Insurers will need to weigh up the true cost of compliance
One of the objectives of being stranded on a deserted island is getting back to the mainland in order to assimilate with normal society. While some may argue that being stranded on a deserted island is an idyllic situation, the reality is that it is not. Humans need to adapt in order to survive and they use societal norms in order to define this.
It is the same with the financial services industry. While there is some caution and resistance to the current wave of regulation, which the Financial Services Board (FSB) is hoping to bring into the market, this resistance can only last for so long.
Compliance is inevitable, but the key question is: Are advisers and brokers equipped with the right tools to navigate this wave, or are they left in the middle of troubled waters without a paddle? This was the just of the presentations made on the second day of the second annual Insurance Regulation Conference.
The great debate on the cost of compliance
One of the major concerns in the industry is that the FSB is introducing legislation which will require a significant investment in systems and processes in order to make sure that they comply with the established regulation.
However, Robert Stutterheim, Founder of Robert Stutterheim Consulting, says that compliance does not cost companies a thing. “Compliance is to act in accordance with the wishes, commands or expectations of guidelines provided to a company. Therefore, the actual act of compliance does not cost a company anything,” says Stutterheim.
Whether this is true or not is debateable. There are no less than four pieces of new legislation which is going to be introduced into the financial services industry in a direct or indirect way. Treating Customers Fairly (TCF), the Retail Distribution Review (RDR) as well as Solvency and Asset Management (SAM) are being tailor made for the financial services industry by the FSB. The Protection of Private Information (POPI) Act is being designed by government, but will have an effect on the financial services industry.
Keeping up with all of these acts and making sure that the company is compliant with all of it is a major undertaking, and may require building capacity in a company’s compliance or legal departments.
This is reiterated in almost all of the determinations handed out by the office of the Financial Advisory and Intermediary Services (FAIS) Ombudsman. What complicates matters even more is the possible outlook of the FSB where senior management of insurers will possibly be held responsible for the actions of their advisers.
In order to avoid multi million Rand law suits, companies will most likely increase the capacity in their compliance department. Is this not a cost of compliance; albeit an indirect cost?
RDR remains a mystery
The FSB’s RDR White Paper has still not been published, despite assurances from FSB Deputy Executive Officer of Insurance Jonathan Dixon’s, assurances that the White Paper would be published by the end of May.
Until this is published, much of the concerns regarding RDR are purely based on speculation. Patrick Bracher, Director at Norton Rose Fulbright, says that one of the dangers of the White Paper is that when it is put out, the FSB may have some preconceived ideas regarding the RDR framework, which will be hard to change.
“One thing is for sure, customers need to see value for the services that they get. This means that there will be a lot of consultations between the intermediary and the client. The client must become part of the process and products need to meet their expectations,” says Bracher. He added that the RDR framework will take a similar view to that of the UK model, but will be adapted to suit the South African environment.
A significant issue that RDR hopes to gain clarity on is the issue of remuneration within the industry. Again, Bracher warns that it is dangerous to speculate about this until the White Paper has been published, but he adds that consumerism drives insurance regulation everywhere and that certain aspects regarding remuneration will be hard to circumnavigate.
“We don’t know what the FSB’s thoughts are regarding remuneration, but commission will be hard to stop. Upfront commission will be hard to ban if there is money in the bank for clients to pay for it,” says Bracher.
At least we know where POPI is going
A rough version of the POPI act was introduced to the market least year, but was stopped from being passed into law by President Jacob Zuma. This was because there was specific wording within the Act which needed to be clarified.
However, Zuma didn’t give any indication that the Act itself will undergo any drastic changes. So we do have a basic idea of what we can expect from this important piece of legislation.
The purpose of POPI is that it will give the industry a sense of responsibility and will provide the public with increased protection of their personal information. Insurers and intermediaries need to be clear with clients at all times about what is contained in the documentation and how the information that is being given by them will be used, stored and processed.
One of the most important features that POPI hopes to regulate is direct marketing. If an insurer wants to use the policyholder’s details for direct marketing purposes, the insurer needs to ask the policyholders permission to do so. If the policyholder agrees to this, they can still call the insurer and opt out of this.
The processing of this information is also key. Intermediaries need to be clear on what they are gathering the information for and how the information will be used. Nikki Pennel, Senior Manager at KPMG Corporate Law Advisory Practice, says that POPI will have a significant impact on the industry. “The retention and destruction of records will be a significant challenge when it comes to POPI. The Act will fill in the gaps where existing insurance legislation falls short, and will introduce a level of reasonableness in the insurance industry. Even for clients who do not know the FAIS act,” says Pennel.
There is a cost
Although Stutterheim is correct in that compliance itself does not have any costs, the indirect actions of compliance do have an associated cost. And what is the major deterrent? The penalties levelled against non-compliant companies.
Hennie van der Watt, Head of Risk and Compliance at Alexander Forbes, points out that the Royal Bank of Scotland was forced to pay a fine of £125 million after IT neglect caused its ATMs to go offline for three days. A major insurer was fined £2.3 million after losing customer data which was kept on a memory stick, and we cannot forget the recent fines imposed on South African banks because of RICA violations.
Editor’s Thoughts:
These fines will force companies to invest in systems, processes and human capital which will ensure compliance. The last thing an insurer needs is to be hit with a hefty fine for a challenge they can control. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
