The true motive behind regulation: is the FSB working towards improvement?

Over the past few years, the Financial Services Board (FSB) embarked on a crusade to introduce new pieces of legislation into the financial services industry. While this has been met with some opposition, with many questioning the true motives behind the FSB’s intentions, we need to be open and honest and look beyond the legislation and towards what the FSB hopes to achieve by its introduction.

During this time, the financial services industry has an important role to play in society as the public looks for ways to protect themselves against economic hardship and unforeseen events, such as death and critical illness.

But there are legacy issues that we are facing, as there is a high level of uneducated people in the country who simply do not understand the workings of the insurance industry. At times, unscrupulous product providers and intermediaries have taken advantage of this. And it is this exploitation that the FSB hopes to prevent.

Is regulation stunting growth?

Despite the legacy issues that the South African insurance market has, rating agencies and industry analysts believe that South Africa is the most developed insurance market on the continent and is a trend setter when it comes to its influence on the continent.

Major listed South African insurers are taking the lead in Africa and have a growing presence in many countries with a clear focus on future expansion, something that bodes well for the establishment of a Pan-African insurance industry led by South Africa.

But, whilst having their eyes firmly on the continent north of their national borders, their competitiveness at home may be stifled by regulatory requirements. This is according to a recent report: Dissecting disclosures: benchmarking listed insurers, by professional services firm Deloitte.

Penny Binnie, a Partner at Deloitte, says the industry is bracing itself to comply with a raft of additional legislation. In contrast, companies operating in the UK of similar sizes to listed South African insurers, are operating in an environment where there is clearly far less red tape.

"The report, and other key industry changes discussed in annual reports, show significant amounts of legislation affecting South African companies. With the Western world focusing on reducing red tape to overcome the global financial crisis and enhance competitiveness, it's an unfortunate disadvantage for South African companies to be facing increasing legislation," says Binnie.

She is of course referring to Treating Customers Fairly (TCF), the Retail Distribution Review (RDR) and Solvency and Asset Management (SAM). But what Binnie fails to mention is that markets such as the UK and Australia have already implemented their own versions of this legislation, so South Africa is behind the curve when it comes to legislative implementation.

And perhaps the timing of the FSB's implementation was a shrewd move on their part. When the UK and Australia launched their versions of TCF and RDR, it was met with major industry outcry. So much so that they completely failed and had to be reassessed and re-implemented.

We need to ask ourselves: can the South African insurance industry afford a similar situation?

Comparing apples with pears

When comparing legislative changes facing the industry, the Deloitte study pointed out that only two applied to UK-listed entities. These were BIS regulations and directors' remuneration.

By comparison, South Africa is facing nine changes that range from adhering to the Broad-Based Black Economic Empowerment Act of 2003 Equity Act, through to the Consumer Protection Act, Protection of Personal Information Bill, the Short-Term Insurance Act and the Financial Services Laws General Amendment Bill 2001, amongst others.

But we already pointed out that this is a bit of an unfair comparison because the UK has already implemented key legislation that we are in the process of implementing. The key questions we should be asking are: will South Africa learn from the mistakes made by international markets during their implementation phase, and is our legislation stifling the industry's growth?

At a round table discussion meeting between industry regulators and stakeholders, the issue of RDR was discussed with the industry. The CEO of the Financial Intermediaries Association of South Africa (FIA), Justus van Pletzen, assured the industry that the FIA and the FSB are learning valuable lessons from international mistakes. The FIA's participation on the World Federation of Insurance Intermediaries (WFII) is testament to this as the WFII provides a platform for open discussion regarding regulation.

Van Pletzen added that we cannot take a blanket approach to resolving our issues. The steps taken to resolve international issues will not resolve ours. We need to design a fit-for-purpose programme to achieve that.

Getting to the truth of the matter

While industry regulators and administrative bodies play an important role in the industry, the heart and soul of the insurance industry are the insurers and intermediaries. What are their views on regulation? Thiru Pillay, Group Executive and Chief Risk Officer, Liberty points out that the FSB is creating a situation where product providers are forced to implement mitigation programmes without firm direction on policy framework.

"The volume, rate and closeness of timelines for implementing proposed legislative requirements are creating additional pressure in the sector to meet expectations. The financial burden and shortage of skilled professionals to meet the implementation requirements is significant. Whilst the industry recognises the need for additional financial stability and market conduct regulations, there is a caution that such increased regulation results in increased cost of financial products/services to customers and the cost of additional compliance as a result is significant," says Pillay.

He adds that insurers are going to have to reconsider their market conduct activities and ensure that there is appropriate governance at all levels of the business. This would require a relook and configuration of the way legislation is interpreted, how new products are manufactured and priced and how existing products are monitored, how products are distributed and how customers are managed including TCF.

The danger of this is to implement such processes without firm direction from the FSB on policy framework. This is a major concern for the FSB and was highlighted by Leanne Jackson, Head Treating Customers Fairly at the FSB who called for calm in the industry.

Editor's Thoughts:
Improving the industry and introducing a measure of accountability to product providers and intermediaries are the two main objectives that the FSB hopes to achieve with its new legislation. But delaying it the way that they have done has created an unintended feeling of uncertainty in the market. If they are expecting industry stakeholders to play their part in terms of market conduct, then proper guidelines need to be provided. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

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