Is the FSB truly ready for Twin Peaks?
An unfortunate recurring theme this year was the fact that there are still some brokers, advisers and product providers who do not comply with the guidelines set out by the Financial Advisory and Intermediary Services (FAIS) Act. These individuals (and companies) get reported to the FAIS Ombud who has had a busy year in terms of determinations. According to the latest annual FAIS Ombud report, which was released on November 1 2013, the number of new complaints for the 2012/13 year was 9 949. This is an increase of 1128 complaints from those which were recorded in the 2011/12 year.
An area of concern is the fact that the Ombud had to handle 33 determinations during the period under review, which is an increase from the 25 determinations which was handled in 2011/2012. In fact, 2012/2013 was the second highest period since 2009/10 where 91 determinations were recorded.
This points to the fact that there is a void when it comes to monitoring and ensuring the compliance of the industry, which is a significant responsibility. However, this cannot fall on the shoulders of the Ombud. In fact, the Ombud is the last port of call, it is the place to go when non-compliance is proven and fraud is suspected.
It is the responsibility of the Financial Services Board (FSB), as the industry regulator, to ensure that the industry’s role players are conducting business in an acceptable manner. But the regulator faces its own challenges when it comes to compliance monitoring.
The state of compliance as told by the FSB
According to the latest FSB Annual Report, the FAIS Compliance department’s goal is to ensure that all financial services providers (FSPs) are held to a high degree of compliance with the FAIS Act. The department is also committed to instil the goals of the FSB Treating Customers Fairly (TCF) initiative, in order to ensure that clients are treated fairly within the ambit of the Department’s responsibilities.
To attain the above goals, the department assesses complaints regarding financial services and conducts investigations into FSPs, which could ultimately result in regulatory action. As a result, the department’s responsibilities include the suspension, withdrawal and lifting of suspensions of FSP’s, debarment as well as the reappointment of debarred representatives, the referrals to the relevant authorities for possible prosecution, curatorships, inspections which includes the monitoring of the inspection process and dealing with requests for information from other regulators.
During the 2012/2013 financial year, the FSB received 1027 FAIS related complaints of which 717 were finalised. It opened 3521 cases of regulatory action of which 3009 were finalised. The FSB also had to deal with 2056 debarment cases of which 1594 were finalised. Fourteen companies were inspected by the FSB of which 9 cases were finalised. Two cases were put under curatorship, however, none were finalised.
Is this enough?
If one looks at this from a practical perspective, just over 69% of the complaints which were referred to the FSB were finalised. Although this would be an impressive statistic in any other industry, one person who is defrauded by an unscrupulous FSP is one person to many. The FSB needs to sufficiently increase the capacity of its FAIS Compliance Department so that it is able to work towards a complaint free industry.
The fact that the FSB did not take regulatory action against 512 FSP’s is another worrying statistic. We know from previous discussions with the Deputy Executive Officer of Insurance, Jonathan Dixon, that it is not always easy to get cooperation from a company that the FSB wants to take regulatory action against. If this is the case, do we have to question the abilities of the FSB to ensure FAIS compliance?
Is the FSB ready for Twin Peaks?
South Africa is moving towards the Twin Peaks model whereby the Federal Reserve Bank will oversee regulation and policy formation while the FSB will oversee the compliance of the industry. But is the FSB ready for this mammoth undertaking?
The amount of complaints, debarments and regulatory action taken by the regulator has been steadily increasing since 2010.
In 2010, the FSB opened 817 complaints. In 2011 this increased to 901, it dropped to 628 in 2012 but increased substantially this year to 1027. While the drop in 2012 pointed to the fact that the regulator was possibly in the right path, an increase of 399 complaints is unacceptable.
A debarment is a serious issue in the industry as it is a drastic step by the FSB to strip a broker/adviser from his/her licence. In 2010, the FSB took this drastic step with 1006 advisers/brokers. This increased to 1168 in 2011, dropped to 1163 in 2012, and again increased dramatically in 2013 to 2056 debarments.
While it must be pointed out that these debarments and complaints represent a small portion of the industry’s FSP who are largely law abiding citizens, it does point to a growing element of lawlessness in the industry. And we don’t need to remind South Africans how a small element of lawlessness can spiral out of control.
Although we don’t have much of a choice in the matter, we have to question whether the FSB is ready for its role as the compliance regulator under Twin Peaks.
There are a few aspects which will be working in the FSB’s favour. Currently, the regulator is responsible for policy development (which it does in consultation with National Treasury), the implementation of policy, and the enforcement of policy. Under the Twin Peaks model, the Reserve Bank will take over the duties of policy development (in conjunction with Treasury) and its implementation. The FSB will only be responsible for compliance.
Editor’s Thoughts:
When
addressing the media at the launch if the annual report, FSB CEO Dube Tshidi
said that 2012/13 was a significantly challenging year for the regulator. And
the stats highlight this challenge. The FSB won’t be measured by the warnings
it puts out, but the action that it takes against the law breakers. Their
success under the Twin Peaks model will depend on its ability to work towards a
zero incident industry. Please comment below,
interact with us on Twitter at @fanews_online or email me your thoughtsjonathan@fanews.co.za.
Comments
Indeed, the FSB will at first say that this is their ideal but in later years will admit that it is mission impossible. All the poor fellows can hope for is a year on year reduction per policy in force.
If FAIS has been unable to improve persistency by a single jot over ten years, it is most unlikely to prevent people continuing to make fools of themselves, TCF and "twin peaks" notwithstanding. Report Abuse