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Local banks enter the era of high touch conduct regulation

13 July 2020 Gareth Stokes

The Conduct Standard for Banks, newly introduced by the Financial Sector Conduct Authority (FSCA), gives valuable insight into the hands-on approach the financial services regulator will take in achieving pro consumer outcomes. The standards were issued in line with the explicit mandate given to the authority under the Financial Sector Regulation (FSR) Act to regulate and supervise the conduct of banks in relation to the provision of financial products and services.

The FSCA expanded on the introduction of these standards at a media briefing held 8 July 2020: “The Conduct Standard for Banks is a new regulation that requires all banking institutions to comply with the promotion of the fair treatment of customers”. The authority will now actively monitor banks’ conduct against these standards and take various actions to ensure that banks achieve customer-centric culture, strategy, and governance. “We want to improve the outcome for customers,” said Kedibone Dikokwe, Divisional Executive for Conduct at FSCA. “Banks will have to make sure that they have better disclosures and that their product offerings are designed and targeted at appropriate customer groups”. 

A huge milestone for bank customers

The authority welcomed the Conduct Standards for Banks as a “huge milestone for the banking sector” that would require a “fundamental shift in the culture and mindset of the industry”. It observed that banks would have to change their value systems to ensure that the intended conduct culture cascaded from top to bottom through the bank. They indicated that banks’ boards and CEOs would have to achieve the fair treatment of customers without obsessing over their bottom line. “Banks have to conduct themselves in an acceptable manner, they have to be ethical, and must be accountable to their customers,” said Sindiswa Makhubalo, Head of Banking at FSCA. The FSR Act gives the authority wide powers to issue fines and penalties if they believe a banking practise is unfair or if a bank’s treatment of customers is inconsistent. 

Banks deserve credit for increasing access to financial services among the country’s low income earners; but draw plenty of criticism for failing to engender trust in this segment. “The FSCA is advocating for the fair treatment of customers and will serve as a sounding board for them,” said Makhubalo, before adding that the partnership between the authority and the banking sector was not adversarial. The Conduct Standard for Banks will ensure that the products and services marketed and sold by them meet the needs of identified customer groups. “We want to ensure that the bank’s culture accommodates the needs of the customer,” said Dikokwe. “This means that products must be suitable for their target markets, that product disclosures are made in a language that the target market will understand, and that the product delivers what it is meant to deliver”. 

Acting against poor practices

The FSCA’s interventions in the banking sector will be informed by customer experiences, especially those that result in complaints being taken to the Banking Ombudsman. “There may be individual complaints that signal a broader conduct issues and we will intervene in those areas,” said Makhubalo, mentioning recent issues around fraudulent debit order syndicates. The media has highlighted countless poor banking practices in recent years. Another frequent complaint stems from debit order instructions being  processed against accounts despite the customer not having signed an instruction. Banks would illegally take the money and then levy a fee if the account had insufficient funds. Product disclosure was also singled out as a major source of discomfort, as evidenced during the ‘selling’ of recent COVID-19 payment relief schemes. The pros and cons of taking payment holidays were not always adequately communicated to customers. 

Some of the comments made during the media briefing suggest the FSCA will be more involved in influencing banks’ operational decision making than expected. The authority observed, for example, that while the setting of maximum interest rates is the domain of the National Credit Regulator, the FSCA would scrutinise the fees charged by banks for various transactions. “Fee charging was one of the issues flagged by the World Bank diagnostic report, commissioned by the National Treasury in 2017/18, and we will look at fees that customers are charged and the output of the product they are paying the fees for,” they said. The authority has indicated that it will intervene where it believes banks are charging excessively; but banks should play close attention to how the unfair treatment of customers might be revealed. 

Is benchmarking anti-competitive?

One area is through feedback from existing customer complaint mechanisms, most notably the Banking Ombudsman. Another, perhaps more concerning, is by way of benchmarking exercises undertaken by the FSCA. “We will check and compare the fees that are being charged [by different banks] on, for example, a start-up account,” said Makhubalo. “We pull market information, look at the fees charged, and if we feel the bank is out of line compared to its peers, there will be engagements. Pricing is going to be important”. Does this mean that the authority will contribute to an anti-competitive role of price fixing in what is meant to be a competitive banking market? Only time will tell. 

The authority’s final message to the banking sector was clear: “The customer will now have confidence that the bank he or she is banking with will make his or her fair treatment central to its business”. This, they said, was a big win for customers on the journey to restore trust in the banking sector. “The customer has a voice,” concluded Makhubalo. “They can now feel empowered to raise issues with, and challenge the conduct and behaviours, of their bank. There will be no fear of victimisation and they will have the comfort of knowing they can escalate issues with the conduct authority”. 

Writer’s thoughts:
The last piece of South Africa’s financial services conduct regulation will soon click into place with the long-awaited implementation of the Conduct of Financial Institutions (COFI) Bill. This regulation will ensure the consistent supervision of conduct across the financial services sector. Are you comfortable with the level of intrusiveness hinted at by the FSCA during the launch’ of its Conduct Standards for Banks? Please comment below, interact with us on Twitter at @fanews_online or email me us your thoughts [email protected].

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Added by Quinten Knox, 13 Jul 2020
This is going to be fun!
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