A challenging year for the industry as regulation forges ahead
December is a time of reflection, and if there is one word that could sum up the operational dynamics of the financial services industry in 2014, that word would be challenging. It has been difficult for industry stakeholders to make a profit in the industry. The cost of doing business increased during the year, and regulation was a major issue for insurers and brokers alike.
In the Financial Services Board (FSB) Annual Report, FSB Chairperson, Abel Sithole, reinforces the view that it has been a difficult year for the industry. “While policyholders and the public attempted to maintain the momentum they had gained in recovering from the global financial crisis, the FSB focused on implementing regulations to offer better protection to the public.”
Protecting the public
Besides the mining industry, the insurance industry has been a corner stone of the South African economy for many years. The industry has a rich history and is seen by many as the most developed insurance industry in Africa.
But this does not mean that the industry has always been operating in an optimal way. According to the FSB, necessary interventions were needed in order to introduce increased public protection in the market. During the 2013/14 period, key new legislation included the Financial Markets Act 19 2012 and Credit Rating Services Act 24 2012, effective from 3 June 2013 and 15 April 2013 respectively. Both acts are aimed at enabling the FSB to protect South African investors more effectively while aligning itself with international standards.
A key aspect of the FSB is that it does not pass legislation without fully consulting the industry first. This presented both an opportunity and a challenge for the FSB. The opportunity lay in the fact that the regulator was able to engage with industry stakeholders on a regular basis, the challenge was that because this is a long process there were some delays in meeting some of the FSB’s own targets.
“Given its mandate, the economic performance of South Africa will always have a bearing on the performance and activities of the FSB. For 2013, rising unemployment was reflected in higher lapses for insurance policies, or consumers cashing in their savings with some investing in unregulated entities. In response, the FSB stepped up its efforts to educate consumers about the inherent dangers of these practices in tandem with investigations to eliminate undesirable elements in the industry, such as pyramid schemes,” says Sithole.
Changing mandate
In many respects, the efforts of the FSB during the period under review has been working towards Destination 2016, which will possibly see the full implementation of the Twin Peaks model, Treating Customers Fairly (TCF - as entrenched in a formal act), the Retail Distribution Review (RDR) and Solvency Assessment and Management (SAM).
National Treasury is currently reviewing public comments on the Financial Sector Regulation Bill 2013 – draft legislation that covers the first phase of a series of laws to introduce the twin peaks model of financial sector regulation with two authorities, one focusing on prudential supervision and the other on market conduct.
“The bill proposes that the new prudential authority be housed in the Reserve Bank, which will be responsible for overseeing the safety and soundness of banks, insurers and financial conglomerates. The FSB would then become the new market conduct authority, with a mandate to protect customers of financial services firms and improve the way financial services providers conduct their business. This authority would also be responsible for ensuring the integrity and efficiency of financial markets, and promoting effective financial consumer education,” says Sithole.
Judged by actions
There is an old boxing proverb which says, “What a boxer says outside the ring does not count. What counts is what he does inside the ring.” This is one of the sports in the world where actions truly speak louder than words.
In essence, the FSB will also be judged by its actions next year. It promises to be a busy one for the regulator as it intensifies its RDR consultation process. It has to engage with the industry on a number of aspects. Two of the main issues to be discussed would be the difference between being an independent financial adviser and a multi-tied financial adviser, and the safe harbour rates that advisers can charge when it comes to advice fees.
“Although critics argue that the industry runs the risk of becoming over-regulated, the World Economic Forum’s 2013 Global Competitiveness Report ranked South Africa first in securities exchange regulation, and second in availability of financial services. The implementation of the Twin Peaks model is intended to streamline regulation and clarify regulatory scope to ensure the country maintains those rankings for the benefit of all its citizens,” says Sithole.
It will be interesting to see if the FSB can roll out legislation which is beneficial to all. It is all very well that you want to protect the public, but can this be done without micro-managing the industry? There also has to be an element of support when it comes to brokers and advisers in that they also need to be fairly compensated for the work they are doing. The FSB says that this is one of the main objectives of RDR, but again, they will be judged by their actions and not their words. Let us hope that they can create a sustainable industry through RDR.
Editor’s Thoughts:
There is a fine line between regulation benefiting the industry and regulation becoming a barrier of entry into the industry. While the FSB says that South Africa needs to catch up with the rest of the world in terms of regulation, recent regulation in the UK and Australia failed miserably. The question is: if RDR in South Africa fails, will it become a white elephant that prevents young talent from entering the industry? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.
Comments