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.
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.
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 firstname.lastname@example.org.