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MitonOptimal Weekly Comment - Week 46, 2014Each year, November normally serves as the last full month in which we look to finalise the year’s activities. In December, we traditionally start to prepare for a well deserved break, with the ultimate aim of arriving back in January full of vigour and a well thought-out strategy under our arm. This time around however, our industry will face profound challenges in 2015: to both collaborate with the FSB in challenging the 55 proposals introduced by the FSB’s framework for South Africa’s Retail Distribution Review (“RDR”) by 2016, and at the same time we potentially face a large divergence in performance of asset classes/sectors/currencies, both locally and globally. Both of these challenges will ultimately test our industry in 2015 and beyond.

This week I want to briefly start to discuss the RDR proposals and next week, in part 2, I will discuss the second challenge, market divergence.

Challenge 1: Retail Distribution Review

I personally believe that the FSB’s 72-page proposal document, probably one of the most comprehensive attempts to provide intent, background and a level playing field that aims to focus our industry on Treating Customers Fairly (“TCF”), that I have ever read. The RDR proposal document has obviously raised a few eyebrows and even renewed some degree of fear across every rank of our industry. No matter what your view, no one can afford to ignore the intent of the initial RDR document.

This isn’t the correct platform to attempt to summarise all 55 individual proposals within the RDR document, but I do want to share a number of the more profound proposals/challenges that I feel will impact our industry.

Financial Advisors:

  • Can only be registered to provide advice in 1 FSP entity.
  • Need to identify themselves as either an Independent, Multi-Tied or Tied Adviser.
  • May not earn more than what clients agree to pay as upfront or on-going fees, i.e. no additional fees can be obtained from Product Suppliers. References to product suppliers and products apply equally to investment managers and their investment portfolios in relation to which advice may be provided.
  • RE2 exams appear to be abolished, but a rationalisation of fit and proper requirements will not just entail appropriate level of education, but also include training in relation to product types & classes and specific training on a product supplier’s specific product structures.

Product Suppliers:

  • Outsourcing activities – suppliers remain responsible for the activity concerned.
  • New restrictions to prohibit a CIS manager to outsource investment management to any agent/intermediary through an agreement where the agent is also an intermediary.
  • Responsibilities to monitor activities, fees, training and approval of IFAs will increase.
  • No rebate agreements / payments between product suppliers ( LISPs are implicated).
  • Pro-actively manage the quality of advice of multi- tied and tied advisors.

I have only highlighted 9 of the original 55 proposals, but my intent is to call upon all readers to review the entire RDR document and get involved in the review process, by joining industry groups to discuss the proposals and challenging or approving those proposals, put forward by the FSB, before the deadline in March 2015.

As the respective UK and Australian investment industries have learnt from their experience with their still on-going RDR process, the ultimate intent of RDR is positive, both from a professionalism and TCF point of view. Mistakes/poor decisions can be made however, and the RDR process can potentially become bogged down in rhetoric and lack of conviction, or trust, across the industry. This would ultimately damage our industry and our perceived professionalism and it is our responsibility to support the process and help steer it. I would hope that South Africa has noted the lessons learnt from the recent experiences in the UK & Australia and is able to approach RDR in a sensible and well thought-out manner, highlighting the high degree of professionalism within our industry to the world and our desire to further improve what we do and how we do it.

 Weekly comment Week 46 2014 - Divergence in Markets - RH.pdf


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