Mission Impossible : Your mission…should you choose to accept it

If you are reading this article, then you have survived two of the most challenging years the industry has seen in 25 years. And yet, more challenges await you. Your mission, should you choose to accept it, is to negotiate the challenges that the year poses, to comply with the requirements set out by the Financial Services Board (FSB) and to work towards prosperity.

You might be forgiven for feeling that you are being briefed ahead of a dangerous task in a Mission Impossible movie; we are by no means painting the industry in that light. But the reality of the situation is that there is no exaggeration in the description of the reality brokers faced in 2014 and 2015. Now we have finally reached Destination 2016, a year that will change the face of the industry.

FAnews caught up with Jonathan Dixon, DEO Insurance at the FSB, and Paul Kruger, Editor and writer-in-chief of Investment Indicators & Moonstone Monitor, to find out their view point on what the industry can expect this year.

Putting pen to paper

What can you as a broker expect from 2016? Well, 2016 will be a busy year from a regulatory standpoint.

Two major pieces of legislation will be in Parliament this year, which in combination will mean the biggest change to the insurance regulatory environment in more than 25 years since the FSB and the Insurance Acts were first put in place.

The first of these is the Financial Sector Regulation Bill (FSR Bill), which will introduce the Twin Peaks model of financial regulation. This will see the prudential regulation of insurance shift to the South African Reserve Bank, while the FSB will become a dedicated market conduct regulator, to be termed the Financial Sector Conduct Authority (FSCA). Deliberations on the FSR Bill already started in Parliament towards the end of last year, and it is hoped that the Bill will be promulgated by the middle of 2016.

The other major piece of legislation is the Insurance Bill. The Insurance Bill will put in place the SAM framework, as well as a framework for formal insurance group supervision and a micro insurance framework. The Insurance Bill will be deliberated on by Parliament later in 2016, with a planned effective date of 1 January 2017.

Enter the protagonists

There will also be changes that you as a broker need to face. The other major cross-cutting regulatory reform that will be taken forward in 2016 is the Retail Distribution Review (RDR).

An RDR Phase 1 Update was published in November 2015 that outlines the reforms to the regulatory framework for financial advice and distribution that will be implemented in 2016, many of which will impact the insurance sector. Draft regulatory changes will be published by April 2016 for public comment.

By the end of 2016, the FSB also hopes to have finalised detailed proposals for Phases 2 and 3 of the RDR, for implementation from 2017 onwards, as outlined in the RDR General Status Update published in December 2015.

Dixon highlights that another big regulatory and supervisory focus in 2016 will be on access to information and data exchange in outsourced business models in the insurance sector, such as binder arrangements. There is a substantially increased risk that poor outcomes for customers and financial risks may not be adequately identified or managed in business models where a significant portion of the an insurer’s activities is outsourced to a third party without having proper governance and oversight in place.

He stresses that effective oversight requires adequate management information, which in turn requires insurers to have robust systems and processes in place that allow for the exchange and management of relevant, comprehensive and reliable data.

Catch more flies with honey

Building a world class industry cannot be done without the broker; and the broker can find ways to prosper in the industry.

There is a huge responsibility on industry media to assist with the understanding process through the provision of accurate refined information. Representative bodies will play an increasingly bigger role in ensuring that the interests of their members are protected while at the same time taking cognisance of the need for aligning member interests with the fair treatment of clients, which lies at the heart of the proposed changes.

Product providers, as major employers, have an equally significant task to ensure the best outcomes for both the industry and its clients.

Consultation will achieve so much more than confrontation. Kruger points out that one must bear in mind that the change envisaged in the industry is not a uniquely South African phenomenon, it happens all over the world. He adds that the dramatic reduction in the number of advisers in the UK, for instance, after the replacement of commission with fees, certainly affected the views of local legislators. We need to accept that change is inevitable, and that neither fight nor flight is the solution.

The TCF question

While we are five years into the existence of the concept of Treating Customers Fairly (TCF) in the industry, Dixon points out that there are still some companies who may not be fully embracing the objectives set out by the key document.

The FSB has embarked on a process of incremental implementation of the TCF outcomes, gradually embedding the TCF approach in the way it supervises regulated firms as well as in the way it will develop the regulatory framework.

Some significant TCF aligned market conduct regulatory and supervisory projects have already been outlined to the industry. RDR in particular is a clear example of the FSB’s changing approach to market conduct regulation.

Dixon recognises that the FSB has seen many examples of firms taking their TCF commitments to heart, but notes that more work needs to be done to eliminate remaining practices that drive unfair outcomes. He points out that the FSB’s experience has been that those firms who have adopted a strategic and risk-based approach to implementing TCF across their entire business, are much better equipped to identify and resolve risks to poor customer outcomes, than those who have taken a reactive, compliance-based view.

Final nail in the coffin

At the end of the day, the FSB wants to work towards creating an industry which is enabling for brokers who have the best interest of clients at heart; the other side of this coin is that the actions of the FSB want to rid the industry of rogue agents: those brokers who only act with their best interests at heart before the clients.

One must bear in mind that one of the most important drivers of change is the need to professionalise the industry. This will become even more important if a proposal in the new Fit and Proper requirements, which sets specific standards for the appointment of new representatives, is implemented.

A more professional industry will draw a higher calibre of job seeker. Most people, if they look back to when the Financial Advisory and Intermediary Services Act first became a reality on 30 September 2004, will acknowledge that the way in which they conduct business since then has certainly become a lot more professional.

Being taken out of one’s comfort zone is never pleasant, and following a head in the sand approach only postpones the inevitable. It is possibly better to embrace change, unlock the benefits, and make the fair treatment of customers the reason for the existence of your business.

By far, most of those who survived in this the industry did so exactly because the interest of their clients always came before their own. For them, the transition will be more profitable.