The Draft Market Conduct Framework, published in December last year, identified the diversity of legislation regulating different sectors of the industry as one cause for the Regulator’s inability to supervise effectively across the financial services industry.
The same applies to practitioners in the industry as far as complying with the regulations is concerned. One sometimes gets the impression that certain aspects of the FAIS Act, for instance, was aimed at addressing problems in the investment arena, yet was beaten into a different shape to be applied to the short-term industry. The Regulator has identified this, and plans are afoot to address it.
The proposed framework identifies the problem from the Regulator’s perspective as follows:
Regulatory siloes impede reform
South African financial institutions are subject to an incomplete and inconsistent legal framework for market conduct, creating opportunities for regulatory arbitrage, and meaning that the level of customer protection depends on the industry and distribution channel. Within this fragmented system financial customers tend to be easily overwhelmed. These effects are heightened by regulatory requirements that tend to focus on sub-sector rules rather than on consistent, cross-sectoral outcomes.
Financial institutions find this structure cumbersome and costly, requiring multiple licenses and being subject to multiple Registrars which typically each operate in a different way, with different and at times competing objectives. A siloed approach to financial sector regulation – with each sub-sector governed by a separate and distinct piece of legislation – has naturally led to siloed supervision. With this level of legal complexity, full harmonisation of regulatory and supervisory standards remains compromised, impeding the FSB’s best efforts to strengthen conduct holistically across the sector.
The following graphic shows how the Market Conduct Regulator plans to merge existing legislation into a far more effective tool for supervision:
This is a highly challenging project, but both the Regulator and the industry will benefit from the clarity it will provide.
There are of course other Acts which still overlap with both the current and proposed new Acts outlined above. The RDR discussion document makes mention of this.
Activities regulated by the National Credit Act 34 of 2005 are outside the scope of this paper. Broader engagements are however underway between the National Treasury, the Department of Trade and Industry, the National Credit Regulator and the FSB to develop a co-ordinated approach to reducing household over-indebtedness, as mandated by the Cabinet.
Another example concerns the remuneration of intermediaries in the healthcare arena.
Where distribution of medical schemes is concerned, certain aspects of the distribution model are regulated by FAIS, while the Medical Schemes Act 131 of 1998 also imposes supplementary requirements – particularly in relation to intermediary remuneration. (My emphasis). Co-ordination with the Council for Medical Schemes will be necessary to consider how best to ensure that the objectives of this RDR are achieved in relation to health benefit brokers and medical scheme distribution.
This issue also emerged in discussions around the draft Demarcation Regulations, where participants expressed concern about the practicality of aligning commission payable on the sale of health insurance products, such as gap cover, to the restrictions applicable to medical schemes commissions.
If remuneration for the distribution of financial products is to be the domain of the new Market Conduct Regulator, then it should also determine the fees for such services, and not another body which falls outside the scope of the proposals to consolidate legislation to enhance regulation and compliance.