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Global regulations: The vise on agents and advisors tightens

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Say the word “compliance” and many agents and advisors become furious about the government regulations they have to abide by, some of them seemingly useless, if not downright harmful to business. You probably count yourself among the angry and frustrated.

You’re in good company — globally speaking. For your counterparts in regions around the world are dealing with many of the same issues: mounting paperwork, beefed up requirements respecting disclosure, due diligence, and responsibilities owed the client regarding product and plan recommendations.

And in several countries — the U.K., Canada, South Africa and Australia — the really big issue is pay. As regulators raise practice standards for financial service professionals and endeavor to protect consumers from substandard advice, they’re also launching an assault on compensation arrangements they see as conflicting with their objectives. Upshot: commissions on product sales are being reduced or eliminated in favor of fee-based advice.

United Kingdom

On January 1 2013, the U.K’s Financial Conduct Authority (FCA), implemented one of the largest shake-ups in financial services in the last 30 years: the Retail Distribution Review (RDR). The RDR increased professional qualifications for advisors, categorized them as “independent” or “restricted” (depending on their ability to offer a full range of financial service products) and mandated greater information-exchange and transparency in advisor-client engagements.

The most consequential change of the RDR rules impacted compensation: Agents and advisors could no longer receive commissions on new policy sales, only advisory fees. Clients who purchased life policies prior to 2013 could also discontinue renewal/trailing commissions if they believed they weren’t receiving adequate advice or service.

Advisors that were earning trailing commissions on bundled, pre-RDR investment products are also impacted by the new rules. Beginning April 6, 2016, a sunset clause kicks in requiring advisors to implement new fee-based arrangements on these products — or give away their services for free.

These changes, industry pundits feared in the run-up to 2013, would negatively impact producers’ income, as clients cashed cash out their policies and bought new ones so they can turn off the renewal commissions. The loss of commission income, combined with the new educational and transparency requirements, would also prompt producers to leave the business — or force other, non-RDR-compliant agents to operate under the radar. (These fears have, to a degree, been born out. See accompanying chart.)

For U.K. insurance and financial service professionals already operating on a fee basis, the RDR has entailed greater compliance, but been less disruptive. Katy Baxter, a principal of Baxter & Lindley Financial Services Ltd., says she now must submit to the FCA periodic reports detailing the firm’s business activities, including investments, planning arrangements and fee income.

One purpose of the exercise: to ensure that capital adequacy requirements are met. (Investment firms subject to the U.K.’s Capital Adequacy Directive, or CAD, must hold capital against operational risks arising from the giving of financial advice.)

How onerous have the new requirements been? Baxter says the additional workload has mainly saddled a firm co-director in charge of compliance. But the burden has, since last year, been lessened by the adoption of new data capture solutions that automate regulatory reporting; and by the outsourcing of certain compliance functions.

“I’m working on the assumption that if I’m taking over the running of the business, I don’t really want to have anything to do with compliance,” says Baxter. “I need to know that I have really good people who are doing the due diligence.”

In respect to wealth management, much of this due diligence is handled by Transact, a product of Integrated Financial Arrangements plc., which boasts an online administrative tool to help advisors manage their clients’ portfolios. The software holds investments in tax-advantaged savings vehicles and, says Baxter, offers “phenomenal” compliance reporting capabilities.

If international regulators were to reshape rules to be better attuned to advisors’ business practices, what changes might we see? To start with, more specifics from regulators as to what they want.

Baxter says that U.K. regulators have at times described as inadequate certain financial reporting of business activities or processes, but then failed to indicate how to comply with the rules. Result: Guesswork, as firms are left to their own devices to try to fill in the blanks.

“If [regulators] were really clear and said, ‘We want from you A, B, C and D,’ that would make the compliance process a lot easier,” says Baxter.

South Africa

The U.K.’s Retail Distribution Review has had an impact far beyond the nation’s borders. In November 2014, South Africa’s Financial Services Board (FSB) proposed a similar regulatory regime (also called Retail Distribution Review) that promises big changes for advisors. To be implemented in phases between now and year-end 2017, the RDR entails changes to compensation and disclosure practices. Under the new rules, agents will no longer be able to charge commissions on policy replacements or exchanges’ only advisory fees will be allowed.

For new policies, producers will be permitted to take a 50 percent up-front commission on the sale. Thereafter, they can charge fees (in place of trailing commissions) for advice offered during policy reviews. And advisors will have carry out such reviews every six months to secure a written “mandate” (authorization) to continue charging fees.

Commissions (both upfront and trailing) on sales of most investment products are going away, too. Excepted from this provision are low-cost products or investment advice, provided that the advisor meets certain (as yet undefined) qualifications.

