As discussed in Chapter 3, the current regulatory framework gives rise to imbalances in the responsibility of product suppliers and intermediaries for fair customer outcomes, by placing rigorous obligations on intermediaries (particularly in relation to advice), but significantly less responsibility on product suppliers to be accountable for customer outcomes achieved through their chosen distribution channel – despite the fact that product suppliers have a clear interest in effective and appropriate distribution of their products to their customers.
Going forward, the regulatory framework will aim to rebalance these responsibilities, by requiring product suppliers to monitor advice and distribution outcomes and put reasonable controls in place to promote fair treatment and mitigate mis-selling risks, regardless of the distribution channel they adopt.
O Tied advisers
Proposal BB: Product supplier responsibility for tied advisers
A product supplier will be fully responsible for the advice provided by advisers with whom it has a tied relationship as contemplated in Proposal R, as well for ensuring the tied adviser’s compliance with all relevant regulatory provisions. The regulatory framework will impose similar obligations on a product supplier in this regard to those currently imposed through the FAIS Act on an authorised FSP in respect of its representatives. New conduct standards will be set to confirm the product supplier’s responsibilities in this regard, including more explicit responsibilities in relation to ensuring that the tied adviser has the requisite generic and specific product knowledge, and in relation to monitoring the adviser’s delivery of TCF outcomes. The product supplier’s responsibilities in relation to its tied advisers will include, but not be limited to, the product supplier responsibilities in respect of multi-tied advisers set out in Proposal CC below.
Note that, for purposes of this proposal, references to product suppliers and products apply equally to investment managers and their investment portfolios in relation to which advice may be provided.
O Multi-tied advisers
A multi-tied adviser will not be regarded as the agent or representative of any one product supplier with whom it has a relationship as contemplated in Proposal P. A multi-tied adviser will instead be required to either be licensed in its own right as a financial institution authorised to provide multi-tied advice, or act as a representative of a juristic entity holding such an authorisation (a multi-tied advice firm).
However, in view of the relationship between multi-tied advisers and product suppliers – which by definition entails that the relationship between the product supplier and the adviser is not entirely at arms’ length – it is reasonable to expect product suppliers and multi-tied advisers to share responsibility for the quality of advice provided to their shared customers, as opposed to the current framework which places this responsibility almost entirely on the adviser. To achieve this, product suppliers would also be expected to pay greater attention to the general customer treatment culture and supporting controls that a multi-tied adviser has in place.
Proposal CC: Product supplier responsibility for multi-tied advisers
Conduct standards will require product suppliers to take responsibility for aspects of the conduct of multi-tied advisers with whom they contract, including in relation to the following:
O Ensuring that the advisers are adequately equipped to provide appropriate information and advice on the product supplier’s products. Specifically, product suppliers will be responsible for ensuring that the adviser meets specific levels of generic and product specific product training, failing which the product supplier may not enter into any form of arrangement with the adviser in relation to its products (including paying commission, paying any form of outsource or binder fee, or facilitating payment of advice fees). Such product specific training may either be provided by the product supplier itself, or through an appropriate service provider, subject to strict standards. Product suppliers should not impose unreasonable barriers or conditions (for example minimum production levels) related to the provision of training. This will result in fit and proper requirements being rationalised, particularly the removal of RE2 exam requirements and their replacement with a new model requiring both generic training in relation to product types and classes, and specific training on a product supplier’s specific product structures. Further consultation will take place regarding details of this proposed new product knowledge framework.
O Taking reasonable steps before entering into any such arrangement, and in the course of the arrangement, to satisfy itself that the adviser will be in a position to deliver fair customer outcomes and provide advice suitable to the needs of the type of customer base and product types concerned. This includes the product supplier taking reasonable steps to establish that the adviser is fit and proper, has adequate governance and control measures in place to deliver TCF outcomes and that there is no cause for concern regarding the adviser’s commitment to a culture of fair customer treatment.
O Reasonably monitoring appropriate fair treatment indicators, at adviser level, in relation to the adviser’s book of business, including (where applicable) the type and volume of: Product sales, after sale product changes, product terminations, transfers, replacements, claims, and customer complaints; and taking appropriate action to address or mitigate identified poor customer outcomes.
O Identifying specific types of activities that pose a high risk of poor customer outcomes and putting reasonable risk mitigation measures in place. Possible examples would be monitoring sales of products with unusually large recurring contributions, or sales of long term products to elderly customers, or sales outside of the relevant product’s target market, to identify potential mis-selling risks.
O Having processes in place to monitor and resolve customer complaints relating to the multi-tied adviser’s services, and take appropriate action to mitigate unfair customer outcomes identified.
O Monitoring adherence by advisers to the fee guidelines for advice.
The market conduct regulator will monitor that product suppliers are effectively exercising these oversight responsibilities.
Further consultation will take place on appropriate measures for product suppliers to proactively manage the quality of advice provided by multi-tied advisers (for example, sample based review of advice provided in particular cases).
Note that, for purposes of this proposal, references to product suppliers and products apply equally to investment managers and their investment portfolios in relation to which advice may be provided.
