Burden of regulation identified as top risk

01 November 2013 Yurika Pistorius, Compli-Serve

Most global economies rely on foreign direct investment in order to maintain the sustainability of key industries. This investment is dependent on regulation as investors tend to shy away from countries which restrict freedom of operations.

In the 2013 Insurance Banana Skins report it was stated: "This is the second year in a row that the burden of regulation has emerged as the top risk in the survey of the insurance industry.” The findings of the report clearly indicated that the concern about regulatory risk was global.

The report is released by PwC every two years, and examines risks facing the insurance industry, gleaned from insights from over 660 insurers, regulators and close observers of the industry across 54 countries.
According to the report, it is all too easy for management to succumb to a tick box mentality, which will blind them to the real risks their industry faces, or to spend so much time meeting regulatory demands that business opportunities go by the board. "In that sense, bad regulation (or over-regulation) can really be a threat, and that is clearly how it is perceived at the present time”.

The top risk identified by the survey is the burden of regulation that is being placed on the industry by a wave of regulatory reform at international and local levels, in particular the European Union’s Solvency 2 Directive. The fear is that these initiatives will load the industry with heavy costs, and distract management from the task of running profitable business.
Key legislative changes in SA

The numerous changes coming into effect follow the publication of National Treasury's A safer financial sector to serve South Africa better policy document in February 2011.
Treasury, in collaboration with the Financial Services Board (FSB), is developing a stronger regulatory framework, strengthening the effective supervision of the FSB, introducing crisis resolution, addressing systemic institutions, conducting international assessments and benchmarking South African principles and assessments against international norms. A couple of legislative updates are indicated below, but this list is by no means exhaustive.

The Financial Services Laws General Amendment Bill (Omnibus Bill)

Parliament is currently considering this bill, and will amend almost 15 financial sector
acts. The objectives of the bill are to ensure an even transition to the Twin Peaks system
and to address urgent areas identified by the financial sector assessment programme regarding South Africa’s compliance with international standards of financial regulation.

Twin Peaks regulation

Under the Twin Peaks model, the financial services industry and related structures will have two regulators, namely, a prudential regulator which will operate under the South African Reserve Bank and a new market conduct regulator, operating under the FSB.

Treating customers fairly (TCF)
The financial sector should already be including TCF principles in their day-to-day business with consumers and not wait for the implementation date of January 2014. POPI is set to become law shortly and will significantly affect the way in which Financial Services Providers (FSPs) collect, store, process and disseminate personal information.
Retail distribution review
A full cross-sector retail distribution review is expected for publication shortly. It is likely to include, among others, a review of remuneration models, the roles and responsibilities of product providers and the oversight of intermediaries, keeping TCF in mind and the consideration of consistent definitions for intermediary services.

Binder regulations

The guidance and supervisory approach has been issued on activities that constitute binder functions, and activities that are incidental to binder functions and remuneration payable as a binder fee.

The golden thread

The golden thread through this new legislation is that a compliance culture must be created, and thereby the policyholder will be protected. The need for compliance monitoring has arisen in the industry in that all regulatory risks must be identified and a process of control must be in place to ensure that risks are mitigated.
Quick Polls


How confident are you that insurers treat policyholders fairly, according to the Treating Customers Fairly (TCF) principles?


Very confident, insurers prioritise fair treatment
Somewhat confident, but improvements are needed
Not confident, there are significant issues with fair treatment
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