Criteria aside, the advisors will have to disclose during initial client meetings (1) their professional classification (i.e., “type advisor” (captive or career agent), multi-type advisor (multi-product/multi-carrier), independent financial advisor or (optionally) certified financial planner); and (2) how the regulatory classification may limit their product or planning recommendations.

These and other regulatory changes on the horizon — including new compensation disclosure rules and a requirement to treat customers fairly (TCF) under South Africa’s Personal Protection Act (PPA) — will entail an overhaul of business processes for the industry’s players.

“The big financial services providers will have to re-gear whole structures — how they remunerate their producers, organize their agencies and operate IT support systems,” says Kobus Kleyn, director and financial advisor, Kainos Financial Services Ltd. “Major changes will have to take place.”

“For commission-only advisors, the changes will be difficult to navigate,” he adds. “Our practice is more fortunate than many because we’ve already adapted to the fee-based regime. But fee-based advisors represent only about 1.5 percent of financial service professionals in South Africa.”

Much of the challenge, he notes, will be to reduce operational costs to compensate for the additional compliance work and reduced revenue that inevitably results when transitioning from a commission- to fee-based practice. Hence the need for technology that can, among other things, provide labor-saving efficiencies, reduce errors and, for the benefit of clients, enhance security of personal financial information

“The bottom line is, costing under RDR and other new regulations is going to be critical because upfront commissions are going away,” says Kleyn. “You’ll have to reduce overhead costs drastically. All the changes we’re making in our practice aim to help us run the business more cost-effectively and productively.”

Yet practice management changes can only accommodate so many edicts from the powers that be. Establishing a “macro-managed” environment in which regulations endeavor to balance consumer protections and business needs is fine. What Kleyn cannot accept is regulators interfering with his practice.

“Under a micromanaged system, the cost of running a practice would become too expensive,” says Kleyn. “Then agents and advisors will leave the business. And when they do, the loser will be the consumer.  There’s no doubt about it — the U.K. is proof of that.”


The phrase “regulatory overkill” perhaps best sums up the situation in Canada. The nation now has 53 entities, both national and provincial, that oversee insurance and financial service professionals. For both newbies and veterans in the business, the dizzying array of agencies and authorities can seem intimating and overwhelming.

There’s the Mutual Fund Dealer’s Association or MFDA, which oversees distributors of mutual funds and exempt fixed income products. The Ontario Securities Commission administers and enforces securities legislation in Ontario, the largest of Canada’s provinces by population.

The Office of the Superintendent of Financial Institutions (OSFI), reporting to the Minister of Finance, is the primary regulator of insurance companies, trust companies, loan companies and pension plans in Canada. Not to be confused with OSFI is the Financial Services Commission of Ontario (FSCO), which also reports to the Minister of Finance and regulates many of the same entities.

An Investment Industry Regulatory Organizations of Canada (IIROC) oversees investments and investment brokers, dealers and providers in Canada.  There is also Ombudsmen for Banking Services and Investments (OBSI), which handles the financial disputes between consumers and financial service providers. Each of the provinces also has an insurance council that regulates agents and brokers. The combined operating budgets of the various institutions now tops CDN $600 million. They spend an estimated CDN $3 billion per year regulating about 80,000 active financial advisors. 

“Regulation of financial service providers is a growth industry in Canada,” says Wade Baldwin, principal of Baldwin & Associates, Financial Services Ltd. “[The authorities] are constantly looking for new things to regulate us on. They’ll come up with a solution to a problem even before they investigate whether the problem is really a problem.”

Like whether a client might have links with extremists or organized crime. In the wake of 9/11, Canada’s parliament passed the Proceeds of Crime and Terrorist Financing Act, which sought to cut off sources of funding for terrorist activity. How did this affect advisors? They must now ask every client, “Have you or any close relative, whether living or deceased, ever held offices or positions in a country other than Canada?” 

“Criminals being criminals, do you think they’re going to answer ‘yes’ or ‘no’ to that question?” asks Baldwin. “These questions are a big waste of time.”

Worse, they result in lost business. Baldwin says the accumulating list of questions mandated by the authorities has humiliated clients to the point where they cut short the planning engagement. Or the additional labor devoted to complying with rules has eaten into time that could be better spent interfacing with clients and prospects.

The regulatory environment could get worse. Baldwin says Canada may impose on all advisors a fiduciary standard of care like of the U.S. Department of Labor’s proposed rule for retirement advisors. Also of concern: a tightening of commission disclosure requirements on such products as variable life insurance, segregated funds (variable annuities) and mutual funds.

