2015 will see the South African financial services sector undergo major regulatory changes that are expected to ultimately improve outcomes not only for customers, but also for financial advisers, and the financial services industry as a whole.
That is the view of Jonathan Dixon, Deputy Executive Officer for Insurance at the Financial Services Board, who says that it is expected that by 2016, the Twin Peaks model of financial regulation will have been implemented, bringing in a new approach to market conduct regulation and supervision informed by Treating Customers Fairly (TCF) principles. 2016 will also see the implementation of the Solvency Assessment and Management (SAM) regime for insurers and reforms emanating from the Retail Distribution Review (RDR). “Collectively, these reforms are expected to usher in a forward-looking, pre-emptive and proactive, outcomes-based, risk-based and proportionate, comprehensive and consistent, and intensive and intrusive approach to regulation and supervision.”
He says that the recently issued RDR paper is a prominent example of the shift towards a more proactive and interventionist approach to market conduct supervision, aimed at dealing with market failures and addressing product mis-selling and poor outcomes for customers.
Dixon says the new approach to market conduct regulation and supervision will be less about ‘tick the box’ compliance and more about demonstrating delivery of the right outcomes for customers. “It will be proportionate to the risks in the business being undertaken while being as consistent as possible across different industry players. It will also be much closer to the business, to understand what the risks are and whether they are being properly managed.”
According to Dixon, it is anticipated that the Financial Sector Regulation Bill, the legislation that will pave the way for the establishment and implementation of Twin Peaks, will be considered by Parliament during the course of next year and therefore the new Market Conduct Authority could come into being as early as the latter part of 2015.
The broad scope of responsibilities of the Market Conduct Authority will be divided into three focus areas, namely regulation and supervision of financial market integrity, regulation and supervision of conduct of business, and financial consumer education.
“For the Twin Peaks model of regulation to function, it will require a paradigm shift from the current regulatory regime, whose approach is backward-looking, compliance-based, one-size+–fits-all, and compartmentalised.
“The Twin Peaks model will ensure that customers can have confidence and trust that they are dealing with firms that will keep their ‘promises’ and treat them fairly”.
“The emphasis of the new market conduct approach is on firms’ and intermediaries’ ability to demonstrate that the culture, systems and processes they have in place are consistently delivering fair outcomes to customers.”
Dixon says the new market conduct approach will see a rebalancing of responsibilities, with 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.
In addition, 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.
The new market conduct approach also recognises that fair outcomes can be achieved in different ways – for instance, if there are limitations on the amount of advice that can sustainably be provided, then this increases the emphasis that must be placed on other mechanisms – particularly appropriate product standards – to ensure fair outcomes for the targeted customer group.
It is therefore expected that firms will start demonstrating real evidence of a customer-centric approach, through their own efforts as well as effective supervision, as opposed to mere lip service. Firms will be expected to have in place enhanced Enterprise-wide Risk Management (ERM) frameworks that not only encompass financial risks but also conduct risks.
The FSB will be embedding TCF principles in all its regulatory instruments, such as the new standards being devised for retirement fund rules.
“Customers should have confidence that they are dealing with firms that will treat them fairly – this is ultimately the key to a sustainable future for the financial services industry and all of its role players,” concludes Dixon
Subscribe to our free newsletter
Stay at the forefront of financial advisory excellence with MoneyMarketing's weekly insights. As a professional adviser, you'll receive carefully curated content that enhances your practice and client relationships without cluttering your inbox. Our commitment to delivering only relevant, actionable intelligence helps you make informed decisions that drive your business forward. Join our community of leading financial professionals today and transform your practice with our complimentary newsletter—because your success is our priority.
