South Africa should take the lead when it comes to compliance

The South African financial services industry has been hit with a wave of regulation as the Financial Services Board (FSB) attempts to bring clarity into the industry, to offer consumers increased protection to bring South Africa on par with international markets.

This means that there will have to be a strong compliance element in companies as they have to make sure that they are fully compliant with every element of the legislation that the FSB is implementing.

Core principles driven by IAIS

At the Insurance Regulatory Seminar held in Pretoria last year, Jonathan Dixon, Deputy Executive Officer of Insurance at the FSB, informed a packed auditorium that South Africa is playing catch up in order to ensure alignment with the Insurance Core Principles of the International Association of Insurance Supervisors (IAIS).

As a member of the IAIS, which represents more than 200 jurisdictions globally, we are required, by virtue of our supervisory body, the FSB, to incorporate, on a customised basis, the IAIS Insurance Core Principles (ICP’s).

The ICP’s, which were revised in 2011, largely as a result of lessons learnt from the financial crises in 2008, focus on:

• corporate governance,
• risk management,
• group-wide supervision and
• macro-prudential surveillance.

The way in which we practically roll-out and implement the ICP’s are informed by benchmarking with the implementation experiences in the UK, Australia and other developed markets.

The Treating Customers Fairly (TCF) programme and the move to a Twin Peaks regulatory regime are both examples of how we have followed in the footsteps of the UK.

Following the British lead

In April 2013, the new regulatory regime for financial services in the UK came into effect, which created a UK Prudential Regulator, the Prudential Regulation Authority, housed under the Bank of England and a separate market supervisor, the Financial Conduct Authority.

While the Prudential Regulation Authority aims to oversee the financial stability of deposit-takers, insurers and major investment firms, the Financial Conduct Authority oversees consumer trust and a reformed business culture at the centre of its agenda for the UK financial service sector.

At the home front, this UK initiative is referred to as Twin Peaks and is currently in Phase 1 with the release of draft legislation. The Financial Sector Bill, which has been released by the National Treasury for public comments, aims to establish two new regulators: the Market Conduct Authority and the Prudential Authority.

Another major development that has been in development since 2010, and is expected to become fully operational in 2016, is the new risk-based solvency regime for South African short-term and long-term insurers, known as the Solvency Assessment and Management (SAM) regime. SAM is based on the international standards developed by the IAIS and the European Union’s Solvency II risk-based regime.

Winding up and exiting the market

The most recent proposed regulatory initiative is the IAIS Insurance Core Principle number 12, which refers to the Winding-up and Exit from the Market. In alignment herewith, the FSB and National Treasury is in the process of introducing a Policyholder Protection Scheme (PPS). A PPS is part of the resolution framework to be applied in the event of an insurer failing and it is estimated that there are approximately 37 PPS’ in operation with several more countries considering the establishment of a PPS.

All of the aforementioned serve as live examples that our regulatory regime is comparable on a global stage as we continually strive to design and implement regulatory reforms in alignment with best practice.

Whether the implementation of mechanisms to ensure compliance will increase the costs of doing business is an issue which the industry will to wait and see. If costs are increased too much, small and medium businesses may find the cost of doing business too overbearing.