In respect to the last, a set of rules drafted by the Canadian Securities Administrators, dubbed Client Relationship Model 2, went into effect last July. Under CRM2, mutual fund statements must detail how much in commission is paid to the advisor’s broker-dealer and the amount the advisor receives in up-front and trailing commissions.

Baldwin insists the enhanced disclosure rules are, taken alone, not a cause for worry. But he fears they represent the “thin edge of the wedge” — a change that could herald the banning of commissions on sales of insurance and investment products.

He and other advisors are now pushing back against the growing financial bureaucracy. Before Parliament is legislation proposed by Advocis, the Financial Advisors Association of Canada, to replace the overlapping layers of authority with a self-regulating organization that would report to the Minister of Finance.

Modeled after FINRA in the U.S., the new entity (delegated administrative authority of DAA in Canadian parlance) would require advisors accredited with professional associations like Advocis to adhere to a Profession’s Model. The new framework would mandate a code of conduct, continuing education requirements and disciplinary action for agents and advisors who run afoul of the DAA’s rules.

What are the prospects for the new DAA? Baldwin believes the bill — a revised version of an earlier one that died in Parliament — stands a 50-50 chance of passing. But he acknowledges the bill’s backers will have to overcome opposition from entrenched agencies that won’t take kindly to being phased out of existence.

The industry’s stakeholders have much to lose if the bureaucracy refuses to give ground. Baldwin warns that mounting compliance costs — not least increased premiums paid for errors and omissions (E&O) insurance to guard against malpractice suits — could rise so high as to push all but the most successful advisors from the business.

“If we keep making it more difficult to be in the business by adding new regulations, then few people will enter the profession,” says Baldwin. “The average person on the street won’t have access to financial advice because there won’t be any advisors out there to advise them.”


Like their counterparts in other advanced economies, Australian-based insurance and financial service professionals are also girding for restrictions on compensation. Under a joint proposal of three industry organizations — the Association of Financial Advisers (AFA), Financial Planning Association of Australia (FPA) and the Financial Services Council (FSC) —commissions on insurance sales will be drastically reduced.

To be phased in over a three-year period, up-front commission rates will be cut from 120 percent of premiums to 60 percent by 2018. The reform proposals would also limit ongoing commissions to 20 percent of the annual premium starting next January.

Why the scale-back in upfront commissions? For the same reason commissions are under attack in other developed countries: a belief by regulators that big commissions lead to lower quality advice, inappropriate product recommendations and conflicts of interest among unscrupulous producers motivated by high payouts. The Australian Securities and Investments Commission (ASIC), which researched the issue, found a “strong correlation between high upfront commissions and poor consumer outcomes.”

The industry’s proposals (issued subsequent to the release of a government Financial System Inquiry (FSI) report last December outlining a direction for Australia’s financial system) also calls for development of an advisor code conduct, more product choices and a review of statements of advice.

Oddly, the proposal overhaul of compensation is deemed necessary despite the fact that producers in Australia are already held to a fiduciary standard of care — to act in the client’s best interest — both when recommending investment and insurance products.

Susan Patterson, an advisor for Guardian Financial Planning, believes that about 30 percent of an estimated 16,000 advisors will the leave the business if new compensation rules take effect. The exodus will likely be more pronounced among less experienced producers who aren’t generating enough (or any) fee income to compensate for the cut in upfront commissions. Other producers will take on new roles. Patterson says a life insurance agent in her practice who is not prepared to fulfill new educational requirements will be repositioned as an internal paraplanner.

If a downsizing of the agent workforce is indeed imminent, how might Australia’s life insurance carriers adapt in order to maintain product sales objectives? Matthew Fogarty, an advisor at Financial Planning By Design, believes the insurers will boost direct-to-consumer sales and marketing efforts. Interfacing with prospects at the point-of-sale will be agent-employees paid on salary.

“Advisors will simply have to adapt to the changing regulatory environment or be forced from the field,” says Fogarty. “In today’s market, it’s all about survival of the fittest.”

A net plus or minus?

For many of the agents and advisors who survive the changes sweeping their profession, new regulatory requirements might actually prove a boon to business. Held to higher practice standards and compensated accordingly, they’ll be perceived by clients as more professional and deserving of their trust and loyalty.

But will enough producers remain in the business to serve consumers who need financial advice? And will consumers —especially those in the middle market who are most in need of planning and protection products — be able to pay the fees charged? Only time will tell. In the interim, we’ll all have to hope that the regulators know what they’re doing. A lot is riding on their decisions.

Check out these related stories about U.S. and global regulations:

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AALU: Life industry facing a ‘bloody battle’ over DOL’s fiduciary rule