Climbing the regulatory mountain
We live in uncertain times… And the insurance sector plays a vital role in protecting us from the loss events that these uncertain times bring. In his keynote address to The Insurance Conference, held at Sun City recently, Mr Ismail Momoniat of National Treasury acknowledged the insurance industry for the contribution it makes to South Africa’s economy and the financial services sector as a whole. But he soon shifted gears from praise singer to legislator – after all – the conference organisers had invited him to share government’s thinking on financial sector regulation, with specific reference to the insurance sector.
Lessons from the global financial crisis
“When a major bank or insurance company goes under its capable of spreading to other institutions, because there are so many interlinks s in the global financial system,” said Momoniat as he reminded the audience of the global events that forced economies around the globe to rethink their financial services regulatory environments. Lehman Brothers in the US was the first in a chain of financial institutions that suffered due to poor regulatory oversight and abysmal market conduct. The world soon learnt that if one bank goes, many others can follow. The lesson: You cannot simply regulate on a bank by bank basis – you have to look at the entire sector.
Although South Africa’s banking sector survived the financial contagion relatively unscathed the country was unable to dodge the ensuing recession. “We lost a million jobs,” said Momoniat, “And South Africa’s loss of jobs was in greater proportion than any other G20 economy!” In the run up to the crisis – and even in the months following – the domestic financial services sector has called for self-regulation… “I don’t think anyone today can justify an approach of light touch regulation,” he said. A single banking disaster in the US resulted in a knock-on through the financial system in Europe, Japan and most developed economies around the globe. How should we react?
South Africa is still working on its response to the global financial crisis. In broad brushstrokes the country will be moving to a so-called Twin Peak model to regulate the financial services sector. Stakeholders who want a better understanding of this model can visit the National Treasury website (http://www.treasury.org/) and download the discussion document titled: A Safer Financial Services Sector to Serve South Africa Better. Many of the regulatory proposals discussed in this guide were in direct response to the financial crisis. The aim of the document, said Momoniat, was to strengthen financial sector regulation, broaden access to financial services products, and to protect the integrity of the sector by eliminating money laundering and other criminal activities. And one of its primary objectives is to ensure a sector-wide approach to bank risks.
Unpacking the “Twin Peaks” model
The key response advocated by Treasury is to move from a single registrar model – where, for example, the insurance industry is regulated by a single “registrar” within the Financial Services Board (FSB) to a Twin Peaks model. The model, which would apply to each sub-sector of the financial services industry, includes a prudential element (to ensure the financial safety of the institutions in question) plus a market conduct element (to regulate the way each institution conducts its business). In the insurance sector the Solvency Assessment and Management (SAM) program addresses prudential issues while the Treating Customers Fairly (TCF) regulation tackles aspects of market conduct. Going forward these cannot be viewed separately.
“The prudential regulator operates from within the South African Reserve Bank,” says Momoniat. “The banking regulator will form part of the prudential authority within the SARB – and certainly a component of insurance will also be regulated from there.” He reminded the audience that these changes were unlikely to be implemented overnight. It is early days and Treasury is still discussing aspects of the Twin Peaks model with industry stakeholders. Market conduct will have to be carried out through a separate regulator. At present the thinking is that the FSB will become a market conduct and consumer protection regulator for the financial services sector as a whole!
A regulatory safeguard against disaster...
Momoniat says National Treasury’s Twin Peaks document was not a knee-jerk response to the financial crisis. The document had been on the drawing board since 2007 and was intended to tackle a range of concerns in the domestic financial services space. The global financial contagion has simply accelerated the process.
In conclusion, he said: “The short-term industry faces many challenges and opportunities in the light of greater uncertainty globally. In the wake of the financial crisis the financial sector might not be as profitable as before, certainly in the banking sector where higher capital requirements have been introduced. The industry will have to adapt to tighter prudential challenges and significantly improve market conduct going forward.”
Editor’s thoughts: The Twin Peaks model outlined by National Treasury seems well thought out… The main concern, given the amount of new legislation the industry is already wrestling with, is whether the sector has enough resources to participate in the development of new legislation – and to effectively implement and enforce such legislation subsequently. Is the financial services industry in danger of being regulated to death? Please add your comments below, or send them to gareth@fanews.co.za
Comments