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Actuaries to play an active role in TCF risk mitigation

11 August 2014 Jonathan Faurie
Jonathan Faurie, FAnews Journalist

Jonathan Faurie, FAnews Journalist

As the Financial Services Board (FSB) moves steadily towards its Destination 2016 vision, whereby all of the new pieces of legislation will be rolled out, companies within the financial services industry are becoming more comfortable with the expectations that the FSB has for them.

This means that the FSB, as well as the wider industry as a whole, can move away from the educational aspects of legislation. For a long time, companies were engaging with the FSB on how the legislation will affect them and now they can turn their sights towards the implementation and compliance of this legislation. The participation of the actuary in Treating Customers Fairly (TCF) compliance is becoming increasingly important.

Avoid the TCF pitfall

As we all know, TCF is one of the key pieces of legislation the FSB has put forward to be sanctioned once the Twin Peaks model has been implemented. However, while TCF has not officially been signed into law, the FSB still expects companies to adhere to the guidelines that it hopes to imbed in the industry.

TCF guidelines aim to raise standards in the way firms carry out their business by introducing changes that will benefit customers and increase their confidence in the financial services industry. The document forces a shift in the focus within companies towards an outcomes based business model.

Companies should be aware of the six outcomes provided by the TCF document, but there is a certain amount of risk companies may carry when complying with these outcomes, particularly in the retirement space where the investment of an individual has to be an adequate provision for his/her life during retirement.

“There is a TCF compliance obligation on the board as they are tasked with administrating the fund. Trustees are expected to go beyond the fund rules in order to meet these outcomes. There may be risks which trustees do not see, and this is where actuaries can play an important role. They can identify the risks and consult with the trustees on ways in which they can overcome these challenges,” says Lizzie Vambe, Senior Legal Advisor at Alexander Forbes.

Phone a friend

Traditionally, the role of the actuary in fund management has been silent where they are only seen by the fund managers. Their role however, is becoming increasingly important as they can become a significant lifeline for product providers.

An important aspect of regulation compliance is gap analysis, but companies doing this may be too involved with the fund in order to see all of the compliance gaps the company faces. “The role of the actuary in gap analysis is crucial. The actuary has to advise the fund on relevant risks and advise funds on their ability to meet the promises that they are making to clients. Another crucial role actuaries play is the monitoring of fund risks and advising funds on their concerns,” says Vambe.

She adds that one of the major concerns is the reasonable benefit expectation. This is one of the biggest areas of concerns amongst the public as they do not fully understand all of the factors which affect a benefit pay-out.

“There are a number of factors which need to be taken into consideration. If you, as a client, are given an assurance from a trustee, is the trustee delivering this promise? The most important question a client should be asking is if they fully understand the profile of the fund. From a trustee’s point of view, they need to focus on how they are going to ensure that people get a reasonable return from the fund that they are participating in. Trustees also need to ask if enough is being done for members to look at their funds and identify gaps within the fund,” says Vambe.

Punitive measures

Currently TCF is not a legal requirement within the industry. However, the FSB does expect companies to comply with the TCF regulations as there needs to be a seamless transition when it is passed into law. Vambe points out that the FSB does have the power to enforce punishment on companies who do not comply with TCF.

“There are a number of punitive measures the FSB can hand down to non-complaint companies. The biggest of these is hefty fines which can be implemented, this may be in line with similar fines which were imposed in the UK, which turned out to be significant. There can also be reputational damage which could be caused. The FSB can declare the business, as well as its practices undesirable; the FSB can also suspend or withdraw the regulatory licence of a company,” says Vambe.

The FSB has also weighed in on this issue and has pointed out that the punitive measures the regulator could impose on companies should not be discouraging. “We want an open relationships with product providers. Actuaries are welcome to consult with the FSB to debate on the proposed changes to the pension funds industry. We agree that there needs to be professional standards, but there also needs to be room for professional judgement,” says Rosemary Hunter, Deputy Executive Officer of the FSB.

Editor’s Thoughts:
After TCF was implemented in the UK, companies have reported that it has added significant value to their bottom line. This will be good news for South African companies if the FSB is able to implement it in an appropriate manner. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts


Added by Zarrick, 11 Aug 2014
Paragraph 5 above

"Companies should be aware of the six outcomes provided by the TCF document, but there is a certain amount of risk companies may carry when complying with these outcomes, particularly in the retirement space where the investment of an individual has to be an adequate provision for his/her life during retirement."

With Retirement planning, even if you can get a client that can afford the savings, they won't make it, as gov "allegedly" doesn't declare the correct inflation rate. Is not more like 9%? So the goal posts keep on moving then and the client will never reach them. Will the disparity between the actual inflation and sal increases make the middle class poorer and poorer each year and the poor feel it first? Is this why the miners want such a high increase? Should gov have TCF as well? i.e. "Treating Citizens Fairly" Lennon, the founder of the Russian Communist party said.
"We will control the middle class by grinding them between the millstones of taxation and inflation" It's like slowly boiling a frog. You turn up the heat slowly and the frog doesn't realise that it's being cooked. What will the picture be in 10 years or 20 years time? Add a tax every now and then like toll roads, and eventually after fighting the masses they give in, because they can't fight against a government, as the government fights them with the tax payers own money. Tell everyone that inflation is 6% by playing with the weighting of the indices allegedly, when it's possibly 9% or 10% and you won't have to pay such high sal increases. Is retirement planning a myth?
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Added by 025 YSH, 11 Aug 2014
UK is a 1st world country with systems to boot. SA is a combination of 1st and 3rd world. if it took 3 years to have a beneficial impact in the UK, it may take 10 - 15 years in SA. the FSB is too reactive when it comes to this type of initiative.
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