Profitability during regulation

30 January 2017 Jonathan Faurie
Jonathan Faurie, FAnews Journalist

Jonathan Faurie, FAnews Journalist

Jeffreys Bay, Bondi Beach and Hawaii are well known locations among the surfing community and are famous for some of the biggest and “gnarliest” waves in the world. In a sense, this is the situation facing financial services providers – as well as brokers and advisers – who are facing the regulatory tsunami that the Financial Services Board (FSB) has been implementing in the industry over the past couple of years. This year is an important year as the tsunami threatens to make landfall as Twin Peaks becomes a reality.

But can insurers, brokers and advisers, remain profitable while riding this wave? FAnews spoke with Leanne Jackson, Market Conduct Strategy Adviser at the FSB, to find out more about the regulator’s thinking on this issue.

Keep calm and carry on

The industry is concerned that the regulatory tsunami that they face will cause unintended consequences. We pressed Jackson about this issue and she assured us that the FSB has the best interests of the industry at heart.

“2017 will indeed be a busy year on the regulatory front, with a number of market conduct regulatory reforms that have been in the pipeline for some time approaching finality.  In almost all cases however, these reforms have already been through extensive previous rounds of consultation - some of them over a number of years - with still more consultation planned.  Industry players will therefore have had the opportunity to consider, plan for and help shape the changes before they are finalised, and there should be no material surprises,” said Jackson.

In addition, Jackson added, the FSB has made it clear that reasonable implementation timelines and transition measures – including phased implementation in a number of cases – will apply, to allow firms to make the necessary changes to their business models and processes.

“It is clear from our interaction with a wide range of regulated entities that many of them have for some time been taking proactive steps to prepare for these reforms.  We urge those who may have been less diligent in monitoring regulatory developments to familiarise themselves with the pending changes as a priority,” pleaded Jackson.

The issue of profitability

Profitability is at the heart of any business, we asked Jackson what advise could the FSB provide companies who want to comply with regulatory reform and remain profitable.

“For financial institutions to treat customers fairly and earn consumer confidence, they need to be sustainable and competitive. Profitability is of course a key component of sustainability - but not at the expense of fair customer outcomes.  Conversely, business models and practices that fail to deliver consistently fair customer outcomes will ultimately not be sustainable. We have therefore emphasised that, in addition to our core consumer protection objective, our regulatory reforms are also focussed on ensuring the sustainability of businesses who meet the necessary market conduct standards,” said Jackson.

She added that related to this are additional key objectives of supporting financial inclusion and financial sector transformation.  “We therefore believe that the enhanced market conduct standards we are introducing largely reflect good business practices that customer centric financial institutions should be adopting in any event, ultimately yielding business benefits,” said Jackson. 

Having said this, the FSB does recognise that implementation of some of its specific requirements, for example new reporting requirements, will inevitably entail costs; most notably at the initial implementation stage.  The FSBs aim is to apply requirements in a proportional way, particularly to minimise inappropriate administrative burdens for smaller and emerging businesses.

Binder worries

There has been some concern of late that the binder model that currently exists in the industry is starting to become inadequate in certain places and needs to be looked at as a matter of urgency. The FSB has noticed this and has come down hard on certain binder arrangements of late.

So what is the future of this model?

“We believe we have been clear on the need to minimise the inherent conflicts of interest that currently exist in these arrangements.  In addition, our supervisory findings and technical analysis work have strongly reinforced our view that too many current binder and outsourcing arrangements do not demonstrate the savings and efficiencies one would expect from an outsourcing arrangement; are subject to inadequate insurer oversight; entail poor customer data management; and generate fees that are not supported by any meaningful activity based costing,” said Jackson.

She added that the FSB’s binder and outsourcing reforms are aimed at addressing these failings. If it is the case that any particular intermediary business is simply not able to generate a profit without also being able to demonstrate clear efficiencies, good governance and data management, avoid conflicts of interest and deliver fair customer outcomes, then the business is not sustainable. 

Editor’s Thoughts:
There is no doubt that despite fair warning from the FSB, there is still a lot of adapting that the industry needs to do to remain profitable while adhering to compliance. This is a time to keep calm and carry on sticking to outlines provided by the FSB. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts


Added by Arnold , 30 Jan 2017
While I agree with most of the comments made by PHJ 30 January 2017 I have difficulty in grasping the 3rd last paragraph regarding the FIA serving its constituency poorly combined with comments regarding management changes at the FIA.

I am a broker member of the FIA and current chair of the FIA Board RDR Subcommittee and invite PHJ to please make contact to discuss concerns and clarify our current stance and continued process with regards to the flood of regulation referred to in the article. e-mail or tel: 012 665 0085. Please also feel free to give me a direct call. The FIA has my number.

The latest regulatory changes and its implementation are currently being studied by the FIA & member committees. Official communication will follow in due course.

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Added by PHJ, 30 Jan 2017
The above standard rhetoric is absolute hogwash.
It is clear that one major insurance company drives the whole process with their "own" connection in the FSB. Once the broking fraternity catches onto this the insurer in question might loose a lot of loyalty and it might cost them more than what they gained.
None of the income that they are taking away from binder holders is going to the client. Every cent taken from the binder holders are going into the insurer's pocket. So much for protecting the public. All binder holders will have less money and must therefore provide poorer service to their clients.
In my office I could have to let go of at least 2 people. Across the country there could be as much as 20 000 insurance broking staff that will have to be let go as per industry calculations. Hopefully they will find employment with the insurance companies who will now be pocketing the money that the binder holders are no longer entitled to.
The upside for the binder holders is that due to more insurance industry people available for employment, companies will be able to pay lesser salaries as there will be an oversupply of insurance staff.
The FSB keeps on talking about conflict of interest. I find it very strange that this term is just accepted. As a broker if I do not give my client the best deal possible he will at some point establish the fact and I will loose that client’s loyalty forever. This is bad business practise since any short-term broker’s income is small but recurring. The initial and continuous service has to be paid for by the recurring broking income.

The FIA served us very poorly indeed. And now that it becomes clear that this is the case there is a sudden change of management. I wonder?

It is the same old story since capitalism became a doctrine to serve the greedy and not the people. Capitalism was never designed to serve the greedy but to motivate people to give their best.

Once again it looks like government influenced by capitalists is just playing along at the detriment of its voters. Why would they even be remotely interested in creating job opportunities if they can create unemployment? Then again the left hand does not know what the right hand is doing.

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