South Africa’s Financial Services Board (FSB) has joined its global financial services regulatory peers in adopting fair outcomes for consumers as one of its overarching goals. The implementation locally of the Treating Customers Fairly (TCF) regime, hot on the heels of similar initiatives in the United Kingdom and other developed markets, supports this claim.
The six TCF principles set out the product quality and service level that a consumer should receive from suppliers and intermediaries when they transact for financial services. For example: products and services must be designed to meet the needs of identified consumer groups and targeted accordingly (Principle 2) while consumers must be provided with clear information and kept appropriately informed before, during and after the point of sale (Principle 3).
TCF is now the cornerstone of new financial services regulation and it will entrench consumer rights at every possible touchpoint industrywide. Existing regulation is being tweaked, rewritten or consolidated as part of a wholesale shake-up of the domestic regulatory environment, both to incorporate TCF and accommodate the structures required for a ‘Twin Peaks’ regulatory model.
“The scale and complexity of the ongoing regulatory overhaul has major implications for financial services professionals and consumers alike,” says Justus van Pletzen, CEO of the Financial Intermediaries Association of Southern Africa (FIA).
Cost is a major issue as South Africa’s risk and financial advisers are already ‘hard hit’ by increased compliance requirements following the implementation of the Financial Advisory and Intermediary Services (FAIS) Act. The income side of the equation is under pressure too per the proposals contained in the FSB’s Retail Distribution Review (RDR).
“The regulatory split into two bodies with prudential and market conduct oversight respectively might add to the costs currently carried by the country’s licensed FSPs,” says Van Pletzen. He adds that the regulator will have to heed the warning signs (and outcomes) following regulatory interventions in international markets such as the UK and Australia.
“We are confident – based on our ongoing interactions with the FSB – that post-regulation outcomes in offshore markets are being monitored,” he says. “But they will have their work cut out for them, because the reports and opinions doing the rounds re the impact of RDR on the UK financial services industry contain plenty of conflicting views.”
Many stakeholders in the UK financial services industry are ‘feeling the pinch’ following regulatory over-reach in that market. It is argued, for example, that the UK RDR has resulted in an advice gap forming due to many consumers being unable to afford the fees that financial advisers charge for advice. The advice ‘gap’ is in part a consequence of there being fewer advisers available to dispense advice.
The pressures and challenges of compliance with financial services regulation have forced many independent financial advisers from the profession in that market. While the UK regulator argues that RDR has not led to a decline in numbers there is evidence to support that the number of independent financial advisers in that market is down significantly between 2011 and end-2014.
“One of our concerns is that the overregulation could trigger a similar exodus of independent financial advisers from our markets, leaving the poor to fend for themselves in an environment where they will end up paying over the odds for the financial product and services they consume,” says Van Pletzen. Proportionately higher fees could also be an unintended consequence of the exemption that the FSB proposes to ensure broader access to financial product.
Another major concern is the behavioural changes brought about by new regulations. Turning again to the UK it is apparent that retirement reforms introduced in that market in April 2015 are negatively impacting the country’s retirement savings culture. The UK Financial Conduct Authority (FCA) recently revealed that 200000 savers had withdrawn cash from their pension pots since the relaxation of the rules, which now allow for any person over 55 to access the cash in their pension funds.
Sales of annuities – products that provide consistent monthly income during retirement – have fallen through the floor, from 90000 between April and June 2014 to just 12000 for the comparable period in 2015. But perhaps the greatest indictment of this initiative – despite its noble ‘fair treatment’ objective – is that 147000 of the 200000 persons withdrawing their funds paid exit penalties of 5% or more!
Can South Africa learn lessons from the UK? “There is nothing wrong with a dynamic financial services environment provided we always consider the consequences of any change,” concludes Van Pletzen. “Consumers tend to take the path of least resistance when it comes to their financial affairs – if we remove the safety net offered by valued and independent financial advice there is no telling the damage that might be done.”