A Regulatory Paradigm Shift

The FSB has a new approach to regulation, in line with its additional obligations under Twin Peaks.

Mr Jonathan Dixon, Deputy Executive Officer: Insurance at the FSB, reiterated the Regulator’s stance as late as last week during an address at the Insurance Conference.

The following slide from his presentation sums it up very neatly:
regulatory paradigm

It seems logical that, for this new focus to work, closer attention should be paid to the origins of problem areas, rather than its undesired outcomes.

Criticism was often levelled at what some viewed as unfair focus on the small fry in the industry. This was mainly the result of media focus on FAIS Ombud determinations, while the bigger fish appeared to receive less attention.

The “Statement of Intent”, published on 12 December 2005 by the long-term insurance industry and the Minister of Finance, set out measures which would be implemented in respect of long-term savings products.

Following on from media reports on “double-dipping”, the FSB issued a directive in 2013 calling for providers to audit their practices in respect of causal penalties, refund clients, and report back to the Regulator on the extent of these actions. The FSB undertook to have its own audits conducted where it felt that there were irregularities. Similar steps were put in place to clarify what the Regulator’s views on binder agreements were.

The new approach to regulation will have an important extra bow in its quiver – Treating Customers Fairly, or TCF.

Whilst we have virtually copied and pasted the wording of TCF in the UK, we have been assured that implementation will differ. There can be little doubt that individual transgressors will not be able to hide in the future. A recent media release by Altrisk, the specialist risk product provider in the Hollard stable, provides some interesting insights:

Recent hefty fines issued against various insurance product providers and brokerages in the UK for contravention of TCF principles could be the warning salvo of what is to come in South Africa. The top 20 fines imposed by the Financial Conduct Authority (FCA) in the UK during 2013 and 2014 amounted to over £180 million for breaches of TCF.

Ryan Chegwidden, Executive Head: Product and Technical at Altrisk, has warned that this could be a glimpse of what is to come locally, especially since our own regulatory reform has so closely mapped that of the UK’s financial services industry.

“The Financial Services Board’s (FSB) deputy executive officer, Jonathan Dixon has already been quoted in May as saying that there will be increasingly harsh penalties for insurers and advisors who do not embed TCF practices into their frameworks as an utmost priority. The TCF approach places emphasis on the outcomes and suitability of the advice provided, product design, the responsibilities of all role players throughout the distribution channel and the manner in which products are marketed. Ensuring that customers are treated fairly is now a joint responsibility for product providers and advisors. At the same time, the current retail distribution review (RDR) currently underway also needs to ensure that the advice, distribution and earnings structures for advisors support the delivery of TCF outcomes,” explains Ryan.

“The bottom line is that the FSB has expressed a desire to not only develop and monitor the TCF framework, but also to enforce adherence. This would include initial negotiation of any corrective action by engaging with the firm’s senior management as per the TCF roadmap, right through to formal action against the firm if the breach was deemed to be a significant risk to consumers,” says Ryan.

Perhaps the most positive aspect of TCF is that it will allow the FSB to ensure compliance with the spirit of regulation, which was always a challenge in the past. The fact that a directive was required to get certain providers back in line, in so far as causal event penalties are concerned, is ample proof of this.

What is called for now is honest soul-searching of all practices which are geared to benefit shareholders, rather than policyholders, and eradicate this. Institutionalised churning seems like a good place to start, as does deducting commission where there is no advisor linked to the client.

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