.
The move towards a new licensing framework is part of the Retail Distribution Review (RDR) that the FSB initiated in 2014 to reform the regulation of financial advice and the distribution of financial products.
In turn, the RDR is part of South Africa’s “Treating Customers Fairly” initiative, aimed at ensuring fairness, transparency and higher standards in the delivery of financial services to consumers.
Differences between the two categories
There are striking differences between the FSB’s two proposed categories of financial advisors.
“PSAs would not be licensed in their own right to provide financial advice. Rather, they will provide advice as agents of financial institutions that provide or issue financial products,” says Dyasi. “The product supplier itself - meaning the financial institution - will accordingly be licensed to provide advice, separately from any licence it holds to provide financial products.”
This means the PSA will operate under the product supplier’s licence. The product supplier will then be accountable to the client or consumer for both the advice given and the product provided.
“An extremely important point to note is that a PSA is permitted to provide advice only on the products of the ‘home product supplier’ that appointed the agent, or of other product suppliers that are part of the home supplier’s same company group.”
On the other hand, RFAs would be licensed in their own right to provide financial advice.
An RFA could be a natural person or an entity, to be known as an RFA firm. “With regards to the latter, an RFA firm will appoint financial advisors to provide advice on its behalf, and will be responsible for the advice that they provide,” Dyasi says.
‘Independence’ will have to be proven
Overlap between the two categories of financial advisors will not be permitted, and there will be little leeway for claims that an advisor is independent.
“While the RFA model is similar to the current Financial Services Provider model, RFAs will not also be licensed as product suppliers,” he says. “The intention is also to prohibit the RFAs from using the word ‘independent’ to describe themselves or their services. The exception is if they can prove they have no relationship with any product supplier that could be seen to exert influence over the advice they provide.
“It goes without saying that PSAs could never legitimately make use of the descriptor ‘independent’.”
When the changes are likely
Dyasi says he expects the new two-tier financial services licensing framework to be introduced when the “much-anticipated” Conduct of Financial Institutions (CoFI) Act is passed. “A draft of CoFI has not yet been published for public comment, but it seems likely that effect will be given to the two-tier categorisation of financial advisors through and under CoFI.”
Commenting on the likely shape of the revised licensing framework, he says: “One imagines that current Financial Services Providers will either need to convert their licences into RFA authorisations or relinquish their current licences in favour of providing financial services as PSAs under the licences of relevant product suppliers.”
As for new entrants to the market, their business models would need to fit into the new regime from the outset.
Says Dyasi: “The new framework is set to have a significant impact on the industry, on financial advisors and on consumers of financial services.”