Regulatory developments signal major changes for industry

Myra Knoesen, FAnews Journalist

In an environment focused on customer centricity and treating customers fairly, the regulatory landscape is inherently more complex, with supervision and enforcement more confrontational, intensive and intrusive. This is according to Benjamin Vosloo, Manager at KPMG South Africa.

“Regulators are making judgments about the nature and transparency of customer advice, and about the suitability of the products sold to customers. How firms respond to and manage this will be crucial to their future success,” he said. 

FAnews spoke to Vosloo about this and other issues the industry currently faces. However, before we move onto his feedback let us look at some findings. 

Local landscape trends

According to a KPMG report, covering the emerging insurance regulatory trends, South Africa is undergoing significant changes in both market conduct and prudential regulation, as a result of the implementation of the Twin Peaks Model and other related enabling legislation. 

Vosloo agrees thatthe South African insurance market is undergoing a significant positive change. “Developments across market conduct and prudential regulation keep the industry on par with the most well regulated insurance markets in the world,” he said. 

He mentioned that the prudential regulation of the insurance industry in South Africa is moving ahead steadily with the continuing development of Solvency Assessment and Management (SAM). 

“This will see insurers’ information requests from intermediaries increase. The type and detail of information required, for example, intermediaries reporting to insurers is expected to change,” he said. 

There is also the possibility, according to Vosloo, that capital charges arising under SAM in respect of the credit risk associated with premium debtors and amounts owing by intermediaries to insurers, will either be recovered from the intermediary or there might be increased pressure on intermediaries to repay collected monies more quickly. 

More defining moments

“Market conduct regulations are expected to impact the intermediated business model the most. The onus of compliance will mostly reside with the insurer. Intermediaries can expect more stringent provisions being included in intermediary, binder and outsourcing agreements to ensure fair treatment of customers,” continued Vosloo. 

“Increased activity from the regulator has seen many insurers reacting to ensure that their Treating Customers Fairly (TCF) programmes are in place and well evidenced. We can expect that the light-tough approach to market conduct supervision will change under the new mandate of the Financial Sector Conduct Authority (FSCA),” he said. 

“The regulators are also in the process of clarifying the demarcation rules between the health insurance and medical schemes industries. The proposed regulations aim to change existing practices applied by insurers to their health insurance products so that similar principles, to those of medical schemes, are applied to the health insurance environment. This will impact this section of the intermediary market immensely,” he continued. 

Added to this is the fact that the Retail Distribution Review (RDR) paper will change remuneration structures. “RDR will change and clarify the types of intermediary services offered. It will also change relationships between product suppliers and intermediaries. RDR is not expected to be implemented before mid 2016,” he said. 

Vosloo further mentioned that where in the UK there is an impact on investment products only (effectively a commission ban); in South Africa there will potentially be an impact on short-term insurance and life risk products as well (where 50% of the commission will be paid upfront and 50% on an as-and-when basis). 

“Firms are attempting to find the strategic and competitive advantage in the new regulatory requirements as they are increasingly realising that organisations based on foundations other than those that are customer-centric will not be sustainable. Only time will tell whether these proposals fit the South African industry and environment, but the unintended consequences may be that the number of advisers in the industry will reduce resulting in fewer sources of advice,” he continued. 

Adapt or die

Vosloo said those advisers offering good value for money are likely to thrive under the new legislation. “Customers will now be able to clearly understand the value they are getting for fees paid to the adviser,” he continued. 

He encourages advisers to change their cultures to ensure that every business decision, strategic or operational, has a customer focus. This will eliminate the need for regulators to create more regulations. Advisers should also stop trying to get around the regulations and rather embrace the spirit of the regulation. 

Even when firms have complied with all regulations, Vosloo said advisers should apply the six TCF outcomes to business processes. These are strategy, products, distribution models and fulfillment models. This will ensure that customers are being treated fairly and to ensure market conduct by training staff and improving the effectiveness and efficiency of in-house regulatory and compliance teams. 

And lastly, Vosloo said intermediaries can also consider defining conduct risk from the intermediary’s perspective, engage product providers in order to leverage from processes implemented at a product level, establish a healthy, positive relationship with the regulator and the product provider and be prepared for their visits or requests. 

Editor’s Thoughts:
Regulation is here to stay so we need to prepare rather than find fault because that will not help us. These changes will create a sound foundation for the industry to be recognised as one that can be trusted over the long-term. Do you agree? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts myra@fanews.co.za