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Mirror Mirror on the wall, is regulatory reform beneficial after all?

17 April 2018 Jonathan Faurie

Regulation is one of the few things that every company in the world bemoans. Over regulation is one of the things that every company in the world fears worse than a volatile economic climate.

These are two business truths that are universal. No matter where you go in the world, every successful industry operates within an environment that does have rules and regulations, which are not overbearing. 

We need to ask the following question: with the wave of regulatory reform that has been introduced in the financial services industry, are we heading for an over regulated industry? 

FAnews recently attended an event that was hosted by the Free Market Foundation (FMF). They had a lot to say about regulatory reform and some of the statements that were made were very blatantly against regulatory reform. 

The good old days?

The FMF made specific reference to the Financial Advisory and Intermediary Services (FAIS) Act which was introduced in 2002 but was only enacted in 2004. 

“Before the introduction of FAIS in 2002, the industry was governed by common law and the courts did rather well in regulating the industry by basic principles of Contract Law. What was the result of this? It worked like a dream. South Africa was a shining light in the world and punched well above its weight when compared to its international counterparts. During this time, two major insurers managed to go for 50 years without reporting any losses,” said Professor Robert Vivian, a Professor of Finance and Insurance at the School of Economics and Business Science at the University of the Witwatersrand.

Then came FAIS

Prof Vivian painted a picture of an industry that was thriving and did not need any further regulatory intervention at that stage. 

"The Financial Services Board (FSB) alleged this lapse rate was caused by mis-selling by intermediaries. They added that a trained intermediary force would solve the problem of the then improving lapse rate. Further, the FSB said that the savings from the decreased lapse rate would cover regulatory costs 3 to 1; which would basically equate to costless intervention,” said Prof Vivian. 

He added that by no means was it clear that concern over the lapse rate gives rise to a valid regulatory objective, and there was no concern raised by the public. Further, there was no evidence that the lapse rate was caused by mis-selling. 

Defeating its purpose

According to Prof Vivian, FAIS already fell short of its objective of resolving the lapse rate situation because there was no demonstrable evidence that regulatory action would resolve the mis-selling situation. 

But, Prof Vivian said that the biggest failing of FAIS is that it did not bring in the savings that it promised. “The staff at the regulator increased to 600 people and is still rising. Current regulatory interventions have cost the industry R1 billion/year and is set to double with the introduction of Twin Peaks, and a further R2 billion/y in additional costs was imposed on the industry, and ultimately the consumer,” said Prof Vivian. 

Further failings

But the blame does not stop here. Prof Vivian pointed out that it was government – National Treasury (Treasury) in particular – who capitulated and gave these powers to the FSB. 

There is no provision in the Constitution allowing parliament to delegate its legislative powers to anyone, it is an implied provision, but it cannot abdicate. And yet it did. 

“The only objective of regulatory reform is to create a massive bureaucratic empire that will enrich those who run it substantially,” said Leon Louw, the Executive Director of the FMF who added that there is virtually no skills at the FSB to speak of; “there is virtually nobody there who have, themselves, been successful operators in financial markets, who have run financial intermediary or product providers,” said Louw. 

The FSB responds

If we take the above information on face value, it is very damming on the FSB. We gave the regulator a chance to respond to the allegations made against it by Prof Vivian and Louw. 

Tembisa Marele, Head of Communications & Liaison Department at the FSB, provided us with the following reply: 

“The FSB, Treasury, and the South African Reserve Bank (SARB) have been preparing for these Twin Peaks reforms for a number of years now. This has included an extensive consultation process with the financial services industry,” said Marele. 

She added that over the years, the FSB has received very constructive feedback; and has used this to further refine its approach. 

“We are encouraged by the support many in the industry have given to these regulatory reforms, and we are committed to continuing with the consultation efforts to ensure that the changes are implemented effectively and optimally, to the benefit of both the industry and consumers of financial products,” said Marele. 

She added that if the FMF has any constructive contribution and recommendations they wish to make, they are more than welcome to do so. 

