Yes, the problem is overregulation

The constant lament of long-suffering financial and risk advisers has finally found traction with the singling out of overregulation as the biggest problem in the regulation of the financial services sector, especially domestically. It took one of South Africa’s most respected insurance law practitioners less than five minutes to make this observation during an insightful presentation to the Insurance Institute of Gauteng (IIG) 2023 Industry Outlook webinar.

Lessons learned from insurance case law

“The biggest problem with the regulation of financial services is overregulation,” said Patrick Bracher, Director at Norton Rose Fulbright South Africa, who based his talk on comprehensive knowledge of financial services regulation and lessons drawn from countless insurance-related cases heard in Australia, the United Kingdom, the United States, and South Africa. Local brokers, financial advisers and insurance practitioners are quite familiar with the idea of overregulation, practising as they do under a twin peaks regulatory framework based around both conduct and prudential regulations. They have to comply with an Insurance Act; Financial Sector Regulation (FSR) Act; ‘remnants’ of the Long-term and Short-term Insurance Acts; the Policyholder Protection Rules (PPRs); and the Financial Advisory and Intermediary Services (FAIS) Act, to name a few. 

“We have an enormous pile of regulations which will be increased exponentially by the Conduct of Financial Institutions (COFI) Bill and all the conduct standards that must accompany it,” Bracher said, before reminding  the audience that the compliance burden is becoming “unmanageable” for both regulators and the regulated. One of the biggest concerns is that new entrants to the financial services sector do not have the legacy regulatory knowledge that those with two or more decades have gathered during their careers. Another is that overregulation crushes the entrepreneurial spirit. The presentation hinted that local financial institutions needed to shift from a compliance orientation to one of anticipation, expectation, innovation and risk taking. 

Compliance crushes the entrepreneurial spirit

Over the years, feedback from the legal fraternity’s intermediary and product provider clients is that they are spending so much time on compliance, from the board level downwards, that entrepreneurial mindsets and product innovations are simply being quashed. Turning to section 34 of the Bill of Rights, Bracher observes that “everyone has the right to administrative action that is lawful, reasonable, and procedurally fair”. His argument was that the enormous pile of regulation that stakeholders in the domestic financial services sector must comply with represents in itself a “failure of administrative justice”. This was an interesting departure point given how local regulators have enshrined Treating Customers Fairly (TCF) principles in all aspects of financial services conduct law; more on this in a moment. 

The integrity and quality of South African law was not under attack, but rather the sheer quantity of it. “The quality of regulation is good but the quantity of regulation, and the lengths to which these regulations go, is simply overwhelming,” Bracher said, adding weight to his ‘failure of administrative justice argument’ by suggesting that the distraction caused by too much regulation inevitably deprived industry stakeholders of their entrepreneurial mindsets. For guidance, the audience was pointed to the preamble to the FSR Act, being to achieve a stable financial system in the interest of financial customers [and to] support balanced and sustainable economic growth. Entrepreneurship is an enabler of economic growth, and are stifled by overregulation. 

Fair treatment beyond the consumer class

Bracher said that TCF is important to both the insurance industry and the broader economy but warned that a truly ‘fair’ insurance market has to enshrine the fair treatment of the insurer and intermediary as well. “There must be a balance to allow us to provide the kind of policies and policyholder protection that is needed,” he said. “We need to encourage fewer words and more focused regulation, so that [more] people can get into the market”. The latter part of his comment was a reference to the unintended transformation-limiting impact of an overly complex legislative environment, with the position being that new entrants to the domestic insurance and intermediary marketplaces were dissuaded by the sheer scale of the regulatory regime, and cost of compliance with same. 

The discussion turned to areas where South Africa’s regulatory efforts were inadvertently harming consumer and insurance industry outcomes. First on the chopping board, was the alleged confusion caused by new classes of business under the Insurance Act. As this writer interpreted matters, Bracher was concerned about how the regulators had reclassified life versus non-life insurance. “Non-life insurance is now strictly defined as indemnity insurance [with the result that] products were moved from non-life into life,” he said. For example, credit life insurance, which was previously for the most part appropriately dealt with as indemnity insurance by the non-life industry, has now been “squeezed into the life industry [despite] covering retrenchment, unemployment and things like that, which are actually not life risks at all”. 