O Independent financial adviser (IFA):
Although the principle that product suppliers and intermediaries should accept shared responsibility for customer outcomes is also relevant in relation to IFA’s, it is accepted that the relationship between a product supplier and an IFA is at arms’ length and that product suppliers cannot reasonably be expected to exercise the same degree of control in relation to customer outcomes in this regard. It is also accepted that the only relationship that will exist between a product supplier and an IFA in relation to the product supplier’s products is the product supplier’s facilitation of payment of advice fees from product values or contributions, or the payment of commissions in respect of certain products, where applicable.
Proposal DD: Product supplier responsibility for IFAs
Conduct standards will require product suppliers to take responsibility for aspects of the conduct of IFA’s who provide advice on their products, in relation to the following:
O Where the product supplier pays any form of commission or facilitates the payment of any advice fee to an IFA, the product supplier will be required to ensure that the adviser meets the same levels of generic and product specific product training as applicable in respect of a multi-tied adviser, failing which the product supplier may not enter into such commission or advice fee facilitation arrangement.
O Identifying specific types of activities that pose a high risk of poor customer outcomes and putting reasonable risk mitigation measures in place. Possible examples would be monitoring sales of products with unusually large recurring contributions, or sales of long term products to elderly customers, or sales outside of the relevant product’s target market, to identify potential mis-selling risks.
O Where an advice fee facilitation arrangement is entered into with the IFA, monitoring adherence by the IFA to the fee guidelines for advice (see proposal II).
O Taking reasonable steps to monitor and assist in the resolution of customer complaints relating to the IFA’s services, and take appropriate action to mitigate unfair customer outcomes identified.
The market conduct regulator will monitor that product suppliers are effectively exercising these oversight responsibilities.
Note that, for purposes of this proposal, references to product suppliers and products apply equally to investment managers and their investment portfolios in relation to which advice may be provided.
O Non-advice sales execution:
As proposed in Proposal D, a definition of “sales execution” will be included in the regulatory framework and will be used to set conduct standards regarding the provision of this service and also placing limits on the types of products or product features that may be distributed using non-advice sales execution. Product suppliers will be responsible for ensuring these standards are met.
Proposal EE: Product supplier responsibility for non-advice sales execution (Also see proposal D)
Product suppliers that distribute their products through a non-advice sales execution model will be responsible for ensuring that:
O The products concerned meet the requisite product standards for the distribution model.
O Any individual providing factual information as part of the non-advice sales process meets the requisite fit and proper standards.
O Any other conduct standards, including disclosure standards, relating to non-advice sales execution are met.
Over and above the responsibility product suppliers will be expected to take in relation to specific forms of distribution, as set out in proposals BB to EE above, the regulatory framework will ensure that product suppliers are generally not in a position to abdicate or avoid responsibility for fair customer outcomes by shifting this responsibility inappropriately to other parts of the product value chain. A particular risk in this regard relates to the level of access to customer data by the product supplier, and the quality of the product supplier’s monitoring of customer outcomes. As a general principle therefore, product suppliers will be expected to build reasonable controls into their contractual arrangements and their day-to-day relationships with any type of intermediary or outsource service provider, in relation to customer related data. The argument is sometimes raised that the product supplier’s access to customer related data held by intermediaries is restricted because the intermediary “owns the customer relationship.” This argument is not considered valid. Although clearly customer confidentiality must be respected, product suppliers should be in a position to access information reasonably required by them to assess the delivery of TCF outcomes by their chosen distribution channels and outsource service providers. Conversely, product suppliers should also be required – subject to relevant confidentiality safeguards – to provide customer related information to financial advisers, where this information is necessary to enable the adviser to provide financial planning or product advice to a customer. It is accepted however that product suppliers are entitled to, and indeed should, take care to ensure that such information is not provided to advisers where there is reasonable doubt as to whether the adviser is in a position to provide appropriate advice on the product supplier’s products.
Proposal FF: General product supplier responsibilities in relation to receiving and providing customer related data
Conduct standards will be set to clarify product supplier responsibilities in relation to ensuring ongoing access to and monitoring of customer related data held by intermediaries and outsourced service providers, to ensure that the product supplier’s ability to monitor delivery of TCF outcomes to customers is not undermined. Such standards will build on the approach already included in the insurance sector binder regulations and outsourcing directive, adapted where necessary to the particular distribution or outsourcing model concerned.
Standards will also be set relating to appropriate levels of customer information that product suppliers will be required to provide to IFAs or multi-tied advisers, when authorised to do so by the customer. Standards may differ for IFAs and multi-tied advisers respectively. Standards may also take into account whether the product supplier is satisfied that the adviser concerned has the requisite product specific knowledge in relation to its products held by the customer. At a minimum, where product suppliers have a valid reason (as recognised in the standard concerned) not to provide the requested customer information to the adviser, the product supplier will be required to provide the information to the customer directly, with a fair and objective explanation to the customer as to why the information is not being provided to the relevant adviser.
Any standards relating to obtaining or providing customer information will include appropriate confidentiality safeguards.
Note that, for purposes of this proposal, references to product suppliers and products apply equally to investment managers and their investment portfolios in relation to which advice may be provided.