Foundations laid for South Africa’s ‘Twin Peaks’ model of financial sector regulation

The laws necessary to implement a ‘Twin Peaks’ model of financial sector regulation in South Africa are at an advanced stage. Caroline da Silva, DEO of FAIS at the Financial Services Board (FSB) told attendees at the 2016 Insurance Conference that both the Financial Sector Regulation Bill (FSR Bill) and Insurance Bill were before Parliament for final consideration. The Insurance Conference is hosted annually by the Financial Intermediaries Association of Southern Africa (FIA), the Insurance Institute South Africa (IISA) and the South African Insurance Association (SAIA). It was held from 24-27 July at the Sun City Conference Centre and this year attracted more than 1300 insurance professionals from 23 countries. The theme of the 2016 conference was ‘Business Unusual’ and the FSB assured attendees that the myriad factors affecting insurers, insurance brokers and risk managers at an operational level were ‘top of mind’ when designing and implementing new regulation.hide“A responsible regulator gives consideration to every ‘business unusual’ factor – it will not pass regulation that goes against the consumers’ best interests nor will it pass regulations to put a firm out of business simply because it is innovative and able to provide competitive pricing,” said Ms. Da Silva. She used the arrival of Uber as a competitor alongside the established taxi industry to illustrate this principle and explained that any regulation in this space should ‘level the playing field’ for all stakeholders. South Africa’s move to Twin Peaks was hastened by an economic shock in the form of the 2008 global financial crisis (GFC). Analysts’ claims that local banks and insurers emerged relatively unscathed may hold some truth; but the SA economy still shed close to a million jobs in subsequent years. The economic fallout due to the interconnectedness of global economies and markets was unavoidable and regulators will, in future, have to take steps to ensure market stability and consumer protection should similar events occur. The FSR Bill sets out the structures necessary for the Twin Peaks model. “Once the FSR Bill is passed, we expect it will be in effect either January or April 2017, the FSB will close its doors and reopen as the Financial Sector Conduct Authority (FSCA),” said Ms. Da Silva. The FSCA will focus on market conduct only and adds the banking sector to the non-banking sector which the FSB previously supervised. It remains unclear to what extent the new regulatory authority will be responsible for market conduct in the payment systems and ‘lending and credit’ environments. The new bill demands a step change from a reactive, compliance-based and rules-focused FSB to a FSCA that is proactive, pre-emptive and outcomes focused. “Our challenge will be to get close enough to business to better understand market conduct risks and in that sense we will become a more intrusive regulator,” said Ms. Da Silva. Additional regulatory underpins for the FSR Bill can be found in the Solvency Assessment and Management (SAM) legislation and the Insurance Bill. The former provides strict guidelines for insurer capital requirements and reporting while the latter outlines the prudential requirements for firms in the insurance sector. A third body of legislation, the Conduct of Financial Institutions (Cofi) Act, will replace the Financial Advisory and Intermediary Services Act and the market conduct sections of the two insurance acts by end-2019. It will provide for comprehensive oversight of market conduct in financial institutions. South African regulators have the additional challenge of addressing various socio-economic factors such as inequality and unemployment. “Among the mandates given under the FSR Bill is that of financial inclusion and we are in the process of drafting a strategy that closely aligns with that of SA’s National Development Plan,” she said. The solution needs to go beyond merely providing access to financial product to one where the product improves quality of life. This sentiment was shared by SA’s National Treasury in its address to the conference. “We remain deeply committed to tackling the challenges of poverty, unemployment and inequality while building a safe and sound financial services system that treats its customers fairly,” said Dr Reshma Sheoraj, director of insurance in the financial sector policy unit at National Treasury. Inclusion is currently being addressed through the micro-insurance framework (being included in the Insurance Bill); the reassessment of existing financial sector regulation to ensure proportionality; and the possible amendment of conflict of interest regulation to facilitate black broker development to name a few. Consumer protection remains a primary driver of all financial services regulation. SA’s regulators want to carve out an environment where consumers can switch seamlessly between product providers and avail of new technologies without undue risk. “The future FSCA will be about making sure the industry is sustainable, treats its customers fairly and delivers good outcomes – because an industry that a customer trusts and has confidence in is an industry that grows,” said Ms. Da Silva. South Africa is ahead of many regulatory regimes, including Australia, in that its treating customers fairly (TCF) principles have been in place for more than five years while professionalism and competency requirements were introduced as early as 2004. Ms. Da Silva pointed out that the on-going Retail Distribution Review (RDR) is as much about consumerism as it is about advice: “We are introducing RDR “because we believe that consumers need advice – and if the advice market is not sustainable we believe that we are robbing consumers of that advantage”. The hope is that once RDR is bedded down the consumer will both benefit from sustainable advice and understand the value of that advice. Good financial advice offered by an intermediary is seen as indispensable in the insurance distribution environment. RDR both recognises the value in the current advice-centric distribution methodology and acknowledges that conflict of interest and excessive fees could render the model unsustainable. It aims to ensure responsible outsourcing, proper governance and effective oversight, especially in the data field. The regulator notes that brokers will have to “share data comprehensively” with their insurers so that they can pass on the benefits of better underwriting and economy of scale to the end-consumer. “You should not look at RDR as regulation that removes incentives – it addresses larger issues such as the sustainability of advice and advisers in the best interest of the customer,” concluded Ms. Da Silva.

Foundations laid for South Africa’s ‘Twin Peaks’ model of financial sector regulation

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