Overwhelmed with the burden of regulatory reforms

Over the last year and a half, there has been a lot of commentary on, and changes to the regulatory landscape, particularly as South Africa seeks new ways to soften the impact of COVID-19 on businesses (particularly financial services businesses).

Analisa Ndebele, Candidate Attorney, Lenee Green, Senior Associate and Mateen Memon, Associate at Webber Wentzel focused on some of the most significant developments over the past year. 

Some developments over the past year

“The Financial Sector Conduct Authority (FSCA) and the Prudential Authority (PA) published various communications, media statements, directives and notices directed at the financial industry during March and April 2020. They provided a great deal of regulatory and supervisory guidance, including relief for financial services institutions during this uncertain time,” said Ndebele, Green and Memon.

“Significant legal precedent arose from COVID-related litigation between insurers and policyholders, as the courts were tasked with interpreting ambiguous policy provisions to determine whether the impugned policies also covered COVID-19-related claims. The FSCA also published Communication 11 of 2020 (dated 26 March 2020), which required pension funds to consider all requests received from employers or fund members to suspend or reduce contributions during the hard lockdown,” added Ndebele, Green and Memon.

“The Authorities also issued several communications and directives in response to COVID-19. They expressed their concern about the impact of the pandemic on the financial soundness of the insurance industry and emphasised the importance of engaging with them when solvency problems arise. They extended the timing of reporting requirements (not only for insurers, but also for mutual banks and banks). The Authorities expected an increase in claims would occur across different lines of business (such as business interruption, consumer credit, credit life, life risk and funeral policies). Reporting requirements, including disclosures by insurers, have evolved further,” they continued.

“In terms of premium relief and complaints handling the Authorities proposed that insurers consider providing outstanding premium relief to policyholders affected by the pandemic. Therefore, insurers were tasked with finding ways to assist their policyholders while maintaining sound risk management and governance practices,” they said.

“On the business interruption front, the various lockdowns prompted many businesses to lodge claims against their insurers for business insurance cover. The FSCA found that it had no reasonable grounds to intervene when COVID-19 was clearly not covered in the standard business interruption policy because there was no physical damage to the business premises covered under the policy. The FSCA's engagements with insurers found that most insurers deemed that only a small percentage of policies with business interruption cover actually had specific extensions for infections or contagious diseases. At that stage, the industry's interpretation was that the pandemic would only be covered if the loss of business income was due to the business being interrupted by localised COVID-19 infections, not other actions such as the lockdown introduced by government,” said Ndebele, Green and Memon.

“In terms of recent and ongoing legislative intervention, the FSCA has proposed amendments to the Policyholder Protection Rules (PPRs). The proposed changes are intended to align with the FSCA's mandate of protecting financial customers and promoting their fair treatment by financial institutions, particularly with regards to the reinstatement of policies and non-payment of premiums by policyholders. In Communication 14 of 2020, the FSCA also set out its expectations of insurers and financial services providers (FSPs) regarding collection of premiums for assistance business policies (funeral policies) in the new environment and contact restrictions,” they said.

“One of the most significant developments has been the need by FSPs to conduct business online and to ensure that their employees can work from home (where possible and necessary in light of essential services exemptions) by ensuring that their policies and systems are updated, and protocols are in place to protect information and avoid cyber-attacks and data breaches,” they continued.

Product innovation and policy wording

“The initial exposure for the insurance industry was expected to be minor, as most insurers believed that there was no connection/causation between the interruption of businesses and the government-imposed lockdowns. The proliferation of litigated claims has,  however, almost forced the insurance industry to reconsider its initial stance,” said Ndebele, Green and Memon.

“Insurers have had to adapt to ever-changing circumstances (fluctuating lockdown levels) and become flexible in their approach towards upholding customer/policyholder fair treatment while protecting their businesses,” they added.

Is the industry over-regulated?

Ndebele, Green and Memon said, “The South African insurance industry (along with the broader financial services industry) has remained overwhelmed with the burden of regulatory reforms introduced in 2018 through new and amended legislation.”

“The Twin Peaks model was implemented by the Financial Sector Regulation Act 9 of 2017, in 2018, with the Prudential Authority regulating prudential requirements and the Financial Sector Conduct Authority regulating market conduct requirements. There is, however, considerable overlap in their mandates and operations. In some instances, the regulatory framework can over-regulate certain aspects instead of following a risk-based, customer-focused approach. Certain parts of the regulatory framework do not cover technological developments such as cryptocurrencies, AI and other fintech offerings. Changes such as the introduction of the Conduct of Financial Institutions (COFI) Bill do show signs of positive reform,” they added.

Mitigate the risk of non-compliance

“Undoubtedly one of the industry's key learnings from the uncertainty of the past two years has been the importance of adaptability, particularly in restrictive environments. Brokers and advisers will have to consult frequently with compliance personnel at their organisations to ensure that regulatory developments (and their impact) are flagged during the initial commentary stages,” they continued.

“Also, as required by the Fit and Proper Requirements, Continuous Professional Development (CPD) and ongoing training programmes are of utmost importance. Attendance at regular training programmes, "plain language" and integrated company policies, together with effective management, are ways to mitigate the risk of non-compliance. Innovative risk-based solutions will assist in ensuring that compliance requirements are geared toward organisational requirements. The digital communication capabilities of institutions will need to adapt to the new digitised 'normal' too,” they said.

They concluded by saying that there are always going to be external factors that affect the manner in which firms conduct business. “What the pandemic has shown us is that flexibility is required in terms of the manner we conduct our business.”

Writer’s thoughts
The industry is bracing itself to deal with the regulatory changes, and brokers and insurers need to stay well informed of the effects of these changes. Knowing the “what” is not enough anymore, knowing “how” is now the key to ensure we manage the journey ahead. Many, however, believe that what we need is less regulation not more. Do you believe the industry has overwhelmed itself with its own excessive regulation? Please comment below, interact with us on Twitter at @fanews_online or email me - myra@fanews.co.za

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