Twin Peaks – the Regulatory Framework
The Government made a decision in 2011 to shift to a Twin Peaks model of financial sector regulation for South Africa .To quote a recent National Treasury media statement ‘Twin Peaks is a comprehensive and complete system for regulating the financial sector .It represents a decisive shift away from a fragmented regulatory approach to reduce the possibility of regulatory arbitrage and forum shopping.’
The two peaks are Prudential regulation and Market Conduct regulation .There will be two regulators , a Prudential Authority ( PA ) within the SA Reserve Bank and a new Financial Sector Conduct Authority ( FSCA ) .The PA will supervise the safety and soundness of financial institutions while the FSCA will supervise how financial firms conduct their business and treat customers. The Credit and Medical Scheme regulators will remain separate but their activities will be harmonised with this framework.
When fully phased in this will be a comprehensive system of licensing, supervision, enforcement, and customer education and training, as set out in the draft Financial Sector Regulation Bill (available for comment by March 2 2015).
In the first phase, existing sectoral legislation such as the Short Term and Long Term Insurance Acts and the Pension Funds Act will ‘plug into’ these arrangements and remain largely unchanged. The FSB will be dissolved and replaced by the FSCA. The responsibility for licensing entities other than banks and Insurers, that is, pension funds etc. will lie with the FSCA.Existing licenses will remain valid. However both the PA and FSCA will be able to apply their powers to any licensed entity.
In the second phase the focus will be on revising and consolidating the various sectoral laws. Ultimately the various market conduct and market integrity provisions in sectoral laws will be consolidated in an overarching Conduct of Financial Institutions Act. This will be aimed at:
- levelling the playing field across market segments and activities;
- recognising the cross cutting product development, distribution and customer bases that exist ;and,
- ensuring that the FSCA has full powers to carry out its mandate including full implementation of the Treating Customers Fairly ( TCF ) framework .
Market Conduct -Treating Customers Fairly
In the context of TCF, a discussion document ‘Treating Customers Fairly in the Financial Sector: A Market Conduct Policy Framework for South Africa ‘(available for comment by 8 April 2015) has been issued. This proposes a comprehensive framework for how the market conduct regulator will operate in order to ensure that financial institutions treat their customers fairly.
National Treasury indicates that “Poor customer outcomes in South Africa’s financial sector have highlighted the need for stronger oversight of how financial institutions conduct their business and treat their customers. To better protect customers, the financial sector must be held to higher standards than generic consumer protection, and the standards must be applied consistently across the sector.”
National Treasury has issued a number of papers on pension provision. One of their major concerns is about the impact of costs on member values. Moreover, advice is currently largely aimed at the fund and often only incidentally takes into account the interests of members.
Treating Customers Fairly – The Six Outcomes
The six key outcomes are:
- Customers can be confident they are dealing with firms where TCF is central to the corporate culture.
- Products & services marketed and sold in the retail market are designed to meet the needs of identified customer groups and are targeted accordingly.
- Customers are provided with clear information and kept appropriately informed before, during and after point of sale.
- Where advice is given, it is suitable and takes account of customer circumstances.
- Products perform as firms have led customers to expect, and service is of an acceptable standard and as they have been led to expect.
- Customers do not face unreasonable post-sale barriers imposed by firms to change product, switch providers, submit a claim or make a complaint.
Retail Distribution of Financial Services – RDR
RDR addresses Outcome 4 of TCF in respect of the distribution of financial services to the retail or individual market. It does not deal with wholesale markets such as Retirement Funds but clearly states that these markets will be addressed separately.
The regulatory authorities clearly feel that ,despite the success achieved to date in professionalising financial service intermediation via FAIS , there remain serious concerns about poor customer outcomes and miss-selling. RDR proposes a set of structural interventions to change incentives, relationships and business models to support consistent delivery of fair outcomes to customers. A key change is to place greater responsibility on product suppliers for ensuring delivery of fair customer outcomes through their chosen distribution channel, limitations on remuneration for intermediaries designed to address conflicts of interest, and enabling customers to compare the cost of advice.
The objective is to build on FAIS.
The two most obvious recommendations in the retail financial services space are:
- The categorisation of intermediaries into IFAs (Independent Financial Advisers), multi tied, and tied based on their independence from product suppliers.
- Reward for retail investment products will be on a fee basis only. Retail risk business will still attract commission but only 50% upfront, with the balance as and when.
Implications for Retirement Fund Business
The new regulatory environment will rationalise the current situation and that is to be welcomed. Much of the detail remains to be filled in and it will be 2016 and after before all the changes are in place. There remain issues to be resolved in the short term in the pensions industry including the end of provident funds and the previously proposed changes to S13 B administration requirements .The elephant in the room is still a national scheme.
Customer-centricity is the new watchword and this needs to become an integral part of every financial services business model. Is the outcome experienced by the customer consistent with the expectations they could reasonably have formed (given their demographic) as a result of their contacts with the supplier and intermediary?
More, and more pervasive regulation will mean more compliance and more cost. This will probably improve customer outcomes and the stability of the financial system but there may be an unforeseen cost in RDR in the effective exclusion of many customers from the system. The authorities are aware of this and promise to give special attention to the needs of low income markets.
We must wish them every success with these proposals, since the remedy for failure is likely to be another round of corrective legislation in the next decade.
Meantime the retirement fund industry can sit and watch until it is their turn.
Written by John Solomon