Moonstone: Regulation and the financial crisis

The normal knee-jerk reaction when a problem arises is “If it moves, regulate it.”

We are however hearing more and more voices warning against this. The Insurance Times in the UK reports that the chairman of the Financial Services Authority (FSA) Lord Turner said regulation of a post-financial crisis banking system would not lead to heavy-handed regulation across other sectors.

He said: "The regulation of insurance companies needs to be different from the regulation of banks, even while we identify and track the potential knock-on consequences from one sector to others."

Archie Kane, chairman of the Association of British Insurers, said: "We need to restore confidence in financial regulation and in those who regulate. It is vitally important we get this right for the industry and avoid a direct read-across from the regulation of banking to the insurance sector."

We are convinced that this thinking should also apply in South Africa.

One size fits all

While the different financial services offerings have very specific legislation applicable to it (long- and short-term, healthcare, collective investments etcetera) the FAIS Act attempts to be everything to everybody.

One of the few attempts at differentiation is in respect of the minimum qualifications in terms of what one is licensed for, and the training requirements linked thereto. While an attempt is made at providing a one-size-fits-all approach to documents such as the FAIS report, it does appear as if the main focus is on investment related business while short-term and healthcare for instance need to adopt different thinking to fit into the mould.

While the focus of FAIS is the advice process and servicing of clients, the process and product differs radically between investment, healthcare and short-term. Yes, a needs analysis must be conducted, but how will a needs analysis for an investor with R1 million differ from that of someone who has just bought a car? Radically, I would venture.

Be warned though that, should differentiation be implemented, it would mean that your admin burden may expand substantially, particularly if you are licensed for the different categories used in the example above.

Restore Confidence in Regulation

With regards to the need expressed above to “…restore confidence in financial regulation and in those who regulate…” the same challenge exists here.

It is becoming more and more apparent from our interaction with FSPs that the initial goodwill of many towards the implementation of legislation aimed at regulating the financial services industry is turning into frustration at what appears to them to be the one-eyed focus of the authorities.

The final straw was possibly the recent threat of huge penalties for non-submission of compulsory returns to the FSB which led to a huge outcry from all and sundry despite the fact that less than ten percent were sent out erroneously. Most people reasoned that even one mistake was one too many, given what is expected of us in terms of the legislation. What is good for the goose is good for the gander, and people are expecting the regulator to set the example in all respects in terms of what it expects from FSPs.

Change is seldom a pleasant experience, particularly when applied to people who place a very high premium on their independence. The eventual spin-offs in terms of our standing in the community and business world, though, make it worth our while to grit our teeth for a while longer.