New legislation, such as the Financial Sector Regulation Act, may appear daunting to independent financial advisors, but we believe it will achieve its objective as consumers regain confidence in the integrity of the financial services industry.
The Financial Sector Regulation Act, commonly referred to as Twin Peaks, RDR and COFI, seeks to achieve a financial system that works in the interest of financial customers and supports balanced and sustainable economic growth. It does this by establishing a framework that promotes financial stability, the safety and soundness of financial institutions, the fair treatment and protection of financial customers, the efficiency and integrity of the financial system, the prevention of financial crime, financial inclusion, transformation of the financial sector and confidence in the financial system.
Having a well-regulated financial services sector is not just beneficial to local financial customers. Regulation that also meets global standards is vital for South Africa’s successful participation in the global financial services market. This is especially important to attract foreign investment, as foreign investors need confidence in a financial sector and will only invest here if they trust our systemic stability. It is therefore not surprising that South African regulators are aiming to stay abreast of their global counterparts.
In line with international standards, which require that regulation and supervision apply to financial groups or conglomerates as well as individual institutions, the Act allows South African authorities to regulate and supervise these groups as well as individual entities.
The Financial Services Board’s thorough approach to regulation is also globally acknowledged. The International Monetary Fund has recognised that insurance regulation in South Africa is sound, with only the assessment aspect identified as an area for development. Furthermore, regulation has improved the level of compliance in South Africa in line with that advocated by international standards body, the International Association of Insurance Supervisors (IAIS).
Learning from international legislation and regulations what should be implemented also mitigates our risk to ensure a resilient and stable financial system. The adoption of the Twin Peaks approach is a perfect example. The United Kingdom, Australia, New Zealand, the Netherlands and Belgium have chosen a Twin Peaks approach, each with their own unique version.
Twin Peaks will streamline the interaction between the regulators and the financial services industry, with a more functional approach to regulation and supervision. This system will replace the current industry silo-based approach. It is pro-active instead of a reactive remedy to industry failure. This will allow for a more centralised approach to certain activities, remove duplication and improve efficiency.
Twin Peaks also aims to create a Prudential Authority and a Conduct Authority.The prudential authority housed in the South African Reserve Bank will regulate the financial soundness of financial institutions.
The conduct authority will set standards for conduct in line with the six outcomes-based regulations that demonstrate fair customer treatment across product development, sales, advice and after-sales service.
How to prepare for change
Financial advisors, insurance companies and investment organisations should strive to balance the safeguarding of clients’ interests with meeting business objectives when new regulation is implemented. Having this balance ensures both parties benefit from entering into an agreement with each other. This prompts company sustainability and mitigates the risk of the business closing.
Also, when treating customers fairly is embedded in the business and is part of the business’ culture, it builds income retention and long-term business capital value. This makes a business marketable. The benefits of regulation thus far outweigh the challenges.
One also needs to refrain from having an attitude of: ‘Anything goes, as long as my compliance officer is happy’. Businesses need a fresh approach to regulation, seeking better outcomes for clients and businesses rather than carefully completed forms.
The reporting on the business’ conduct within a company will also change. Reporting requirements will need to be more rigorous and comprehensive to allow market conduct regulator to identify unfair customer treatment and conduct risks.
Masthead’s tools will enable you to enhance your creative approach to your business model and vision, ensuring that you will still be in business no matter what regulations are implemented next. Get in touch with your Regional office should you have any queries or concerns regarding new legislation.