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Five regulatory discussion points for brokers to keep an eye on

06 July 2021 Gareth Stokes

South Africa’s financial services regulators have hardly skipped a beat through lockdown and pandemic, working feverishly on amendments to existing rules and standards and putting the finishing touches to the country’s long-awaited Conduct of Financial Institutions (COFI) Bill.

Lezanne Botha, a senior manager in the regulatory policy division at the Financial Sector Conduct Authority (FSCA), offered a snapshot of five insurance-related regulatory developments during her presentation to the 2021 SAUMA Conference. She commented upfront that most of the presentation dealt with proposed amendments or changes that were still under discussion, both internally between regulators, and externally, with industry stakeholders. 

Expanding PPR protections to businesses

The first topic of discussion was the third set of Amendments to the Policyholder Protection Rules (PPRs), set to be issued for public comment towards the end of July this year. The PPRs, which are issued separately for the long-term and short-term insurance industries, are sets of rules that guide insurer interactions with policyholders and potential customers. “We have been measuring compliance under the second set of PPRs,” said Botha. “The proposed third set of amendments is necessary to accommodate enhancements informed by our supervisory findings and thematic reviews”. The amended PPRs seek to address concerns over a lack of governance in product design, imperfect premium review practices and the design and disclosure around loyalty benefits in the long-term industry, among other issues. Another big change afoot is that the protections afforded to individual policyholders under PPR will be expanded to include businesses customers. 

Insurance brokers should note the proposed tweaks to Rule 12: Intermediation and distribution. Going forward, this rule will require insurers to implement “dynamic and responsive processes and controls over chosen distribution channels – ensuring that these are regularly reviewed and improved”. The regulator has included changes under this rule to bring effect to proposals BB and CC under the Retail Distribution Review (RDR), namely addressing the imbalances in the responsibility of product suppliers and intermediaries insofar consumer outcomes. Although this change is likely to add layers of administrative and governance complexity for insurers, it should sit well with brokers who have frequently argued that shortcomings in product design are as much to blame as poor financial advice for poor outcomes. 

Revamping long-term and short-term insurance regs

The second regulatory initiative affecting the country’s insurers is the proposed Amendments to Regulations under the Long-term Insurance and Short-term Insurance Acts. Some industry stakeholders felt that consultations around the amendments to the PPRs and regulations should run concurrently; but the FSCA felt that there were no significant overlaps between the two processes. These regulatory interventions anyway reside at different authorities. “The regulations are made by the minister of finance, whereas the PPRs are issued by the commissioner of the FSCA,” said Botha. 

Advisers, brokers and intermediaries will be affected by the proposed amendments, which seek to give effect to more unresolved RDR issues. An important change is the splitting of ‘advice’ from the existing definition of ‘services as an intermediary’ to allow for advice fees to be collected from the policyholder. “These amendments seek to plug the gaps in the current regulations that saw undesirable practices in how insurers converted binder agreements to outsourcing arrangements,” said Botha. She added that the general principles for remuneration of binders would most likely be extended to apply to all outsourcing. Changes to the binder regulations were informed by the FSCA’s supervisory functions and will address unintended consequences of the current regulatory framework. The amendments will also address the equivalence of reward concerns raised by RDR, specifically in the long-term insurance context. 

Cell Captives must up their oversight game

The third regulatory thrust for 2021 is the issuing of a Draft Conduct Standard on Third Party Cell Captives. The conduct standard is based around a 2019 paper that lists concerns and risks around current business practices, most notably the lack of appropriate governance and oversight of cell captives and the business conducted by outsource partners on behalf of cell captive insurance license holders. Industry has already participated in two rounds of consultation on the draft, having offered up more than 120-pages of comments following the second round. Despite this, the FSCA still hopes to present the standards to Parliament before the end of 2021. “Following that, we will either go back to drawing board or go ahead and issue the Conduct Standard for Third Party Cell Captives, subject to the approvals and governance processes of the FSCA,” said Botha. 

Point four focused on the pending Draft Joint Standard on Outsourcing, which will be issued by the FSCA and the Prudential Authority (PA). “This joint standard will address the challenge that exists in the FSCA having to mitigate and supervise market conduct risks through the PA,” said Botha. Once again, insurers have themselves to blame for the additional regulatory attention. Per the FSCA: Poor conduct by insurers is driving outsourcing practices that compromise the safety and soundness of insurers and, thereby, impacts on the fair treatment of policyholders. The regulators propose that the current Governance and Operational Standards for Insurers (GOI 5) be repealed and replaced with a joint standard, GOI 6, which the two regulators will then use to ensure compliance within their respective mandates. The draft joint standard will be published during the third quarter of 2021. 

This COFI has been brewing for ages…

Fifth, but not least, Botha offered some thoughts on progress towards the long-awaited COFI Bill. The COFI Bill is primary legislation that will be used by National Treasury to repeal the conduct-related sectoral laws currently contained in around 12 or 13 pieces of legislation. “National Treasury says there is a need to streamline the legislative framework and have one piece of overarching conduct legislation to give effect to the FSCA’s mandate,” concluded Botha. 

COFI will be informed by the regulator’s market conduct policy approach and is intended to strengthen customer protections through consistent application across all types of financial institutions. It will also facilitate competition, financial inclusion and transformation across the insurance sector in line with the requirements contained in the Financial Sector Regulation (FSR) Act. The COFI Bill is being redrafted based on industry comments received in October 2020 and will eventually deliver an activity based licensing system that will also resolve much of the confusion about where binder activities belong. 

Writer’s thoughts:
This long list of ‘in progress’ regulations suggests the compliance teams at insurers and insurance brokers are in for a challenging 2021/22. Each piece of new or revised regulation requires a thoughtful reading and timely interaction with the regulators to ensure that the eventual legislative environment remains ‘business sensible’. Do you believe that the pace of regulatory change has abated during the pandemic period, or is it ‘business as usual’ insofar the compliance function at South Africa’s financial and risk advice practices? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

 

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