Over the last few years, rules-based regulation has been shifting towards outcomes-based regulation. How does this dynamic regulatory landscape affect FSPs and their clients?
Juanita Moolman, Head: Legal and Business Assurance at Hollard, describes an outcomes-based approach as follows: “An outcomes-based compliance approach moves away from reliance on detailed prescriptive rules and provides the outcomes that must be achieved. Rules-based compliance results in a tick box approach to avoid penalties and often does not result in meaningful interaction with clients or appropriate processes and procedures in the FSP’s structure.”
The Treating Customers Fairly (TCF) approach is a perfect example of outcomes-based regulation. The aim is to achieve the six outcomes throughout a customer’s experience with an FSP. This starts when you establish a relationship with a customer and extends through the advice process to after-sales service.
The ‘Amendments to the General Code of Conduct for Authorised FSPs and Representatives (GCOC)’ from 2020 and the ‘Conduct of Financial Institutions (COFI) Bill’ are examples of outcomes-based regulatory frameworks.
The Amendments to the GCOC set out concepts or desired outcomes that particularly align to the TCF outcomes. FSPs must work towards achieving the outcomes by implementing suitable and proportionate measures in their business.
This is particularly evident in the Complaints and Advertising sections of the GCOC. One of the requirements, for example, is for FSPs to create a transparent resolution process. Each FSP can decide for themselves how to do this. So, a larger, more complex FSP will have more complex processes, while a smaller FSP can have simpler processes.
Once effective, the COFI Bill will replace the Financial Advisory and Intermediaries Services (FAIS) Act. It will establish binding principles that reflect the outcomes the financial services sector is expected to meet, such as the TCF outcomes.
Benefits of outcomes-based compliance
Outcomes-based compliance has many benefits for FSPs. For instance, it eliminates the one-size-fits-all approach. Some of the rules do not apply to smaller FSPs, so those FSPs won’t need to implement processes that have no relevance in their structure. This leads to appropriate procedures and processes which are effective at reducing the FSPs risk.
It encourages FSPs to develop business-relevant solutions instead of relying on pre-populated templates.
Thirdly, it is flexible in terms of implementing processes. Every FSP is different, so your FSP can follow its own processes, provided you reach the same outcomes.
Furthermore, having efficient processes that are tailored for your FSP can speed up interaction with clients and therefore increase profits. For example, having an onboarding process saves time, as you won’t need to remember what to do every time a new client is onboarded.
Despite the shift in approach to outcomes-based regulation, rules-based compliance will not completely disappear. A combination of outcomes and rules-based regulation should help the financial services industry comply more effectively and efficiently with market conduct regulation.
Defending your processes
You will need to apply your mind to understand why your FSP follows its particular processes. Instead of simply following rules because they exist, you will need to motivate and explain the processes you follow, and how this helps your FSP to reach the desired outcomes.
This can only be achieved by creating and implementing your own processes and structures that suit the nature, scale and complexity of your FSP. Generic templates that were not created or customised for your FSP can be used as guidelines. Also take the time to properly implement your processes, so your FSP can attain the desired outcomes.
Under this regulatory approach, the world of compliance, especially compliance audits, will also take a different form. It is thus important to identify and keep relevant management information. This includes information used for decision making, as well as the processes to control, analyse and visualise information in your FSP.
While the shift in compliance approach may require time and other resources, the benefits will become evident in both improved efficiency at your FSP and an even better service experience for clients.
Masthead assists FSPs to remain compliant through implementation, webinars and online courses. Please contact your Masthead regional office or compliance officer to find out more.