Another dose of consumer protection
South Africa is awash with consumer protection, and our financial services consumers are among the best protected in the developed world. Advisers in the financial services space have long been governed by the Financial Advisory and Intermediary Services (FAIS) Act and the provisions of the General Code of Conduct for Financial Services Providers and their Representatives (the Code). In recent years the National Credit Act and Consumer Protection Act have been added to the long-suffering consumers’ protection toolkit. Stakeholders in the industry must be insane to try and slip an anti-consumer provision into their product design or sales agreement. But it still happens.
The Financial Service Board (FSB) – the statutory body tasked with the promotion and maintenance of a sound financial investment environment – wants to expand on the ‘fair treatment’ concept for consumers of financial services products. This objective ties in with its goals of ensuring the soundness of financial institutions and the integrity of financial markets and institutions. Sounds like a mouthful! What exactly is the FSB proposing?
Another trip in the colonialist’s shoes
In a nutshell, they hope to copy their UK peer (the Financial Services Authority) in implementing a Treating Customers Fairly (TCF) programme. “Issues concerning the fair treatment of customers arise as a combination of factors and include those related to market failures, firm incentives and consumer behaviour,” notes the FSB. “One of the key market failures is that market participants don’t possess perfect information.” Does the FSB really believe it can ‘legislate’ against imperfect market information? We’re not talking about stock markets, so we concede they may have limited success.
Essentially TCF requires product providers (and other firms) to consider the treatment of their customers at each and every stage of the product life-cycle, including design, marketing, advice point-of-sale and after-sales. Regulators and consumers will be over the moon, but those generating profit from the financial services space will be less enthusiastic.
Why is the TCF campaign so important? The typical financial services consumer only learns of product defects some time after the purchase, usually at considerable cost. “For example, it may be left to the heirs of a customer to find out if the insurance policy under consideration was a fair one.” Regulators want to take a more proactive stance and move away from the ‘default and compensation’ system currently in place. We interpret this as wanting to steer away from selling questionable products and leaving it up to the consumer to fight for his/here rights when product performance isn’t up to scratch.
Tilting in favour of the consumer, again...
The intention will be to create fair outcomes for consumers by creating a set of outcomes focused rules with positive (recognition) and negative (fines) incentives for non-compliance. The good news is regulators want to keep things simple. Six specific outcomes were identified in the UK TCF campaign, which will no doubt guide the FSB as they draft a South African solution:
1. Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture, as demanded in outcomes two through six.
2. Products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups and are targeted accordingly.
3. Consumers are provided with clear information and are kept appropriately informed before, during and after the point of sale.
4. Where consumers receive advice, the advice is suitable and takes account of their circumstances.
5. Consumers are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard and what they have been led to expect.
6. Consumers do not face unreasonable post-sale barriers to changing product, switching provider, submitting a claim or making a complaint.
What must advisers do?
Although we welcome the UK TCF focus on product houses we thought we’d focus on ‘advice’ due to our readers mostly operating in that space. Some of the ‘advice’ practices the UK policy hopes to address include: the appropriateness of commissions structures in the long-term insurance space and the use, by banks of associated insurance companies. As we read these ‘concerns’ we couldn’t help wondering why the FSB is intent on implementing a local version of TCF. These protections are built into existing legislation, and there’s surely no point in creating another lengthy document just because the UK (or any other regulatory authority) is doing so. Perhaps these regulations are going to be aimed entirely at the product providers – in which case financial advisers will heave a collective sigh of relief!
Editor’s thoughts: The FAIS Act governs how financial services providers interact with product providers, regulators and consumers. Insurance companies and other product providers are generally regulated by legislation specific to their industry, such as the Short-term and Long-term Insurance Acts. Should we legislate how product providers interact with advisers and consumers? Add your comment below, or send it to gareth@fanews.co.za
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