Has Treasury ticked all the boxes?
It is too late to debate whether we need Twin Peaks or not. The controversial piece of legislation was recently signed into law by government.
Twin Peaks grew out of the liquidity crises in global markets in 2008 and 2009 despite the fact that - in the words of National Treasury itself - the South African financial sector did not experience the financial upheaval seen elsewhere.
FAnews spoke to Patrick Bracher, Director at Norton Rose Fulbright, to find out a little bit more about the future of the industry in a Twin Peaks world.
A convoluted situation
Bracher pointed out that the problem with Twin Peaks is what is included and what is excluded within the scope of prudential standards and market conduct standards.
"Treasury recognises that the primary purpose of Solvency Assessment and Management (SAM) - one of the key pieces of legislation which will be published after Twin Peaks is established - is the protection of policyholders and beneficiaries to align capital requirements with the underlying risks of an insurer. It is impossible in the engine room of an insurer or an insurance regulator to separate prudential risks from market conduct risks," said Bracher.
He added that solvency influences how insurers stay financially sound, but financial soundness is entirely dependent on how insurers conduct business in the market. "Pricing and reserving underwritten risks must be based on a clear knowledge of marketplace risks. Reserving for instance is not something that Treasury has any experience in, and it is not their remit," said Bracher.
The devil is in the definitions
So we are already seeing that Treasury and the South African Reserve Bank (SARB) will be responsible for legislative oversight in an area of the business that they have no previous experience in.
How successful will this be? Bracher pointed out that the devil is in the definitions. "A prudential standard made within the administration of the SARB, according to the Insurance Bill, can relate to anything to do with financial soundness of an insurer, which would include underwriting poor risks. The Prudential Authority can prescribe prudential standards on any matter that is required to be prescribed in terms of the legislation. Where does that begin or end in relation to market conduct standards?" asked Bracher.
He added to this by asking if all of the risks, for instance outsourcing, follow a combination of conduct standards or prudential issues, or will we have two sets of outsourcing standards issued by each authority?
"Where prudential issues are related to a proposed new product, it will be impossible to unbundle the role of two regulators dealing with the business of insurance. The SARB has very important functions to fulfil in this country without trying to make itself an expert in the world of insurance. Joint regulation is not feasible," said Bracher.
The elephant in the room
Bracher added that we need to address the elephant in the room; the biggest concern when it comes to Twin Peaks is the volume of legislation. The Twin Peaks Act is a highly complicated document running to 290 pages. The draft prudential standards published so far stretch to 532 pages.
"I dare say that if you gave an open-book examination to the members of parliament who passed the legislation on how the Twin Peaks system works in intricate detail, no-one would pass. It has been estimated that the regulatory architecture, besides involving three cabinet ministers and three departments (Finance, Trade & Industry and Health), will have an extensive body of councils, committees, supervisors and regulators administering more than 20 major laws and their endless subordinate legislation," said Bracher.
He added that the complexity of it all, when the industry didn't need it, is going to cost everyone involved dearly in money and time for no demonstrable benefit to the consumer over existing laws properly regulated. There is nothing wrong with the laws that were there already with few tweaks not new peaks. If the aim (and it is one of the aims) is financial inclusion, nothing is gained by overcomplicating the system for insurers, policyholders and regulators and making it impossible for new entrants.
"If instead of having buildings full of compliance people, we had buildings full of people devoted to suitable financial products and suitable financial inclusion, we would have been better off. When you add to this the need to encourage employment and transformation, massively overcomplicating the financial world is a big step in the wrong direction," said Bracher.
Editor's Thoughts:
Government wants to create a financial services industry that benefits the largest portion of the population allowable we cannot fault them on that. However, we need to ask whether they achieving this with the laws that they are passing or are they creating an industry riddled with red tape? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.
Comments
Watch this space for the dead bodies. Report Abuse
It is not going to be cost effective to work in the lower end of the market and possibly in some spaces of the more affluent market. Report Abuse