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FSB reports that industry costs will not lead to exclusion

19 May 2014 Jonathan Faurie
Jonathan Faurie, FAnews Journalist

Jonathan Faurie, FAnews Journalist

Containing costs within the insurance industry has always been one of the foremost objectives of industry stakeholders, as it can significantly improve the health of the industry. Contained costs means that barriers to entry are significantly decreased, break even margins are more achievable and administration becomes less onerous. Even for smaller companies and independent intermediaries.

However, this has become a major concern for the industry, especially with the barrage of new legislation that the Financial Services Board (FSB) is planning to introduce. While the intention behind legislation implementation has the best interests of the industry at heart, the issue of compliance monitoring could prove to be costly.

Is consolidation inevitable?

The cost issue means that insurers with size and scale will be able to manage the cost implications of compliance monitoring better than smaller companies. Deputy Executive Officer of Insurance at the FSB, Jonathan Dixon, does not dispute the fact that there will be increased cost implications, but he encourages companies to look beyond these implications at the bigger picture.

"The consumer is becoming more educated regarding issues facing the financial services industry. This brings increased risk factors that companies need to come to terms with. The value of compliance is that these companies have clarity on all issues facing the industry and can implement measures which will see them become more sustainable over the long term. However, the FSB is trying its best to make sure that compliance costs are as proportionate as possible in order to accommodate these firms,” says Dixon.

While this is an objective of the FSB, we may have to come to terms with the fact that this may not be achievable, and that industry consolidation is inevitable.

But what does this mean for independent brokers and advisers? There is a lot of value in being independent, and Dixon points out that the FSB does value the role that independent advice plays in the industry. However, in the last three months, Chris Benfield, CEO of Hollard Investments, and Dan Hugo, CEO of PSG Distribution, have said that regulation may see the death of independent brokers and advisers.

"This is not the intention of the FSB which stands behind its view that independent advice adds significant value to the industry. A stated objective of the FSB is to support independent advice, and we are still on course to achieve this,” says Dixon.

This will however be dealt with in more detail when the FSB releases its Retail Distribution Review (RDR) White Paper, which is due by the end of May.

Is it all falling into place?

When one looks at the new pieces of legislation the FSB is proposing to impose on the industry, one would not be amiss to think that this is a masterly planned move by the FSB to provide the organisation with the protection that it needs to operate within the Twin Peaks model.

Dixon points out that much of the Twin Peaks model is to move from a sector-based approach to a more functional approach. He adds that this would standardise as well as streamline various industry functions such as licencing, supervision, and enforcement across all of the sectors that the FSB regulates.

"The supervision of market conduct will become more proactive and intensive, guided by the Treating Customers Fairly (TCF) framework. Increasingly, product providers and intermediaries will have to demonstrate how they are embedding fair treatment of customers into their culture and conduct of business, and regulatory action will be taken against those firms who have breached the principles underpinning the key TCF outcomes,” says Dixon.

He adds that to act as a strong deterrent against consumer abuse, sanctions will become increasingly punitive, especially for those firms - or intermediaries - who persist with poor practices.

Offering a helping hand

These new powers may offer a helping hand to the offices of the industry's various ombudsmen, who have been dealing with a significant number of determinations over the past two years. Last year saw the office of the Financial Advisory and Intermediary Services (FAIS) Ombud handle 33 determinations.

"All determinations are considered to decide the appropriate regulatory action to be taken. This could include the withdrawal of a licence and or a debarment of an individual. In some instances, regulatory action gets taken and a licence is withdrawn or an individual gets debarred before the matter is referred to the FAIS Ombud. We are also, in addition to withdrawal and debarment, able to impose penalties on financial service providers for negligence and may also - in cases of criminal behaviour - refer matters to the South African Police Services or the National Prosecuting Authority for prosecution,” says Dixon.

Does this mean we will finally see an end to the gross negligence which is regularly proven by the office of the various industry Ombudsmen? Let's hope so.

Because of the sure size of the industry, and the current role that the FSB plays in the industry of policymaker as well as enforcer, it makes it difficult for the organisation to keep tabs on all illegal activity in the industry.

"There are also competing forces which may put the industry in balance. As consumers are becoming more educated about the financial services industry, more complaints are being brought before the office of the Ombudsmen. However, TCF is seeing companies taking deliberate steps to avoid this. Both of these are desirable outcomes,” concludes Dixon.

Is the FSB leading the industry into a brick wall?

The concerns about the dangers of regulation inadvertently increasing costs within the industry go hand-in-hand with concerns about the significant stranglehold that regulation is putting on the industry's day-to-day business.

While the FSB is expecting all companies to adhere to TCF principles, these will not be formally passed into law until Twin Peaks is implemented. Speculation over the controversial RDR is expected by the end of May.

Editor's Thoughts:
Actions always speak louder than words, and we will just have to wait for the implementation of TCF, RDR and the Solvency and Asset Management (SAM), to see the cost implications they will have on the industry. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

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