FSB responds to the FIA
Jonathan Faurie, FAnews Online Journalist
There has been a lot of worldwide debate regarding over regulation and the detrimental effects that it brings to industry and global economies. However, regulation is necessary within the context of fully protecting consumers by creating a competitive ind
With this in mind, we look at the FSB’s response to the concerns raised within the FIA e-newsletter last week.
The Financial Services Board (FSB) appreciates the open sharing of views by the Financial Intermediaries Association of Southern Africa (FIA) in its recent article in FAnews. The FSB has always worked constructively with the FIA in partnering to improve professionalism in the financial advice and intermediary services sector, driven by a desire to protect consumers of financial services.
Jonathan Dixon, executive officer Insurance at the FSB, says that the association appreciates the message that financial intermediaries are exposed to risk in the course of advising and serving clients. It is only natural that financial intermediaries will feel vulnerable during uncertain times.
“It is for this reason that the FSB has always endeavoured to follow a consultative approach to regulatory reform. I am sure that the FIA will agree that it has been included every step of the way in the FSB’s deliberations on what changes are necessary in the financial services sector to better protect consumers,” says Dixon.
He states unequivocally that the FSB views a dynamic, sustainable and professional financial intermediary sector as a critical contributor to its ultimate goal of protecting consumers of financial services and promoting confidence in the financial system.
Accordingly, the FSB strongly agrees that part of a comprehensive framework for financial consumer protection is that reform initiatives must also be “fair” to financial intermediaries, in the sense that the legitimate interests and on-going viability of the financial intermediation profession must be considered. In particular, change must not be implemented in a way that undermines the profession’s continued ability to provide appropriate levels of professional advice and services to customers.
It is clear that the FSB has to tread a delicate line in striving to achieve this objective. It is this very desire to be consultative and consider the interests of all stakeholders that has sometimes led to regulatory change taking longer than expected – in turn creating the potential for regulatory uncertainty referred to in the FIA article.
Let me try and address this uncertainty by stating that:
• Regulatory change will only be introduced after comprehensive consultation. In other words, intermediaries will be given early notice of the FSB’s intentions to review elements of the regulatory framework that will affect them and will be given ample opportunity in the process to share their views and reflect their interests;
• Regulatory change will entail an explicit consideration of the interests of different partners in the overall approach to financial consumer protection, including the need to maintain a sustainable model for financial advice and intermediary services while always bearing in mind that consumer protection remains the overriding objective.
And
• Regulatory change, once finalised, will be implemented in a way that recognises the need for intermediaries to adjust their business models and smooth their business revenues.
With that context, let me address a few of the specifics in the FIA article:
Powers and protection of the FSB
It goes without saying that the granting of powers to the regulator must come with accountability. Unfortunately the debate in the media in recent months on the revisions to the FSB’s powers has given rise to a number of red herrings and misperceptions.
“Firstly, the amendments in the Financial Services Laws General Amendment Bill 2012 dealing with protection from liability for the FSB when exercising its regulatory powers in good faith are in no way exceptional. In fact, they are quite the opposite. This type of provision is explicitly set as the international standard by global standard setting bodies such as IOSCO and the IAIS, and is the norm for other regulators in South Africa, including the Bank Supervision Department of the SARB, the Commission for Conciliation Mediation and Arbitration in terms of the Labour Relations Act, and the Auditor-General, among others,” he says.
Secondly, the powers granted to the FSB are absolutely accompanied by accountability. Any regulatory action by the FSB is subject to the Promotion of Administrative Justice Act (PAJA), and to the right of appeal to an independent Appeal Board if any regulated entity is dissatisfied with a decision of the FSB. Over and above that, the FSB is subject to on-going oversight by, and accountability to, the National Treasury, the Minister of Finance and ultimately to Parliament.
