The Future of Compliance

The basis of mutual trust, which is a cardinal principle of insurance and assurance, also applied to the relationship between financial services product providers and the regulatory authorities up to the end of the previous century. Shortly after the dawning of the new millennium, things changed. Financial implosions like Masterbond and Supreme Holdings were instrumental in the strengthening of regulations aimed at protecting clients in the investment space.

The advent of the FAIS era did not prevent the likes of Leaderguard and Fidentia and, more recently the RVAF scheme, from fleecing investors, but certainly the industry today is in a far better space than it was on 30 September 2004.

How did we get here?

A rigid, rules-based compliance regime applied a one-size-fits-all approach, with the FSB regulating FSPs and COs, and relying on questions-based regulatory reporting to monitor compliance.

Billy Seyffert, COO of Moonstone Compliance recently expanded on the future of compliance in a presentation to Moonstone’s compliance officers.

Pre 2004 Today
Anyone could advise people on financial products Professionally qualified advisors
No disclosure other than policy documents Transparent transactions
No record of transaction or rationale for advice Recorded advice and holistic financial planning
Product suppliers were allowed to “buy” business Conflict of interest and TCF
Fly by night advisors. Here today – gone tomorrow Sustainable financial planning businesses

The introduction of FAIS certainly brought about much needed change but, after 12 years, the time is ripe for the next evolutionary step

The Road to Prevention

The underlying principle of the new approach is the replacement of rules-based regulation with an “outcomes- and principles”-based version.

This brings both advantages and challenges:

Advantages Challenges
Recognizes maturity and accountability Raises the bar as to what is expected
Proportional Subjectivity of review
Risk based Evidence based heightens burden of proof
Freedom of engagement between FSPs and compliance providers Management information showing improved outcomes becomes critical
More freedom to determine own risk universe and controls Compliance becomes integral to risk management

The current compliance model only requires that I need to prove to the Regulator that I have done A, B and C by answering questions. It is more about protecting myself by ticking the right boxes than about the client.

Under the proposed new dispensation, we will be measured against our ability to achieve conduct standards. The need to record evidence thereof will become integral to any financial services business. In essence, it will be a measurement of your market conduct.

The compliance report will be replaced by a conduct of business return which will measure the following:

Challenges to the financial planner

To develop a client value proposition which:

  • Is in line with conduct standards
  • Demonstrates improved outcomes to clients
  • Is aligned to RDR principles
  • Is financially sustainable

Adds Seyffert: “None of this will happen overnight. If the roll-out of the RDR proposals is anything to go by, it will develop over time, with lots of industry consultation. The secret to success is to embrace change and unlock the benefits.”

“In a strange way, it will, for the first time, provide the adviser who has always placed the client’s interests first in a position to quantify it.”

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