Keeping it simple is the solution

Ninety-eight percent of lawyers give the rest of us a bad name, quipped Steven Wright, American stand-up comedian, actor, writer and Oscar-winning film producer.

This view was also applied to the financial services industry at the beginning of this century, which led to the raft of legislation currently governing how we do business.

Prior to 2004, the industry was self-regulated, with the odd rattling of the government sabre to make sure we toed the line. Then FAIS entered the arena, and life, at least in our business, would never be the same again.

This was a mammoth task facing the Financial Services Board (FSB), the regulator at the time. Here was a flourishing industry, selling a diverse selection of products, each unique in its offering via a myriad of intermediaries in different contractual agreements with product providers.

There was no national register of who was doing what, so, as a first step, all financial services businesses were required to apply for registration by 30 September 2004. At Moonstone, which functioned as a representative body to assist the FSB with the process, about two-thirds of the applications were received in the last month, an indication of just how “keen” people were to join the party. Many of those in the funeral business simply ignored the request, leading the FSCA later admitting it was their worst nightmare.

Product diversity

Part of the registration process was to indicate which products you wished to include under your licence. Many applicants simply ticked all the blocks in case they wanted to market new products in the future.

Spare a thought for the regulator which had to put some order into this potpourri. I have no doubt that the initial motive for regulation was anomalies in the investment space, but the rest could not be disregarded, so a one-size-fits-all approach was adopted.

This inevitably led to the mantra of “regulation by exemption”. By way of example: when the regulatory examinations became a reality, those representatives selling funeral policies were required to pass the same stringent professional exam as investment advisers who operated in a substantially more complicated field. With a near zero pass rate, an exemption was announced for these FSPs and representatives subject to the condition that the relevant representatives complete a “bespoke” first-level regulatory examination by a date to be determined by the registrar. This never materialised.

In 2013, we reported on an announcement by the FSB that stated:

“The registrar was satisfied that reasonable grounds existed to distinguish between persons that render financial services in respect of basic and easy to understand financial products and persons that render financial services in respect of more complex financial products.” The objective of the exemption was “…to create an enabling environment for increased access to financial services and to prevent the creation of entry barriers into the industry.” (My emphasis.)

New sub-categories of financial products

In the same notification, the FSB indicated that the exemption was only an interim measure until it was able to effect the required legislative amendments to provide for the new sub-categories of financial products. The proposed amendments provided for the new sub-categories of financial products, as well as qualifying criteria for credit life and funeral policies.

Those very same categories have not yet, to this day, been successfully incorporated in the legislation as intended for the very simple reason that it is far too complicated. Rather than simplify matters, it became a crow’s nest of definitions, exacerbated by the introduction of new legislation and “cross border” conflict between different pieces of legislation – for example, life or short-term.

In March 2021, we commented on a request for input on this matter from the FSCA:

“In 2017, new classes and sub-classes of insurance business were introduced through the Insurance Act, 2017 (Act No. 18 of 2017). Subsequently, the Determination of Fit and Proper Requirements for Financial Services Providers, 2017 (Board Notice 194 of 2017) was amended to ensure alignment between the sub-categories of financial products contained in the Fit and Proper Requirements and the new classes and sub-classes of insurance business under the Insurance Act.

“Notwithstanding the above alignment, it was recently identified that some of the reclassification that took place under the Insurance Act inadvertently resulted in certain complications in the context of the Fit and Proper Requirements.”

Fast forward to 2022

Last week, the FSCA published its response to industry input on a discussion document. The result was another exemption to qualification requirements, expecting affected FSPs to notify the FSCA that it renders financial services in respect of credit life and/or funeral products and applying to the authority to amend the sub-categories of financial products for which the FSP is authorised to render financial services.

In addition, class of business training, experience and qualification requirements are waived until further notice.

It is now nine years after the first attempt to simplify matters and “…to create an enabling environment for increased access to financial services and to prevent the creation of entry barriers into the industry”.

Many FSPs are selling products for which they are not licensed correctly, the Fit and Proper requirements are not being met, and the public, who is supposed to be protected by this legislation, is still no better off.

A more pragmatic approach, rather than a legal one, will address these and other issues. Regulation by exemption is not the answer.

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