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Are We Experiencing Regulatory Overkill?

The head of Britain’s recently formed Financial Conduct Authority (FCA) was accused of backtracking on a promise to introduce “proportionate” red-tape on insurance brokers by the British Insurance Brokers Association (Biba), according to an article in The Independent, published on 30 December 2013.

Steve White, the chief executive at Biba, told The Independent: “The issue is the cumulative effect. Individually, each review has merit, but our concern, as shared by our members, is that they are causing an obstruction to serving customers – with more reviews to follow.

“This certainly doesn’t feel proportionate, particularly given the low risks of the broking industry.”

The biggest risks associated with brokers are that they might give poor quality advice on the policies that clients should purchase and they could cause those customers to lose money. Neither of these are the type of seismic impacts that could be identified as potential causes of a financial crisis.

Many brokers in South Africa share the sentiments expressed in the last paragraph.

I find it a rather strange view, given that the Brits are supposed to be the leaders in terms of treating customers fairly. One should of course not lose sight of the fact that one customer may be an insignificant fraction of all clients in the industry, yet for that customer, the personal impact can be severe.

Changes in the South African context, in contrast to the views expressed above, were handled in a far more democratic manner. The way in which the improper application of binder agreement regulations were handled is but one example of how the problem was resolved through consultation, leading to a final directive which left no-one in doubt of what is expected, and the consequences of non-compliance.

The same applies to the Retail Distribution Review which is currently under way. Feedback from the industry to a discussion document led to the Regulator acknowledging that the whole matter was far more complex than it had previously thought, and an undertaking to go back to the drawing board. This is in sharp contrast to what the Brits appear to be unhappy about.

A discussion document is due for publication in May this year. The FSB has given an undertaking that it will not be a carbon copy of the RDR implemented in the UK which led to a huge fallout in broker numbers.

What does the bigger picture in South Africa look like?

I attended a seminar by Anton Swanepoel, aimed at updating the industry on imminent legislative changes, and the same message, as expressed above came across.

A recent article published by Walkers Attorneys contained a different point of view:

The steps intended to ensure a top-end well-regulated insurance sector, fair treatment of policyholders, accountability, and the like, are meant well and in line with steps in developed economies. However, we have a history of well-meant steps having unintended consequences.

The steps are contained in a variety of statutes in various stages of progress, and it is virtually impossible for a long-term insurer (or Insurance Group) to develop a coordinated and systematic approach to compliance.

The cost and effort of due compliance with the tsunami of legislation is likely to increase the cost of doing insurance business to such an extent that consolidation (meaning the demise of smaller insurers) and premium increases (in practice funded by policyholders) may become inevitable. The fallout from structural changes brought about other than by market related forces often hurt the persons ostensibly being protected.

We approached the FSB’s Jonathan Dixon, Deputy Executive Officer: Insurance for his views on these comments.

I cannot agree with the comment that it is virtually impossible for insurers to keep track of regulatory reforms and the definitive statement that the changes are likely to increase the cost of doing insurance business.

The FSB spends considerable time and effort on industry consultation and communication to ensure, not only that industry players are continuously aware of planned regulatory changes, but also that their input is actively sought early on in the reform process. We have also demonstrated that we respond to this input. While it is acknowledged that we are undergoing a complex raft of regulatory reforms to ensure that standards of insurance regulation in South Africa are aligned with international standards and adequately protect policyholders, this is the very reason why we have set up such robust consultation channels.

All of the various regulatory reforms are designed to be supportive of the long-term sustainability of the insurance sector – both in terms of ongoing financial stability and improving the confidence and trust of consumers in the insurance industry. The regulatory changes will have short-term implementation costs, but these cannot be viewed in isolation from the longer-term benefits, both for consumers and the industry. The FSB, together with the National Treasury, undertakes explicit cost-benefit analysis, such as the SAM Economic Impact Study, to understand these trade-offs. We view many of the reforms, such as the governance and risk management requirements, as being consistent with good business conduct, and not an additional cost of doing insurance business. We have also requested industry input on how to ensure that these requirements are applied in a way that is proportionate to the nature, scale and complexity of the risks in the insurance business.

Lastly, many of the reforms being introduced through the Twin Peaks regulatory changes are designed to streamline regulatory requirements and make them consistent across the financial sector, thereby reducing compliance costs. The combined benefits of better risk management practices, enhanced risk-based capital requirements, improved oversight over business conduct, and streamlined regulation are expected to translate into lower premiums over time, and will certainly help avoid the potential catastrophic costs to consumers of insurance failures or miss-selling of products.

In summary, there is no doubt that we are going through a dynamic period of insurance regulation, but the bigger picture is that we are well on our way to an industry in which risks are better managed and consumers can have more confidence that they will be treated fairly. It is a journey during which we remain committed to travel hand-in-hand with industry.

My conclusion, after attending Anton Swanepoel’s seminar, is twofold:

  1. The focus of impending legislation is much more on product providers than on intermediaries and
  2. We are far better equipped to face the future than we were, ten years ago.

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