The challenge of adopting best practice principles
Regulation has forced the financial services industry to adopt an approach where it integrates best practice principles into its corporate culture. However, how easy is it to comply with these principles, and are these principles necessarily suitable for the South African market?
The Financial Advisory and Intermediary Services (FAIS) Act has already become a mainstay of the industry, and the Financial Service Board (FSB) are now steadily forging ahead with the implementation of Treating Customers Fairly (TCF), the Retail Distribution Review (RDR), and Solvency Assessment and Management (SAM). This means that insurers will now have to adopt another set of best practice principles so that they can ensure compliance.
Casting light on grey areas
The urgency with which the FSB is expecting the industry to comply with regulation is becoming pertinent. At almost every industry event we are seeing a growing presence from the FSB with regular updates being given on the roadmap to the roll out of the regulation.
The FSB expects insurers to comply with this regulation even if it is not officially passed into law. At the 15th annual Compliance Conference, Leanne Jackson, Head of TCF at the FSB answered a number of industry questions regarding TCF.
One of the main themes of the questions was the FSB’s expectation of insurers to comply with TCF principles even if they have not been passed into law. However, the FSB has gone about this in a clever way. “The overriding framework governing TCF has been embedded in many laws which are already present in the industry. These include the FAIS Act, Binder Regulations and the Consumer Protection Act,” says Jackson who adds that the FSB is constantly reviewing the country’s legislative framework to see where TCF principles can be blended in.
The FSB is also beefing up TCF compliance monitoring. Jackson points out that during the last year there has been onsite testing of companies’ TCF commitments. “We will be looking at specific aspects such as focusing on the effectiveness rather than the sophistication of the insurer’s implementation. The next thing we will focus on is identifying conduct risk whereby insurers ask if their actions are going to be bad for the customer. Finally, insurers are required to report on TCF indicators,” says Jackson.
Unpacking best practice
Adopting best practice principles from international companies may not be the best decision for South African insurers purely because the characteristics that define international markets may not be the same as the South African market. This is particularly true when it comes to customer interaction as the expectations of South African consumers and US consumers are significantly different.
Auditing firm PricewaterhouseCoopers (PwC) defines market leading best practice as competitive positioning practices that come from market research or outreach and are adapted for company use. These practices are often derived from benchmarking and peer comparisons.
PwC adds that best practices tend to be selected and defined in isolation. Once they have a mandate, individual business and functional areas, centres of excellence and shared services often tend to implement new practices without giving sufficient consideration to downstream implications, costs or issues. New best practices come with costs, and when they are supposed to result in higher service levels, they may come with higher-than-average costs.
Accordingly, the application of new practices requires balance and compromise. They may reduce expenses in part of the organisation but they may also increase frictional costs and place an extra burden on people, process and technology elsewhere.
A common problem is that many insurers attempt to implement too many new practices in too many places. Most organisations’ ability to adapt to change is limited and change tends to be undermanaged, especially when new best practices are required by new control mandates.
Structuring a compliance function
Establishing and adhering to best practice principles will obviously aid a company when it comes to complying to regulation set out by the FSB. While many insurers think this is a difficult task, Nicky Kingwill, Senior Manager of Financial Services at KPMG points out that it is a necessary evil.
“Key to an effective compliance function is that it should operate as a truly independent second line of defence. It is when there is no clarity between the first and second line of defence that compliance becomes difficult,” says Kingwill.
She points out that the first step in getting this right is to clearly delineate between the various role players and clearly communicate the roles of each line of defence, so as to eliminate the potential for overlap and the potential for risks.
“Compliance’s role in this is to set the rules and to provide effective monitoring to ensure that the business stays within the rules. It also goes beyond mere compliance with the letter of the law, to compliance within the spirit of the law and adherence to a common set of values, so that all of the decisions taken in the business are based on the principle of doing the right thing,” says Kingwill.
Scanning the horizon for new and emerging regulatory developments is a key success factor. In any regulatory compliance function it enables organisations to remain abreast of the changing regulatory agenda and avoid being on the back foot when changes are implemented.
“It is also important not to forget or underestimate the role of an internal audit as a third line of defence,” concludes Kingwill.
Editor’s Thoughts:
There is no blanket approach that can be adopted when arriving at a fresh and invigorated design of the compliance function and it’s role and powers within the organisation. This needs to be done through interactions with brokers and clients and being aware of the unique challenges companies face. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
