Financial services increasingly overregulated

The Insurance Institute of Gauteng (IIG) recently hosted an IIG Insights webinar, on the industry outlook for 2021.

Patrick Bracher, Director at Norton Rose Fulbright, gave a brief overview on the regulatory developments of the Retail Distribution Review (RDR), the Conduct of Financial Institutions (COFI) Bill and more. 

An overregulated industry

“Financial services are becoming increasingly overregulated. There are excellent examples of the international world of business being enhanced by simplifying regulations. The state of Delaware in the USA has the lightest touch company laws and most American companies are registered in that state. The British Parliament has formed a committee to find ways to cut down laws relating to the financial service industry,” said Bracher. 

In South Africa, Bracher says the laws are metres high if you print them and put them in a pile. “This has two serious effects on business. Firstly, insurers are spending more and more time on the details of compliance, instead of the details of treating customers fairly and creating successful products and services. Hundreds of millions of Rands are being spent on compliance. On the other side, the regulators are being drowned in their own regulations. The complexity is such that it is hard for even the regulators to keep up. Changes of personnel dealing with issues leaves serious gaps in institutional knowledge which leads to uncertainties and delays.” 

“On the positive side there does seem to be an instinct amongst the leadership of the Prudential Authority and the Financial Services Authority to deal with matters decisively and without nit-picking. And treating customers fairly has leapt forward,” he added. 

Updates on RDR

“The Retail Distribution Review (RDR) began in 2014 and has shown positive and negative results. The RDR results from the intention to ensure that intermediary remuneration must be limited. The cumulated growth of commission, of binder fees, outsource fees, brokers fees and other payments needs to be regulated, but in a coherent fashion,” said Bracher.

“The latest word on the subject, is the Intermediary Activity Segmentation and Related Matters document, dated December 2019, which focuses on curbing outsourcing and premium collection activities,” he continued.

“The FSCA proposes to clarify the delineation between the various activities such as: carving advice and advice-related activities out of the definition of “services as intermediary” (as if most insurance can be sold without giving advice), developing additional conduct standards; and amending existing laws and providing guidance notices under section 141 of the Financial Sector Regulation Act,” added Bracher.

Update on the COFI Bill

“This leads us to the other problem of over-regulation, namely the Conduct of Financial Institutions (CoFI) Act, currently in the form of the COFI Bill,” said Bracher.

“The COFI Act will be framework legislation and backed by a mountain of conduct standards which will replace the legislation repealed by the Act, such as the Long Term Insurance Act, the Short Term Insurance Act, the FAIS Act, the Financial Institutions (Protection of Funds) Act, and major amendments to the Financial Sector Regulation Act (20 pages) itself, as well as the Pension Funds Act (24 pages) and other laws. That is going to take a lot of new learning and compliance,” he said.

“In addition, the basis of the law is to create principles rather than black-letter laws and the continuing debates between regulators and the regulated will be never ending as to the spirit of the law. At least the idea is to refine the licensing process, with only one license being required. It took a full two years to get insurers re-licensed, and this may be another extended period of uncertainty,” he continued.

“Downloading everything that is in the FAIS Act and its regulations into conduct standards is going to be a massive undertaking and coping with them even more massive. We hope the regulator will point out exactly where the conduct standards differ from the existing laws, so that we know what is familiar and what is not,” he added.

“One of the issues is the intersection between the business of a medical scheme and the business of an insurer, which is still not resolved and is still doing nothing for policyholders who cannot afford medical scheme membership. The process has been conducted very slowly by the Council for Medical Schemes (CMS), and no-one knows what is to happen in the future, particularly by the deadline date of March 2022,” he said.

Debarment and outsourcing

The big hope, according to Bracher, is that the COFI Bill and its conduct standards will create a rational and manageable process for debarment of representatives. “The COFI Act intends to go back to the system, whereby licensees will debar their current and former employees within six months from rendering financial services, if they are not fit and proper. Currently, the FSCA and consequently the Financial Sector Tribunal are being overwhelmed by debarment challenges when their resources should be applied to more principled matters.”

In terms of outsourcing, Bracher mentioned that there is a major standoff between insurers and intermediaries on the one hand, and the FSCA on the other hand.

“The basic principle to remember is that a binding authority is a subset of outsourcing. The FSCA published a list of ancillary activities which are ancillary to binder functions. Therefore, the ancillary activities listed are outsourced activities by an insurer. It follows that if there is no binder agreement in place, those activities can be outsourced to a non-mandated intermediary on an outsource basis. They cannot magically then become an ancillary activity of an intermediary service. There is also no agreement on whether the list of ancillary activities are truly ancillary activities to binder functions and whether everything on the list is incorporated in the binder fee. However, an application can be made to increase the limited binder fees (for advice givers) if the additional costs can be justified. They can also be increased for non-advice intermediaries if the amount can be justified as commensurate with the services rendered. It becomes a matter of careful and persuasive activity-based costing linked to the actual cost and efficiency of the activities,” he said.

“Policy administration does not come without a cost. If it is genuinely carried on by the intermediary, and not the insurer, it has to be fairly remunerated because, if there is no duplication, there is no additional cost to the consumer. These issues are being played out all the time and it will need some kind of consensus or a decision of the Financial Sector Tribunal or the courts on review under the Promotion of Administrative Justice Act,” added Bracher.

Premium collection developments

“The most recent premium collection developments are found in the FSCA Communication 1 of 2021 and Exemption Notice 1 of 2021 relating to the direct collection of premiums by certain independent intermediaries. The documents are aimed at collection facilitation agents such as Fulcrum and QSure,” said Bracher.

“The exemption, which expires on 31 January 2022, is to enable the direct collection method administered by a third-party collection agency. It allows the agency to charge additional remuneration over and above the regulated commission, relating to the services rendered in facilitating the collection of premiums and managing the allocation of funds. The document is based on the incorrect premise that intermediaries and third-party premium handlers are “accounting for premiums” which is an intermediary service. The collection agencies never handle the premiums and do not account for them. The intention is also to stop the brokers who handle debit order issues from earning anything, in addition to commission, which is unfair on them,” emphasised Bracher.

“Strangely the law appears to require an additional agreement between insurers and premium collection facilitators other than existing outsourcing agreement when this is in fact an outsourced activity. There is no time before the end of January 2022 to put a whole lot of new agreements in place especially as the industry does not know what will come next. This issue is still under discussion and will be a continuing regulatory issue during 2021,” he said.

Writer’s Thoughts:
Bracher concluded by saying what we need, therefore, is less regulation not more. The industry will be bracing itself to deal with the COFI Act and the best thing the regulators can do is to boil all the new laws down to their basic, plain language essentials. Do you agree? If you have any questions please comment below, interact with us on Twitter at @fanews_online or email me - myra@fanews.co.za

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