A tsunami of regulation floods the financial sector
In the wake of the global financial crisis, there has been a wave of international financial regulatory reform designed to highlight the lessons learnt from the crisis, says Annah Manganyi, Senior Manager, International and Local Affairs Unit of the FSB.
While South Africa’s financial system was largely unscathed by the crisis, there is plenty of scope to further strengthen our financial system by applying the best practices that have emerged through this global debate. This includes proactive changes to the structure, scope and focus of future regulation.
Where are we headed?
South Africa plans to move to a "twin peaks” model of financial regulation. Under this model, a prudential regulator and supervisor for banks, insurers and key financial markets infrastructure will be established within the South African Reserve Bank (SARB), while the Financial Services Board (FSB) will be transformed into a dedicated market conduct regulator.
It is envisaged that the model will both strengthen consolidated supervision of financial conglomerates, as well as support a more dedicated and intensive focus on market conduct supervision, in turn supporting a more resilient and stable financial system. This approach is similar to institutional arrangements for financial regulation in countries such as the UK, Australia and the Netherlands. Implementation will take place in phases, starting in 2014.
At the same time, the scope of financial regulation is being expanded to address regulatory gaps and to ensure a comprehensive approach to supervision of risks relating to financial soundness, conduct of business and financial stability. With the establishment of the Credit Rating Services Act of 2012 and the Financial Markets Act of 2012, the FSB’s scope of regulation has been extended to include the regulation of credit rating agencies, over-the-counter derivatives, central counterparties and trade repositories.
Efforts are also underway to implement the Treating Customers Fairly (TCF) approach, and to develop a microinsurance regulation. Both are aimed at enhancing consumer protection, and financial inclusion in the case of microinsurance regulation.
Lastly, in terms of the focus of financial regulation, we are seeing a shift from a ‘compliance’ to an ‘outcomes’ approach to supervision. Under this new model, the regulator’s expectations are expressed as guiding principles, where necessary supplemented by specific rules, designed to ensure the delivery of fair and secure outcomes for customers. This new approach is reflected in major regulatory projects such as TCF and Solvency Assessment and Management (SAM).
International trends monitoring and adoption
The FSB is an active member of the international standard setting bodies such as the International Organisation of Securities Commissions (IOSCO), the International Association of Insurance Supervisors (IAIS), the International Organisation of Pensions Supervisors and the Financial Consumer Protection Network (FINCoNet). Through its International and Local Affairs Unit, it also actively monitors developments from the G20, Financial Stability Board (Finstab), Financial Action Task Force, OECD, World Bank, IMF, and other relevant bodies. It fully subscribes to compliance with standards and principles, as well as the implementation of FinStab recommendations relating to financial stability measures. A weekly internal International and Local Regulatory Developments Monitor is published by the Unit for this purpose.
Additionally, the FSB is continually monitoring developments from key jurisdictions such as the UK, US, EU, Canada, Australia, etc. The on-going development of the SAM regime based on the principles of the Solvency II Directive adopted by the EU is but one example of this.
Having said this, the FSB is aware that our regulatory framework needs to be suited to South African needs.
What works best
As a general approach, the FSB believes that a consultative approach to regulatory development, where stakeholder input is elicited as broadly and as early as feasible, improves buy-in and consistency of application.
This is particularly so in the case of reforms that represent a significant departure from previous approaches. We also recognise the importance of ongoing communication and regulatory guidance. Lastly, it is recognised that having a robust regulatory framework needs to be matched with an appropriately resourced and effective approach to implementing and enforcing the regulations.
