When certainty is lacking, people often make assumptions. As we all know, to assume often leads to making an Ass of U and ME.
Speculation about what the new regulatory environment will look like is rife, and often based on unsound “facts”. For this reason we reverted to recent public presentations by the Regulator to provide some background information on the impending changes.
In an address at the Discovery Financial Planning Summit on 15 May 2014, Mr Jonathan Dixon provided a historical perspective on what led to the need for change, and outlined some of the steps to be implemented over the next two years to rectify identified shortcomings.
Where have we come from?
The past decade has seen fundamental and fast paced change to financial regulation. A lot of this change was in response to lessons from the global financial crisis and evolving international standards, but a good deal of it was about regulatory catch-up. The regulatory framework had not continued to evolve as it should. Much of the criticism of the system was fair: It had become too rules-based and compliance heavy. It did not recognise differences between business models and the various risks attached to these models, and historically evolved along the lines of sub-sector silos, meaning inconsistency and duplication for instance between insurance laws and those governing intermediaries.
Despite this, there is a marked difference in the awareness of good governance and risk management within financial services firms, compared to five years ago.
There appears to be some confusion about who the customer is – in many instances product providers appear to view the intermediary as the primary customer. While this is necessary to provide proper service and build a strong partnership with intermediaries, it should never be at the expense of the best interests of the client.
In combination, the above factors meant that despite extensive rules, there continued to be far too many examples of poor customer outcomes.
Where we are heading?
The National Treasury’s “a safer financial sector to serve South Africa better”, published in 2011, still remains the blueprint on which current planning is based to address inadequacies.
- Financial regulation needs to embed a forward-looking, pre-emptive and proactive approach to risk.
- It should be less about ‘tick the box’ compliance and more about demonstrating delivery of the right outcomes.
- It should be proportionate to the risks in the business and it should be as consistent as possible across different industry players.
- It needs to be much closer to the business, to understand what the risks are and whether they are being properly managed.
What vehicle will be used to get there?
Twin Peaks is the regulatory model that is intended to give effect to these goals. It will see a shift away from an industry-silo approach to a functional approach to regulation and supervision.
In so far as financial advice and intermediary services are concerned, the FSB will evolve into a new, dedicated market conduct authority, with an enhanced mandate for intensive supervision of conduct of business.
Underpinning the new approach will be Treating Customers Fairly (TCF), which requires a marked paradigm shift from all involved:
- TCF is an outcomes-based approach, although the key TCF principles will be contained in legislation. It will be less about ticking boxes in compliance reports and more about demonstrating that the culture, systems and processes they have in place are consistently delivering fair outcomes to customers.
- TCF will also see a rebalancing of responsibilities. The current heavy emphasis on Outcomes 3 and 4 – the point-of-sale and advice stage of the product life cycle – will now be balanced by an increased scrutiny of the way firms develop products, ensuring that firms design and develop products that offer value to the customers and meet their reasonable expectations. Also, product providers will have primary responsibility for ensuring that their products are marketed and distributed in a way that does not undermine fair outcomes, including much more rigorous oversight over their chosen distribution channel. It’s been far too easy in the past for product providers to blame poor outcomes on intermediaries – it must now be clear that delivery of fair outcomes is a shared responsibility.
The FSB is currently busy developing the new regulatory and supervisory framework for its role as market conduct authority. This will outline the requirements businesses need to meet and how implementation and application will be monitored.
Until this is published, speculation will only lead to uncertainty, and serve little purpose other than to ruffle feathers unnecessarily.