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The fine line between the law and becoming Big Brother

04 April 2016 Jonathan Faurie
Patrick Bracher, Director at Norton Rose Fulbright

Patrick Bracher, Director at Norton Rose Fulbright

Christine Rodrigues, Director at Norton Rose Fulbright

Christine Rodrigues, Director at Norton Rose Fulbright

The sextant is widely regarded as one of the most important inventions during the Age of Exploration. By using the stars to map a ship’s position on the sea, a lot of the guess work was taken out of exploring previously uncharted waters.

This has a lot of relevance to the financial services industry as Patrick Bracher, Director at Norton Rose Fulbright, points out that the industry is currently going through the most confusing time in its history.

Quantifying challenges

It is no secret that the industry has been plagued by challenges in the past; this prompted the Financial Services Board to embark on a regulatory reform programme which it says will improve the industry.

But not everybody feels the same way. Key pieces of legislation that the FSB hopes to enact this year include the Insurance Bill as well as the Financial Sector Regulation Bill.

Bracher points out that Financial Sector Regulation Bill will be enacted with major changes to the Insurance Acts, but you don’t know when its provisions - including repeals – will come into effect.

Further, the Insurance Act 2016 comes into operation in stages by proclamation, but the Prudential Authority can delay the implementation of selected provisions for up to two years. The Authority – as referred to in the acts - sometimes means the Prudential Authority (PA), other times the Financial Sector Conduct Authority (FSCA), and sometimes both. There is no more Registrar.

The lack of clarity surrounding the Authority issue, should Brachers fears be proven correct, will cause significant concern in the industry; because who would you ultimately be accountable to? 

Significant shakeups

It must be pointed out that the information provided by Norton Rose Fulbright is information relating to a bill that has not been passed yet. So information may change as the FSB considers its options.

One of the major shakeups in the industry may be the way in which holding companies will be governed under the Insurance Bill.

According to Bracher, the PA can tell holding/controlling companies how to run their businesses and even to restructure their businesses. He adds that intergroup financing and integrated governance would fall under the PA.

“Significant owners, key persons, auditors and major outsourcing will come under the authority of the PA. Further, the pooling and diversification of risk within insurance groups therefore has consequences, but without a significant owner, you may not get a licence,” says Bracher.

There are also significant impacts for reinsurers. Offshore reinsurance requires a foreign branch of an insurer with a trust account.  This will limit capacity because not every foreign reinsurer will be interested especially at exchange rates.

Due process

While we are unsure about exactly when the Insurance Bill will be enacted, Christine Rodrigues, Director at Norton Rose Fulbright, points out that the Insurance Bill cannot be enacted until the Financial Sector Regulation Bill has been enacted.

This is the Twin Peaks regulation which splits powers in the industry between the PA and the FSCA. The South African Reserve Bank will become the PA and the FSB will become the FSCA.

According to Rodrigues, the PA and the FSCA must assist and support each other to pursue their objectives in terms of the Long-Term Insurance Act and the Short-Term Insurance Act. They must inform each other about such information concerning matters of common interest, they must strive to adopt consistent regulatory strategies, and they must minimise duplication of effort and expenses

However, Rodrigues questions who you go to. Some of the functions will sit with the PA, some will sit with the FSCA and some will sit with both.

Far reaching powers

Whatever form the Insurance Bill takes, what is certain is that the Authority, whomever that may be, will have far reaching powers.

Bracher points out that the Authority may issue non-binding guidance notes on the application of a law. Additionally, the Authority may issue a binding interpretation which will be applicable until the law falls away or the court sets it aside thus allowing them virtually to make law.

The Prudential Authority can issue directives to an insurer and take action if it:

-               Conducts its business in an improper or unsound way likely to affect its ability to meet obligations;

-               Contravenes any law;

-               Is involved in a financial crime; and

-               Is contributing to financial instability (with permission of the Reserve Bank)

Directives may also be issued to a holding company in South Africa; even regarding specific financial products, paying a dividend or doing specific transactions.

Editor’s Thoughts:
Over regulation is a major deterrent when it comes to foreign investment. Companies look for destinations where the law is flexible and allows them to freely concentrate on the core strengths of the business. If we consider the above outlook for the Insurance Bill, are we creating this environment?  Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

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