The legal landscape in which we operate is in a constant state of change. For those who are averse to change, it will continue to be an uncomfortable place. However, for those who embrace change and revel in new challenges, it can be a time of great opportunity.
This year has been a challenging year for the South African insurance industry. “Aside from the fact that the industry had to mitigate the ongoing effects of the global financial crisis, role players saw the Financial Services Board (FSB) making rapid changes to the sector’s legal landscape,” says Michael Blain, CEO of Centriq Insurance. “This added pressure to already stretched resources and budgets, which had to absorb the increased work load and costs associated with the proposed legislation. That said, 2010 will also be remembered as a year during which role players had to adapt to the new face of South Africa’s insurance industry by letting go of insurance practises as they’ve known them.”
FAIS
“The Financial Advisors and Intermediary Services Act has assisted in making the industry and the role of a financial advisor more professional,” comments Sharon Teubes, Regional Legal Advisor at Metropolitan Odyssey. “It has also improved the public’s perception of the industry. In October 2008 the new Fit and Proper Requirements were published. The changes were far-reaching as it requires all key individuals and representatives to complete regulatory examinations based on their roles and the products that they are licensed for.”
Regulatory Exams
The Act determines that Level 1 exams have to be completed by 31 December 2011. “At this point there is no clarity on the final timeline for the exams and it is likely that the due date of 31 December 2011 for Level 1 exams will be extended,” says Teubes. “In all professional vocations there are continued education requirements, and this is what the Regulatory Exams are: an opportunity to update knowledge, to best serve your clients which will aid practice building and business sustainability.”
General Code of Conduct
The General Code of Conduct for Financial Service Providers (FSP) and Representatives has been amended to extend the conflict of interest restrictions, which came into effect on 19 April 2010.
“The legislation places a duty upon all FSPs and representatives to avoid or if not possible, to mitigate any conflict of interest between the FSP and the client,” explains Teubes. “Where avoidance is not possible, the FSP is obliged to inform the client in writing of the possible conflict as well as steps taken to avoid it. This duty has been effective from 19 July 2010.
“Restrictions pertaining to the remuneration of FSPs came into operation on 19 October 2010 and those pertaining to the incentivising of representatives will come into effect on 19 April 2011. The purpose is to ensure the client’s best interest is served at all times. It will also aid in levelling the playing fields between product providers, ensuring the reason for support is based only on its product and services offered.”
And that’s not all...
“Legislation such as the Consumer Protection Act, the Protection of Personal Information Bill and the Solvency Assessment and Management regime, among others, means that some companies will have to reposition themselves by re-aligning their business models and insurance practises to comply with regulatory changes. This can be traumatic to internalise as it will be both cost and labour intensive,” comments Blain.
He foresees that the real effects of imposed regulatory standards such as the FSB’s treating customers fairly, SAIA’s revised code of conduct and FAIS’ conflict of interest, as well as fit and proper compliance requirements, will be felt going forward as role players continue to incorporate these requirements into their future business conduct and start to prepare for their FAIS exams.
Insurers increasingly under pressure
So far, Centriq Insurance has identified ten separate regulations or acts that will have a serious impact on them as a company. “These will be closely monitored as to ensure that we align ourselves with policyholder and regulatory expectations,” says Yurika Pistorius, compliance officer of Centriq Insurance.
“At least now that we have tangible proposals on the table and we have seen the regulatory road map unfold, we can start implementing it,” adds Blain. “Although we welcome tighter legislation to improve regulator and consumer confidence in the sector as a whole, we would have liked the regulator to give the industry a bit more time to do proper regulatory and cost benefit studies.”
What the future holds...
Regulatory changes will not slow down at all in 2011. “The Taxation Laws Amendment Bill is awaiting promulgation. There are changes to the tax deductibility of company owned policies and the taxation of the proceeds as well as changes to the transfer duty and capital gains tax relief provided where primary residences are transferred out of legal entities into the names of natural persons,” says Teubes. “The new Companies Act is expected to become effective during 2011 and implementation of the new Dividends Tax may also take place.”
In addition, Centriq expects that the short-term insurance income tax review and the regulations in terms of the Insurance Laws Amendment Act, will have a significant impact on insurers in 2011.
Painful transition
The insurance sector has a challenging implementation path ahead, and Blain believes it will be a painful transition process for various reasons. “The new legal landscape is going to be especially challenging for the smaller insurers going forward as the regulatory trend is for them to either adopt world-class governance practices or to have access to large amounts of capital in order to protect policyholders.
“We need time to digest the short to medium term practical execution, employment and business friendliness of elements proposed in some of the regulatory changes that have proven to be fairly onerous and/or extreme, especially within the short-term sector, to date. It seems, however, as if it is something we have to adhere to until all regulatory compliance issues have been addressed and the regulator can identify areas that suggest a more relaxed approach.”
“Although we realise the importance of keeping up with local and international trends, the fact that some companies still need to align themselves with corporate governance structures such as King III, coupled with the fact that businesses need to align themselves with the new codes, bills and acts as they are introduced, will add pressure to the board as well as risk management and legal departments, among others. And these are all hurdles we’ll have to overcome in 2011 and beyond,” adds Pistorius.
Opportunities for brokers
Change is here to stay - it is the way insurers and brokers deal with this change that will support the future existence of this profession, comments Teubes.
“As a professional financial advisor it is important to keep your attention focused on your existing clients whilst expanding your business by acquiring new clients. Legislative changes provide the perfect opportunity for you to communicate with your clients and to review their financial plans to identify any aspects that may need to change.”