FSB provides important clarity on Twin Peaks

20 November 2017Jonathan Faurie
Caroline da Silva, Acting Deputy Executive Officer for Insurance at the FSB

Caroline da Silva, Acting Deputy Executive Officer for Insurance at the FSB

After years of talking about it and warning that it will become a reality, the Twin Peaks Bill is set to be signed off by the president and has promised to be implemented at some stage in 2018. If government has its way, this will be in the first half of the year; however, there could be delays.

As with most discussions related to regulatory reform, the implementation of Twin Peaks has left the industry with more questions than answers. In an effort to address certain issues, the Financial Services Board (FSB) recently published a newsletter where it addresses some of the issues it feels are the most important. 

An issue of quantum

One of the biggest qualms the industry has about Twin Peaks is that it will come at a significant cost to the industry, a cost that smaller companies will not be able to easily bare. 

According to the FSB, this may not be the case. 

In the FSB newsletter, Caroline da Silva – Acting Deputy Executive Officer for Insurance at the FSB – said that while implementing the Twin Peaks model will have cost implications, from a market conduct perspective, these costs will be appropriate compared to the size of the financial sector’s assets and revenues. 

“The extension of the jurisdiction of the Financial Sector Conduct Authority (FSCA) – the entity that the FSB will transform into once Twin Peaks is implemented – to all financial institutions including banking, and aspects of the conduct of certain credit providers, means that these institutions will pick up the appropriate portion of these additional costs where resourcing is required to enable their supervision,” said Da Silva. 

She added that over and above the extension of jurisdiction, the proactive, risk-based and outcomes-focused approach to regulation and supervision under Twin Peaks will require some different skills at the FSCA which implies additional costs. 

“These include strong research skills, data analytic capability, Fintech capability and the use of Fintech to supervise and regulate just as a few examples. These initial costs however should be justified over time by greater efficiencies and embedment of appropriate risk based supervision, which for many will result in an alleviation of costs but not responsibility,” said Da Silva. 

How these costs will be covered was not discussed. One would think that this cost would be passed onto insurers in some way, shape or form. Insurers are already under pressure when it comes to increasing costs. How much more can they take before it is passed down to clients? 

Enforcement issues

One of the characteristics of twin peaks is that there will be a division of powers. The South African Reserve Bank will become the Prudential Authority (PA) which will craft and implement laws, and the FSCA will be responsible for ensuring that the laws are adhered to. 

The FSB newsletter points out that the Twin Peaks model will follow a similar hybrid approach, while introducing new instruments to give regulators more room to apprehend transgressors. 

The FSCA will continue where the FSB left off; it plans to continue with the Financial Services Tribunal, which fulfils the role of independent arbiter to challenge administrative actions. 

The FSB points out that while the authorities may take an administrative action on their own, all administrative actions can be appealed to the Tribunal and reviewed by the courts. 

A range of options

The FSB newsletter points out that if the future PA or FSCA detects a breach of a financial sector law – including breaches of a prudential or conduct standard – it faces a range of decisions. 

The authority can impose administrative penalties, or institute criminal prosecutions in relation to the offences in terms of the Financial Sector Regulation (FSR) Act or a financial sector law. 

Alternatively, the authority can choose to remedy the situation, either by issuing directives, declaring practices as undesirable, applying to the court for appropriate orders, or entering into enforceable undertakings. The aim of this remediation is to rectify the breach and ensure it does not recur. 

Broker and adviser impact

By all accounts, brokers, advisers and insurers are in for a significantly changed environment when Twin Peaks is finally implemented. 

What does this mean for advisers, brokers and insurers? If we read between the lines of the FSB comments regarding the cost of Twin Peaks, there will definitely be some increased costs in the industry. Whether the FSB can absorb this cost without pushing it onto insurers remains to be seen. What may be an impending reality is that these costs will be filtered down to insurers who would have to make the decision of whether they can absorb the costs. 

When it comes to enforcement, the FSCA will have a singular objective of making sure market conduct is sound. We have seen in the past that the FSCA is changing its ways towards a collaborative approach to make sure insurers, brokers and advisers toe the regulatory line; but the newsletter shows that they have ample backing to show force if they need to. 