The burden on financial advisors
The FSB notes the FIA’s concern that financial intermediaries feel that they bear the brunt of responsibility for poor outcomes for customers. The FSB agrees that the intermediary cannot be the only link in the financial services chain that it is held up to scrutiny for poor outcomes. Delivery of fair outcomes for customers of financial services is unavoidably a shared responsibility of the product provider and intermediary, and other relevant entities in the financial value chain. This lies at the heart of the FSB’s Treating Customers Fairly (TCF) initiative.
“TCF requires product providers and intermediaries alike to be able to demonstrate that they are delivering on fair outcomes for customers throughout the product life-cycle. Clearly it is difficult to achieve fair outcomes for customers if product providers are developing and marketing products that are not designed to adequately meet the needs and reasonable expectations of identified customer groups, or if product disclosure is unclear and the product provider’s service to customers and intermediaries is poor. Product providers also cannot distance themselves from the responsibility to ensure that the distribution channels they establish to promote their products are capable of delivering fair customer outcomes, including provision of suitable advice, where relevant. In many cases, this will involve product providers and intermediaries working closely together to ensure that this shared responsibility is understood and that adequate controls are in place to ensure fair outcomes are achieved. In short, TCF can be seen as the antidote to the concern voiced by the FIA that the intermediary is made to take the blame for poor outcomes; going forward it is clear that delivery of fair outcomes will need to be a shared responsibility. For delivery of certain elements of the TCF outcomes (for example elements relevant to product design), the product provider will need to take the lead, while for others (for example elements related to advice), the intermediary’s lead role is already accepted. Neither party will however be able to abdicate responsibility for any of the outcomes in their entirety,” says Dixon.
TCF is also informing the FSB’s approach to the Retail Distribution Review (RDR). In particular, the shared responsibility of the product provider to ensure fair outcomes for customers through its chosen distribution channel will need to be reflected in the approach to supervision of financial advice and intermediary services, possibly involving some revisions to the FAIS licensing and supervision framework. An important question is the role of the product provider relative to the oversight role of the supervisor. TCF makes it clear that the product provider must have a primary oversight role, which should include dealing with intermediaries that are fit and proper (in terms of qualities of integrity, knowledge and experience) and have the fair treatment of customers at the centre of their culture. Increasingly, the role of the FSB will shift to one of checking that product providers have put in place the necessary measures and controls to ensure that the intermediaries they deal with have the culture and competence to deliver on fair outcomes for their customers. This thinking has already influenced the FSB’s approach to the FAIS level two regulatory exams, which have been deferred pending the outcome of the RDR.
The RDR aims to promote appropriate, affordable and fair advice and services to customers, but at the same time one of the explicitly stated objectives of the review is to support a sustainable business model for financial advice. The RDR is being carried out in a very consultative manner. Very extensive and useful input from various industry stakeholders, including financial intermediaries, is being considered in coming up with various proposals, due to be published in the second half of 2013. These proposals will be issued for comment, which in turn will be carefully considered in arriving at final regulatory proposals. Regulatory changes are not expected before the second half of 2014, and will explicitly provide for a transition period to allow financial intermediaries to adjust their business models. Accordingly, it is fair to say that for planning purposes intermediaries need not worry about any sudden changes to remuneration models over the next 18 months or so, and that any changes that are introduced will be signalled well in advance and will explicitly consider the sustainability of the business model for financial advice and intermediation.
The FSB has also responded to the liability issue raised by the FIA, to read their response please click here.
Editor’s Thoughts:
Consultative processes are good policies to have and ultimately benefit the industry. However, these processes need to be on-going and need to address all concerns in the industry because grey areas cause concerns in the industry where concerns such as those raised by the FIA are raised.
The practice of taking regulatory principles from international markets and adapting them to the South African market without adaptation is another issue which needs to be addressed. The South African market has its own challenges and if we don’t learn to address our challenges in our own way then we will never overcome these challenges.
Addressing challenges in the industry will give advisers and brokers a reason to stay in the industry as opposed to exiting it because of frustration with unresolved challenges. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts[email protected].
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