Is Market Conduct Regulation Working?

An article entitled Regulation not crippling sector, FSB contends by Gillian Jones in Business Day provides two differing perspectives on this issue.

On the one hand, there is the view of Johan van Zyl, Sanlam group CEO, that the regulatory authorities were trying to “…introduce too many new regulations over too short a time.”

In response to this, the FSB’s executive officer, Dube Tshidi, indicated that the Regulator follows “…a gradual and consultative approach to regulatory reform designed to ensure that the standard of financial regulation in South Africa remains world-class, while appropriate to local circumstances”.

A third document which provides a practical perspective on the issue was written by Magnus Heystek. His article RDR – Nasty and unintended consequences is sub-titled “The threat facing financial advisory services, and lessons from the UK’s mistakes.” He looks at the current situation in the UK, and then switches his focus to the local market.

The process known as the Retail Distribution Review (RDR) in the UK is the culmination of a process started years ago to remove the potential conflict of interest inherent in the commission remuneration model, particularly as far as investment business is concerned.

The result of the final implementation, according to Heystek, was a substantial reduction in the number of advisors, and financial advice becoming unaffordable for the middle and lower classes.

Tim Steer, who manages the Artemis UK Growth Fund, confirms this in an article in The Telegraph:

“My conversations with some in the industry indicate that many in what’s left of the adviser market are not prepared to deal with clients with modest amounts of money. Banks are worried about regulation and are pulling out. So where do smaller investors and savers get advice in the new world?”

He also states that smaller funds are also feeling the squeeze: “…Research indicates that the proportion of money invested in the top 10 UK funds has increased in the past two-and-a-half years to 38pc. Tracker funds are more popular, accounting for 32pc at the last count.”

“What does this all mean for UK equity funds? They are becoming polarised with the bigger getting bigger and more money ending up in risk-averse products such as trackers.”

There is little doubt that the same is happening here, stemming from concerns that advisors have about prosecution in case of giving wrong advice. “Conforming” has replaced “Appropriate” as the guideline when it comes to financial advice.

One can understand why the FSB feels that “…the standard of financial regulation in South Africa remains world-class…” This is possibly so, from a prudential regulation perspective, and something we should be proud of. Being part of the international financial stage, we actually have little choice but to be on top of our game.

There are some that are not convinced that the same can be said for the second component of the envisaged “Twin Peaks” model. They are of the view that legislation has become so complicated that it is almost impossible not to transgress some legal prescriptions, often unknowingly.

A second factor that hamstrings regulation of market conduct is the huge amount of red tape which prevents speedy action in cases of suspected transgressions, and leads to the perspective that the FSB is largely reactive.

One can only hope that the Twin Peaks model will bring greater clarity on the local reality, rather than a focus on what is happening elsewhere in the world.

The fact that RDR appears not to be working in the UK, should act as deterrent to the authorities to proceed until a workable alternative is found for South Africa.

The quality of interaction by the Regulator with the industry on the possible review of legislation, including remuneration, is highly commendable. It has already identified a number of potential pitfalls and is working closely with the industry to find a practical solution.

This approach will hopefully act as a blueprint on the road ahead, leading to closer cooperation and a win-win outcome.

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