Editor’s Thoughts:
South Africa needs a sustainable and diverse financial services industry; but if costs muscle smaller players out of the market, are we achieving anything?  Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts


Added by Ayanda, 20 Nov 2017
Dear Nursee, we already have vast amounts of legislation "to curb market abuses". We already have "a body that monitors products being marketed." Indeed, there are several of them.
The plethora of extant SA laws already provide more than adequate protection against anyone "producing 'small print' T&C's which clients will not read".
You are indeed correct about there having been "little or no attention paid to the Emerging Black Market and job creation."
You are also spot on when you observe that "many Blacks have entered the industry and soon left it."
This is largely because of commission regulation, soon to be substituted by entirely unfathomable RDR provisions which will make sure that no more blacks ever join the industry.
The whole thing needs a re-think from beginning to end.
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Added by Peter, 20 Nov 2017
Continually increasing the level of regulation will not improve outcomes or the economy. Twin Peaks falls under the National Treasury so start there. Start by reading Jacques Pauw's book and you will quickly learn where "regulation" is needed to protect the SA people. SARS is a good place to start. That falls under Treasury. In general the financial services sector is pretty good. You are trying to fix what is not broken. Start by introducing real fit and proper requirements and accountability into parliament.
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Added by Nursee Parannath, 20 Nov 2017
All well and good. We do need legislation to curbs market abuses. We also need a body that should monitor products being marketed. Here I refer to subtle "Conditional Selling" and Rewards Progammes that continually shifts the 'goal posts'
I foresee the industry producing 'small print' T&C's which clients will not read in order to protect themselves.
Little or no attention is being paid to the Emerging Black Market and job creation. Many Blacks have entered the industry and soon left it.
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Added by sceptic, 20 Nov 2017
In a growing economy with lots of new investment flowing in this may be palatable. In SA with our economy in tatters and no climate or incentives encouraging new investments, this proposed legislation just increases the costs of doing business and acts as a deterrent to new investments. When will our politicians and bureaucrats learn that you cannot legislate economic growth - you can only create a climate that is conducive to doing business. The burden on the backs of existing businesses is going to destroy jobs as financial products become even more unaffordable and employers cut jobs to save costs.
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Added by Ayanda, 20 Nov 2017
1. The costs of this inscrutable jumble (see Free Market Foundation’s YouTube video explaining how twin peaks cannot possibly work as it is) WILL all automatically be passed on to all bank clients and policyholders, as with every other tax. You may be assured that no bank or insurer is going to “absorb” a single penny of them.
2. The Treasury’s attempt to compare the size of these massive costs with the so called “economic value add”, assets or revenue of banks and insurers is a red herring and complete eyewash. What counts is the value of benefits received as compared with the costs incurred. Clearly, they have not been able to demonstrate any net benefits of twin peaks. Time will confirm this.
3. Out of over 200 member nations of the International Association of Insurance Supervisors, only 3 have experimented with twin peaks. It is therefore most definitely not “international best practice”.
4. Absolutely no empirical research has been done to justify this gigantic folly. No alternative systems were examined and no comparisons drawn. It just looked like a “jolly good idea” and a marvellous way to secure certain bureaucratic jobs and privileges.
5. The civil servants have generated all of this ab initio with little input from industry other than “comments” on forgone conclusions.
6. The role of Banks and Insurers as the essential handmaidens of commence in our economy is far too critical and important to be left in the hands of state employees in this way.
7. If cooperation and “collaboration” is genuinely wanted, we must start with independent empirical research to establish precisely what SA’s problems really are. They can then be prioritised by agreement and worked on systematically with full and effective industry participation, not just by commentary on what has been dished up by people who are undoubtedly of good intentions, but who are otherwise unknowingly the source of immeasurable harm.
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Added by Ari, 20 Nov 2017
It is not just the financial costs that will increase - it is also the huge amount of additional administration, documentation (just read the proposed amendments to complaints management in the Code of Conduct), operational ability requirements, qualifications and training requirements, etc, etc. There will be a hugely reduced time available to actually render financial services to clients . . .
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