A Pre-emptive Market Conduct Regulator

A presentation by the FSB at the second SAIFM Regulatory Conference covered some very interesting agenda points

Mention is made of four shortcomings of the current regulatory approach: It is said to be backward-looking, compliance based, follows a “one-size-fits-all” and a “silo” approach.

To counter this, the Regulator intends to introduce a new model which is forward-looking, pre-emptive and proactive, outcomes-focused, risk-based and proportionate, comprehensive and consistent and, finally, intensive and intrusive.

These elements are covered in more detail in a summary by Alan Holton, a Moonstone Compliance associate, of the Financial Sector Regulation Bill:

Financial Sector Conduct Authority Approach

When performing its function, the FSCA must have an approach that is primarily pre-emptive, outcomes-focused and risk-based.

Pre-emptive Approach

A pre-emptive and proactive approach will mean that the authority will not be confined to responding to complaints but will conduct on-site visits, thematic reviews, off-site reporting and even do mystery shopping. A pre-emptive approach means addressing risks at their source, such as the organisation’s culture, governance and structural interventions.

Outcomes Focussed Approach

An outcomes-focused approach means that organisations will be required to demonstrate delivery of TCF outcomes. There will be on-site and off-site testing of TCF commitment and in particular, the testing of complaints handling.

Risk Based Approach

A risk based approach will entail a focus on leadership’s insight into and accountability for addressing conduct risks. In particular, whether or not risk management frameworks are geared to identify and manage conduct risk.

The bigger picture

The media release by National Treasury on the draft Market Conduct Policy Framework issued in December 2014 states:

“Working towards a stronger and more effective market conduct framework for South Africa’s financial sector creates a unique opportunity to holistically review and revise the current regulatory framework, considering which aspects of the existing regime work well in supporting positive outcomes and which do not, and working with stakeholders to develop a best-of-breed framework that will put in place more effective, rather than just more regulation.”

It also highlighted the fact that, in many instances, “…poor market conduct practices are driven by inappropriate incentives.”

Whilst the FSB SAIFM presentation deals with the retail distribution of financial products, it is important not to lose sight of the expanded authority of the “new” FSB under Twin Peaks.

Individuals and entities who illegally act as deposit-taking entities have a far bigger impact on investor outcomes than miss-selling by individuals. Whilst the FSB regularly warns the public against such schemes, it is often only after much of the damage had been done. Often such operators will use extensive legal proceedings to delay being brought to book.

Under the proposed Financial Sector Regulation Bill, the Financial Sector Conduct Authority will supervise how financial services firms conduct their business.

Several aspects, contained in the Bill, will strengthen the Financial Sector Conduct Authority’s hand in preventing suspect schemes, or at least limiting the damage.

Some of the key changes envisaged for both the Prudential and Market conduct
authorities are to:

  • Improve its legal enforceability.
  • Provide both authorities with powers in addition to the existing institution-specific laws so they are able to supervise and enforce financial sector laws and regulations in pursuit of their objectives;
  • Empower both authorities to issue standards for financial institutions to follow;
  • Clarify the role of other financial sector regulators under Twin Peaks.

An efficient and empowered market conduct regulator is as important, if not more, than ensuring that individual advisers toe the line.

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