Should regulation crush entire markets?

Another issue has cropped up due to the Insurance Act’s positioning around the pooling of risks in group policies. Bracher seemed content with the logic that guided the regulator’s decision making in this area but was unhappy about the outcome. He argued that it was almost impossible to satisfy the group policy requirements in the context of the mass insurance market. “There are millions of funeral products [in the market, many in rural areas, and] it is not easy for an insurer or intermediary to just plug advice compliance on top of that kind of product,” he said. It has therefore become near impossible to write life or non-life group insurance except under a group benefits arrangement offered by an employer or pension fund. 

The Demarcation Regulations and the exemptions granted by the Council for Medical Schemes (CMS) are an example of regulation acting against the current interests of consumers. The regulations limit the amount of cover that a small number of insurers can offer to the public for primary healthcare whereas the Medical Schemes Act does not provide for primary healthcare cover at similar premiums. Furthermore, the regulators moved this product into the health space, where it is regulated by the CMS. 

To this day, a handful of life and non-life insurers continue to offer health insurance cover under an indefinite CMS exemption that looks certain to remain in force until the National Health Insurance (NHI) implementation, up to 15-years hence. “In the meantime, we do not have low-cost benefit options for the public [and] a very limited, restricted health insurance on a primary health care basis; the needs of the country are not being met by the totality of the regulation in this particular respect,” Bracher said.  

The CMS responds

Approached for their response, the CMS said that the assertation that the Demarcation Regulations are an example of regulation acting against the long-term interests of consumers [and that] the regulators moved this product into the health space, where it is regulated by the CMS, is simply incorrect. They noted that the CMS’ mandate was set out in section 7 of the Medical Schemes Act. “One of the cardinal pillars is to always protect the interests of medical schemes beneficiaries; the Act further entrenches the principles of community rating, open enrolment and cross-subsidisation within the medical scheme’s environment,” they said. “The CMS thus ensure the long-term interests of consumer’s health benefits and rights are protected”. 

The further stated that the Demarcation Regulations do not fall within the ambit and powers of the CMS, but are merely complementary to the Medical Schemes Act. “These regulations are enacted under the Financial Services Laws General Amendment Act and, by admission, should support the social solidarity principle embodied in the medical scheme cover,” they said. “The CMS is of the view that specialities fielded within existing regulators are apt to deal with the ‘asset specificity’ problem faced within financial sectors. In fact, the financial sector has shown collective action through the fair treatment programmes. 

The CMS continues to champion consumers’ rights through the following activities in the interests of medical scheme beneficiaries by investigating fraud, waste and abuse in the medical schemes industry; adjudicating medical schemes member complaints; registering and accrediting companies doing the business of medical schemes; and monitoring medical schemes’ governance structures as well as holding medical schemes Principal Officers and Board of Trustees accountable.

Where is the second peak?

Many insurance stakeholders are concerned over the lengthy delay in finalising the second peak of South Africa’s twin peaks regulatory framework. The prudential aspects have been in place since the Insurance Act was enforced in July 2018. Years have since passed, and the conduct peak or COFI Bill is still a work in progress. “The latest information from the regulator is that they have still got to do a lot of strategizing, then drafting, then consultation, then legislation, then more consultation,” says Bracher. “This delay is a consequence of overregulation”. What outcome, other than an inordinate delay, could the industry expect from trying to write conduct standards for countless pieces of pre twin peaks legislation across multiple industries? 

The presentation continued with a condemnation of the proposed, ill-thought extension of PPRs to include commercial policies, but this writer rests here, having supplied enough ammunition in support of the damaging consequences of overregulation. 

Writer’s thoughts:
Having written on the evolution of South Africa’s advice and insurance regulatory environments over many years, I support the view that we have quality regulation, but far too much of it… In keeping with the title of this piece I put it to you, dear reader: overregulation is the problem. Do you agree or disagree? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.

Comment on this Post

Name*

Email Address*

Comment*

 

Submit Comment