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FSCA: Its full steam ahead for Default Regulation compliance

05 February 2019 Jonathan Faurie
Olano Makhubela, Divisional Executive for Retirement Funds Supervision at the FSCA

Olano Makhubela, Divisional Executive for Retirement Funds Supervision at the FSCA

On 1 March 2019, retirement funds will be expected to be fully compliant with the Default Regulations that were implemented on 1 September 2017. The key question that needs to be asked is what some funds have been doing with their time? The Default Regulations were implemented in September 2017 and funds had an 18 month grace period to ensure compliance; why then are there still concerns in the market that some funds will not be ready for full compliance come 1 March?

FAnews spoke to Olano Makhubela, Divisional Executive for Retirement Funds Supervision at the FSCA, to find out what the regulator has to say about this key issue. 

Immensely beneficial

Makhubela feels that while the change may catch some retirement funds, and the Boards of these funds, off guard, the Default Regulations will be immensely beneficial to the industry. 

He points out that the default regulations address both the accumulation and de-accumulation phases of retirement savings and are intended to make the product offering of retirement funds less opaque to members and to offer better outcomes. 

“The benefits to the retirement funds industry will include more transparency on costs and investments to fund members and trustees, better consideration by funds of the needs and requirements of their members, less leakage from the retirement savings net, and more competitive offerings and lower costs for funds and their members, which will result in more retirement savings for members,” says Makhubela. 

Pertinent concerns

The Default Regulations have raised a few eyebrows with some funds questioning whether the Boards that govern these retirement funds have the necessary skills and knowledge to make the decisions that the Default Regulations will require them to make. 

“Funds and their boards have been aware of the content of the default regulations for several years, and many in the retirement funds industry have welcomed these regulations as long overdue. The regulations themselves provide the broad decision-making framework for board members.  Further, section 7D(1)(e) of the Pension Funds Act does provide for the Board of a fund to obtain expert advice on matters where board members may lack enough expertise; this would equally apply in this case,” says Makhubela. 

So, the Boards of retirement funds have been thrown a lifeline when it comes to the skills that are necessary to make important decisions. However, that is not the only concern in the industry. 

The other concern is time. Boards of retirement funds don’t meet often, and there are concerns that they will not meet again in 2019 to address the Default Regulations. Has the FSCA given the industry enough time to come to terms with the requirements of the Default Regulations? 

“Yes. National Treasury undertook an extensive consultation process with the public and industry participants over several years and the Draft Default Regulations were published for comment on 22 July 2015. The Default Regulations were changed after this consultation process and the final regulation was published on 25 August 2017 with an effective date of 1 September 2017. Funds were thereafter provided with a further 18 months from this date (1 March 2019) to comply. It is therefore evident that not only was the industry consulted and made aware of the default regulations many years in advance, but funds were afforded a further 18 months after this date to comply,” said Makhubela. 

A cardinal sin

The Boards may not have the knowledge to make the right decisions 100% of the time when it comes to the Default Regulations and they may not have time to consult with relevant experts prior to making these decisions. These are undeniable facts. 

However, Boards will also be reluctant to make the wrong decision and then be held liable for that decision further down the line. This leads to the next industry concern; many industry experts feel that Boards will revert to a tick box approach when it comes to the Default Regulations. This approach is something that the FSCA has vehemently been fighting against for the past three years. 

“The latest financial services laws and the latest FSCA Regulatory Strategy discourages a tick-box approach to regulation and compliance. The focus, instead, must be on clear and transparent decision-making and an outcomes-based approach by funds, which will deliver better and long-term benefits for their members.  Instead of being overly concerned about making wrong decisions, Board members should focus on applying themselves to whatever decision they need to make, obtain as much knowledge on the subject-matter as is reasonable, obtain further advice and guidance where necessary, and make an informed decision on any subject-matter. This will at least ensure that Board members can demonstrate if and when they are asked to account for decisions they made, they did so reasonably and rationally. Therefore, they would not be held personally liable for such decisions if, with hindsight, it turns out to be wrong,” says Makhubela. 

The FSCA will monitor funds’ adherence to the default regulations on an ongoing basis and the outcomes of these regulations for funds and their members, which will also indicate to the Conduct Authority whether funds are in fact considering the objectives of the default regulations on an ongoing basis and adjusting accordingly. “A skilled and able Board can still make incorrect decisions. It is also the case that Boards are not expected to be right 100% of the time. However, it is reasonably expected that Boards take appropriate and timely action as and when it is discovered that there may have been a wrong decision,” says Makhubela. 

He adds that the FSCA expects funds and their boards to properly apply their mind to the implementation of the default regulations in their funds and to monitor the outcomes of their decisions. 

Editor’s Thoughts:
The industry has had enough time to make provisions to adhere to the requirements of the Default Regulations. The FSCA is confident that all funds and their Boards will apply their minds accordingly. But where the is smoke, there is fire, the concerns in the industry cannot be unfounded. Is the industry ready for 1 March? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

Comments

Added by Derek Smorenburg - SAIFAA, 05 Feb 2019
Hi Jonathan, I am positive that many of the Boards of Trustees of Retirement Funds in SA (all Pension Funds, Provident Funds and Retirement Annuities – R/As) will be agonising over the scope of the default regulations, what TCF suitable products will be made available and what format the range of “free counselling and guidance” services that will be made available to the millions of resigning and retiring Members as from 1 March 2019!
I am aware that the vast majority of Financial Advisors are not prepared to Advise, Guide and Help their Clients especially when it comes to fulfilling a proper comparison of the 'total costs and other vital aspects' that needs to be taken when comparing the 'In-Fund' Default Options with the 'Out-of-Fund' Alternative Options!
SAIFAA is busy preparing a SA First set of 'In-Fund'Default Option Workshops (TBA) where we have designed SIX vital questions to be answered by 5 of the largest Umbrella Funds in SA so that our Members will be properly equipped to handle this major disruption event! we are taking potential workshop seat bookings (derek44@mweb.co.za).
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Added by Harley, 05 Feb 2019
It’s about time Insurers become opaque & transparent with their platform fees for old & new generation RA’s - the Platform fees & Commissions paid to Brokers has decimated retirement funding returns @ the expense of the Policyholder & Fiscus. Insurers wish to continue with their Smoke & Mirror approach by claiming lack of Skills!
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