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South Africa Retail Distribution Review – increased consumer protection

South Africa has started implementing a twin peaks model of financial regulation. The twin peaks model will be enacted by way of statute – the draft Financial Sector Regulation Bill (the Bill) was published early last year for public comment. The Bill proposes a phased-in implementation process with phase one being the establishment of two regulators in South Africa, namely, a prudential regulator which will be created within the existing structure of the South African Reserve Bank and a market conduct regulator, which will be the South African Financial Services Board (FSB).

Treating Customers Fairly

Central to the mandate of the market conduct regulator will be the promotion of the fair treatment of consumers. It has been proposed that the mandate, objectives and regulatory and supervisory frameworks of the FSB, once it assumes this role, will be significantly reformed and amended to:

(a) Promote the fair treatment of financial services customers;
(b) Promote financial awareness in South Africa;
(c) Protect and enhance the efficiency and integrity of South Africa's financial markets; and
(d) Ensure financial stability and financial inclusion.


The FSB published a Retail Distribution Review in November 2014 (the Review) signalling a shift away from the purely rule-based compliance approach historically implemented by regulators in South Africa to a more principle-based approach.

The manner in which investment products are distributed to investors and potential investors in South Africa is a major aspect of market conduct reform considered in the Review. The Review proposes that the existing manner in which investment products are distributed does not meet standards required by a "treating customers fairly" framework.

The Review states that the capacity in which a person acts when performing advisory and intermediary activities must be clearer. The Review covers services provided by intermediaries and recognises a need to regularise the relationship between the intermediary and the supplier of an investment product (product supplier).

The Review envisages three types of financial adviser who act as intermediaries between investors and the product suppliers, namely:

(a) Independent Financial Advisers;
(b) Multi-tied Advisers; and
(c) Tied Advisers.

Specific standards regarding the responsibility of product suppliers will be set in relation to each type. By distinguishing between these different types of intermediary, it is hoped that the foundation for a clearer set of principles for intermediary remuneration will be created. In particular, the Review seeks to prohibit a product supplier from paying commission or incentives to an intermediary in respect of an investment product distributed in South Africa. Instead, intermediary remuneration should be required to meet with identified criteria set out in the Review. This will have a significant impact on the way in which a number of product providers (both local and foreign) seek to have their investment products distributed in South Africa. This aspect seems to have been largely inspired by the retail distribution regime implemented in the United Kingdom in December 2012.

The period for public comment on the Review ended on 2 March 2015. Amendments and developments to the Review may still be pending.

Legal and Regulatory Risk Note
Middle East