Living up to the mandate of licence to change
Over the past two years, brokers and advisers in the insurance industry have had to deal with a lot of change with regards to the way they engage with clients and the way they will be remunerated in the future. This has had some form of impact on the way that business in the industry is conducted. While the industry waits for a period of calm, 2016 will not be that year.
FAnews spoke with Jonathan Dixon, DEO of Insurance and the Financial Services Board (FSB), and he said that 2016 will bring major changes to the industry. “Two major pieces of legislation will be in Parliament this year. In combination, it will promulgate the biggest change to the insurance regulatory environment in more than 25 years since the FSB and the Insurance Acts were first put in place.
Agents of change
Dixon reports that the first of these pieces of legislation is the Financial Sector Regulation Bill (FSR Bill), which will introduce the Twin Peaks model of financial regulation. This will see the prudential regulation of insurance shift to the South African Reserve Bank, while the FSB will become a dedicated market conduct regulator, to be termed the Financial Sector Conduct Authority (FSCA). Deliberations on the FSR Bill already started in Parliament towards the end of last year, and it is hoped that the Bill will be promulgated by the middle of 2016.
“The other major piece of legislation is the Insurance Bill. The Insurance Bill will put in place the Solvency Asset Management (SAM) framework, as well as a framework for formal insurance group supervision and a micro insurance framework. The Insurance Bill will be deliberated on by Parliament later in 2016, with a planned effective date of 1 January 2017,” says Dixon.
He adds that as the Insurance Bill is framework legislation, a significant amount of the requirements under the Bill will be given effect through subordinate legislation, in the form of Insurance Prudential Standards, including standards on financial soundness, governance and reporting. There will also be specific standards for micro insurers and insurance groups. The draft standards will be published in the first half of 2016 for public consultation.
Added to this is the Retail Distribution Review which is being drawn up by the FSB. Guidelines to its implementation are constantly being communicated to the market so that no broker, adviser or intermediary is left in the dark.
Industry agitators
We need to look at what is the point of all of this regulation. It is the FSB’s hope that the regulation will create a financial services industry that adheres to international best practice principles and is comparable with the best industries in the world.
However, it is all very well implementing these laws, but is it improving the industry? “In terms of market conduct regulation and supervision, the implementation of Treating Customers Fairly (TCF) principles remains a work in progress. There are certainly some examples of excellence, where insurers have undergone a thorough analysis of their business models from a customer treatment perspective and have made proactive changes to their products, policies and processes to reflect these lessons and to embed a culture of TCF,” says Dixon.
This is good news. However, there are still industry bad apples. Dixon admits that in terms of market conduct regulation and supervision, the implementation of the TCF principles remains a work in progress.
“Many insurers that have been reviewed as part of on-site visits have made insufficient progress in demonstrating that they have embedded a culture of fair treatment of customers. A particular area of concern is insurers that have employed a largely outsourced business model. For example, the thematic review of binder arrangements found that there was little to no evidence indicating that the sampled insurers are continuously assessing and addressing market conduct risks relating to the distribution and servicing of policies through binder mandates. The outsourcing of insurer functions under these circumstances can significantly increase the risk of poor outcomes to customers,” says Dixon.
Industry buy-in
At the end of the day, the FSB can introduce all of the pieces of legislation in the world, but the industry must be willing to change. Dixon expanded on some watch points industry participants need to look out for in order to avoid acting against the consumer’s best interests.
“These pitfalls are best avoided by regulated firms prioritising TCF Outcome 1 – ensuring customers can be confident they are dealing with a firm where TCF is central to the corporate culture,” says Dixon.
He adds that this entails:
- An organisation’s leaders to accept ownership and meaningful accountability for delivery of identified TCF goals, including mitigation of identified risks to poor customer outcomes.
- Governance structures managing these market conduct risks proactively to ensure that TCF outcomes are demonstrably delivered throughout the product life cycle, from product design and promotion, through advice and servicing, to complaints and claims handling.
Editor’s Thoughts:
One can see why brokers and advisers may at times feel as if they are like jugglers in a circus trying to comply to all of these new laws while trying to make a living. The fact that the industry will see its biggest change in 25 years is an ominous sign of things to come. But the question still remains: is this change truly necessary? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.
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