Editor’s Thoughts:
At the end of the day, the FMF and the FSB will defend their positions. The only opinion that really matters is yours so take part in our poll. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

Comments

Added by Humphrey, 18 Apr 2018
It would be good if the regulator practiced what they preached. Plain language, simple clear regulation (of course not over-regulation) in the same manner they expect insurance policies to be written in. Reading some of the latest regulation (e.g. PPR reveals exactly the opposite - close to 60 pages of over complicated drivel) it is clear that there seems to be self justification in the length and complexity of the legislation produced.
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Added by Kenny, 17 Apr 2018
Yes, completely overregulated. And in response to above comment. Yes there is churning.. it doesn't take the creation of a regulator to sort that out.. it simply takes the life companies or a broker house owner to establish a policy which prevents it. Financial Planning? to the average man/ woman in the street... I say rather they have some cover than not... How many people have ever been covered up to the level of an fna?? business planning, different story.... but with a huge underinsured gap, causing further poverty on the population... I say get rid of the overregulation. Reading an article about how the states started closing the gap in cover, by using teachers... what a brilliant idea. Little successes breed confidence and increase the ability of doing better (think planning better). Why are funeral policies so prevalent? is this because the licence is easier to obtain? wouldn't cheaper life policies with more cover be better... and I wholeheartedly agree that the regulator staff are not actually versed in the practice of dealing with the clients day to day. Perhaps their consultations should be directly with the man in the street. They are costing this country money for no discernible benefit.
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Added by Ayanda, 17 Apr 2018
Prof Vivian is entirely correct.
FAIS has been a complete and utter failure when judged on almost any criteria, especially those given in the preamble to the Act and as given in the cost-benefit analysis done to 'prove' to Parliament that it would work.
It is a sham and will ultimately be repealed when it is finally uncovered, along with the massively expensive permanent-jobs-for-pals that "twin peaks' now is.
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Added by Nursee Parannath, 17 Apr 2018
I fully agree with the above sentiments, nonetheless FSB regulations has done some good for the consumer by addressing the 'rogue' elements in the industry, both insurers and intermediaries. Of concern to me are:
1. We probably have the most advanced Regulatory Authorities on the planet. It did not stop illicit monies flowing out of the country - and it probably never will.
2. The Regulators (including SARS) are almost ruthless when dealing with the ordinary citizen, but yet, if you are connected, well who cares.
3. We are, in many respects a 3rd world country, with unprecedented employment issues. These Regulations STIFLE growth and employment. In Economics it is called "unintended consequences" of well meant processes.
4. The advisory bodies and finance companies merely "suck up" to the regulators by simply toning down their threats of going ahead with stringent regulations, which they do in any case.
5. One has to ask what knowledge, education, experience or competence do the staff of the Regulators, including the training authority Inseta has in the industry.
6. As for required Qualifications to practice in the industry is absurd . A person with 500 credits need not be qualified to service the needs of the industry.
7. Walk into any Financial presentation by any Body or company, you will see very little transformation - over 22 years into our Democracy. WHY? Over-regulation.
8. Over regulating the man in the street will NOT STOP those who are intent on doing illegal transactions or the normal Corporate who WILL and DO find loopholes to bypass the Regulators. It been happening for decades and will continue to do so.
9. My appeal to the Regulators is: Please do some research on how you can assist to create employment. So far you are discouraging any new entrant into the industry and encouraging experienced persons to leave.
10. Look at your stats as regards employment - does it bother those that have the power to make sensible economic decisions.
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Added by Allan, 17 Apr 2018
Over regulated?
How is this from the new Fit and Proper (Operational Ability S 37(2)(f)):
The governance framework of an FSP must have internal controls that include a recovery plan for the restoration of the FSP’s financial situation following a significant deterioration and viable resolution plan setting out options for the orderly resolution of the FSP in the case of failure (S 37(2)(f))

Huh??? One wonders if the author of this piece has ever actually been in business. . . Nevertheless such person is now able to regulate a business!
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Added by AndreK, 17 Apr 2018
How spot-on is this not from FMF? The lack of resistence from the industry is remarkable. They decided to rather work with the regulator than oppose them at the cost of the intermediary and the public. Very few clients have advisors lately and that will decrease since the cost at servicing them, makes it impossible for them to afford it. Just look at the size of the gravy train, good heavens!! The Assurance companies make more money in other countries where there are not such a gravy train.....more than double commission, etc.....huge profits! After 37 years in the industry, I do have a birds view of what has happened...
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Added by Anton Schutte, 17 Apr 2018
As someone with 31 years experience in financial planning I can categorically state that the current wave of regulation is, in my opinion, warranted. I have come to realise that the vast majority of representatives sell products as opposed to doing financial planning. Churning of policies has been rife and client relationships and reviews non-existent. In many cases the outcomes for clients have not been good. There are pockets of excellence and some Advisors are starting to change their business models but there is a lot of work to do.
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