Is regulation increasing costs in the retirement industry?
07 April 2014 | Talked About Features | Straight Talk | Jonathan Faurie
The purpose of regulation is to provide an industry with a framework so that it has clearly defined guidelines in terms of acceptable business practices and treating customers in a manner whereby they are not taken advantage of.
In the past, this was seen as a necessary evil and was largely accepted by the industry. However, not all companies complied with this, which prompted the Financial Services Board (FSB) to introduce new regulation which it hopes will clean up the industry.
This has been met with major opposition and criticism as compliance requires a significant investment in resources, particularly in the legal department which is responsible for managing the growing risk factor that regulation is presenting.
Is retirement saving becoming more of a smoke and mirror industry?
Retirement saving had never been an exact science; there are a lot of factors that one needs to take into account when choosing the right investment strategy to suit an individual. But is this being complicated by new FSB regulation and government's new outlook towards retirement reform?
Arabella Bennett, a Director in the banking & finance business area at ENSafrica, says that the South African legal and regulatory environment for pension funds is perceptibly active and is becoming increasingly complex for trustees and investment professionals to navigate. "The need for specialist legal advice is no longer optional as the regulator places more stringent compliance requirements on the financial services industry," she says.
In the investment space, the South African regulator has been concerned predominantly with ensuring that there is direct regulation of everyone involved in the financial sector, adopting reforms to ensure that clients are treated fairly and following international proposals in the wake of the global financial crisis.
"Significant steps have been taken in this regard, especially in the field of asset management. The Credit Ratings Services Act now provides for the regulation of credit rating agencies, whereas the new Financial Markets Act provides a regulatory framework for over-the-counter derivatives. In 2012 we saw the release of the final conditions for investment by pension funds in private equity funds, and for the conclusion of securities lending by pension funds. In October 2013, the FSB published draft conditions for investments by pension funds in derivative instruments, and draft conditions for investments in hedge funds," says Bennett.
Don't lose sight of the value of legal advice
In the consumer protection space, the FSB is developing a programme for regulating the market conduct of financial services firms. Treating Customers Fairly (TCF) seeks to ensure that fair treatment of customers is embedded in the culture of financial firms.
The programme is only likely to come into effect during the course of 2014, or possibly even 2015, but many firms are already evaluating their practices and the FSB expects companies to adhere to the proposed TCF guidelines as of the beginning of the 2014.
Also known as The Roadmap, the thinking is that this will become law once the Twin Peaks Model is implemented. TCF principles will either be built into the licensing conditions for pension funds, or alternatively into the sample precedent agreements that the Registrar's office is working on. Bennett points out that there is expressed concern regarding the potential exploitation of this in light of the legal ultra vires doctrine.
"Fees related to financial services products is a long standing debate with significant pressure being placed on the industry to address fee structures across asset classes. In July 2013, Treasury published, for comment, a technical discussion paper specific to charges in the retirement industry. Part of an on going investigation into measures that will promote household savings and reform the retirement industry, this document is likely to form part of the wider debate on the possible regulation of the charges financial sector firms apply to client investments," she says.
One such reform that is already in effect relates to the more detailed regulation of conflicts of interest of financial intermediaries and advisers licensed under the Financial Advisory and Intermediary Services Act (FAIS).
Will there be double jeopardy in the industry?
There was some on-going uncertainty on the issue of whether asset managers need to register under the Pension Funds Act as well as FAIS, this uncertainty arose because of an exemption granted in terms of section 13B. The issue has now been resolved; when checking the licensing of a Financial Services Provider (FSP) in the context of the ability to act, it's only necessary to check the relevant FAIS licence.
"The FSB will create a new licence category for FSPs who act for sophisticated clients, such as banks and high net-worth individuals, who previously benefited from the merchant banking license. We expect it to involve a lighter form of regulation. The Financial Services Laws General Amendment Act, which will abolish section 13B for investment administrators, is also expected to become law soon," says Bennett.
She adds that in terms of the extra-territorial application of the FAIS license, there is now an exemption for foreign financial services providers who seek to render purely intermediary services. This has been of particular interest to foreign suppliers.
Editor's Thoughts:
Regulation is becoming a significant risk factor which companies need to adhere to. This makes the legal department of companies a significant part of the companies and will increase the company's costs as opposed to decreasing them. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
Comments
Regulation is not 'becoming' a significant risk factor for the industry, it has been a significant risk for over a decade now. It has simply been further intensifying and is now worse than ever - getting worse every day.
A PriceWaterhouseCoopers survey conducted three years ago showed that financial services CEO's already consider regulation to be the single biggest threat to the future of their businesses. So it's not suddenly 'becoming' that way now. It's an unresolved problem that has yet to be dealt with properly by sensible men and women who do not work for any quango or other government agency. The quangos themselves have entirely lost the plot and, to quote the head of Sanlam, are now entirely out of control in a wild orgy of power grabbing, thinly veiled behind the so called "lessons of the international credit crisis".
Private insurers and pension funds played no role whatsoever in the two financial crises caused exclusively by the US government insisting that banks lend money to "sub-prime' borrowers and later by profligate European governments spending money like drunken sailors.
A new government is going to have to intervene and curtail this surge for power, position, authority, empire building and "draconian intrusion" in the way the British government recently disbanded their failed FSA.
We all understand the need for consumer protection, but the present policy direction does nothing but raise costs and reduce choice for consumers.
In South Africa it has the additional negative effect of actively mitigating against transformation of the industry, greatly disadvantaging people in my general group.
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