In South Africa, the distribution of packaged financial products at retail level is customarily facilitated through intermediaries acting as financial advisors to clients. It is not uncommon for these intermediaries, or financial services providers (FSPs), to claim to be 'independent' of product providers. There is no restriction in doing so as the Financial Advisory and Intermediary Services Act 37 of 2002 does not regulate or distinguish between 'independent' FSPs and those 'tied' to specific product providers. All that is required of FSPs, as a general duty, is that they render their financial services honestly, fairly, with due skill, care and diligence, and in the interests of clients and the integrity of the financial services industry.
When receiving financial advice one may be inclined to question whether the self-styled 'independent' financial advisor can truly be said to be acting in our best interests if it is, directly or indirectly, affiliated to a single product provider. This may lead us to question whether the time has not come for South Africa's financial services industry regulators to consider enforcing a more restrictive use of the word 'independent' by FSPs.
The independence of financial advisors is presently a topic of debate in the UK, as a result of the Review of Retail Distribution launched by the Financial Services Authority (FSA) in 2007. Presently 'multi-tied' advisors are permitted in the UK, but advisors wishing to describe their services as 'independent' have to meet two requirements -
- they must make recommendations to consumers on packaged products from the whole market (or a whole sector of the market); and
- they must offer consumers the option to pay by fee for their advice.
The FSA is proposing the introduction of new requirements for independent advice. In terms of the Feedback Statement in respect of the Retail Distribution Review 2008, such new requirements would occur in the following three main areas:
- Independent remuneration - 'Advisor Charging': The FSA is considering an end to product providers determining how much advisors are paid to avoid the risk that provider influence could lead to bias (or to the perception of bias). During 2009, the FSA plans to consult on new rules that would stop product providers from setting commissions, requiring instead that advisor firms set their own charges.
- Independent advice processes: According to the FSA, there is a need for clarity on what 'independent advice' should comprise. The FSA intends to consult on a more principles-based approach to replace current requirements including those for 'whole of market'. It is considering two new high-level rules for advisor firms that wish to call themselves independent, to underpin what independent advice should be delivered to customers. These new rules would require that any independent advisor firm, regardless of the products they offer, should be equipped to give comprehensive and fair analysis of their relevant markets, and provide unbiased, unrestricted advice.
- Professional standards for independent advisors: The FSA has issued a challenge to the industry and other relevant parties to take forward the development of a framework for securing and maintaining higher professional standards.
At this stage, the requirements that may ultimately be implemented by the FSA in the UK remain simply a matter of debate but should not necessarily be altogether ignored in South Africa. If the Financial Services Board were to consider regulating the concept of truly independent financial advice, it may turn to the UK position for guidance.