New regulations – embrace or resist?

Gareth Stokes, FAnews Online Editor

Last week we shared some thoughts on the Financial Services Board (FSB) Treating Customers Fairly (TCF) discussion paper. We mentioned this was the latest in a series of moves by the local regulator to emulate the success of its counterpart in the United Kingdom, the Financial Services Authority (FSA). There are some in South Africa who believe the FSB is over regulating and placing an excessive load on financial services professionals. Others welcome their ongoing legislative initiatives, but query whether these laws should be based on ‘offshore’ regulations, however loosely.

As we scanned the various reader responses to the TCF discussion paper we were drawn to comments by UK-based, Hennie van der Watt. He believes there are significant differences between the responses of financial services professionals based in South Africa versus those in the UK, especially when it comes to regulatory change. Those in the UK focus on the good each regulatory intervention will do over the long-term, while local stakeholders seem to resist change at every step, before grudgingly accepting it. Why do South Africa’s financial services professionals meet new regulation with such cynicism?

Two different worlds

Van der Watt reckons the FSB’s lack of capacity to implement new regulations, and its failure to pro-actively communicate with financial services providers (its most important stakeholders in the FAIS-space) contributes to an ‘us-against-them’ environment. We can support his assertion by considering the TCF implementation in the UK. “Whilst the TCF regime was met with some resistance in the beginning (as is human nature), the FSA quickly won over the industry by pro-actively engaging them and constantly talking to and updating stakeholders.” The UK TCF campaign went through a difficult implementation phase, but now both industry and customers reap the benefits.

“The rewards for consumers are fairly obvious,” observes Van der Watt, before observing that “rewards for FSPs are slightly more ‘discreet’, mostly through simplified product offerings, better customer relationships and enhanced information about customers that can assist in future decision making.” The next logical step is to introduce a stronger culture of consumer responsibility to ensure consumers accept greater responsibility in their financial decision making.

South Africa’s take on TCF is slightly different. One of our readers asked why the FSB continues to follow the FSA considering the “the damage the FSA has done and continues to do to England’s once proud, once world class insurance industry.” This reader hopes the TCF initiative will underpin a genuine attempt (by the FSB) to simplify legislation and regulation. If they succeed we will see less prescription, with the emphasis shifting to common sense and consumers shouldering more responsibility.

TCF in South Africa

You cannot regulate by simply drafting a new piece of legislation, setting an enactment date and then throwing the industry to the wolves! One of the critical issues for the success or failure of TCF will be the FSB’s ability to enforce it. Van der Watt reckons success (in this case) could be a function of budget. If the local regulator had an extra R250m to implement, monitor and enforce the TCF programme to the level that their UK cousins have done, success is virtually guaranteed. “But South Africa doesn’t have this kind of cash available, and one would hope that the FSB would recognise this early enough and simplify implementation,” he says.

It’s also important for the new regulation to match the FSB’s stated intention. The FSB says: “As part of the move towards a more principles-based approach we are keen to avoid introducing new detailed rules. And we are working to remove such rules where possible, for example by simplifying the Conduct of Business Sourcebook for investment business!” Will they meet their promise not to introduce new rules as part of the TCF and rely on firms and senior management to simply “focus on the principles and the outcomes for consumers that they are looking to achieve?”

Can the FSB implement without ‘hard’ rules?

One of our readers is particularly impressed with the FSB’s use of phrases such as ‘avoid new rules’, ‘removing rules’ and ‘no new rules’. He favours a move away from prescription and urges all industry stakeholders to ‘wait and see’ what the FSB comes up with. Says Van der Watt: “TCF is going to take hold in SA and taking implementation lightly is not an option.” He suggests the battle is half won if all industry stakeholders engage early, take a pro-active stance and show enthusiasm! Instead of focusing on the likely failure of new regulatory interventions we should embrace the changes and shape them for maximum impact.

Editor’s thoughts: There have been numerous legislative and regulatory changes since the FAIS Act revolutionised the local financial advice space in 2004. Perhaps local financial advisers are still struggling to come to terms with the full impact these requirements have on their businesses. Do you believe local financial services professionals react too negatively to proposed regulatory change? Add your comment below, or send it to gareth@fanews.co.za