Mirror Mirror on the wall, is regulatory reform beneficial after all?
Regulation is one of the few things that every company in the world bemoans. Over regulation is one of the things that every company in the world fears worse than a volatile economic climate.
These are two business truths that are universal. No matter where you go in the world, every successful industry operates within an environment that does have rules and regulations, which are not overbearing.
We need to ask the following question: with the wave of regulatory reform that has been introduced in the financial services industry, are we heading for an over regulated industry?
FAnews recently attended an event that was hosted by the Free Market Foundation (FMF). They had a lot to say about regulatory reform and some of the statements that were made were very blatantly against regulatory reform.
The good old days?
The FMF made specific reference to the Financial Advisory and Intermediary Services (FAIS) Act which was introduced in 2002 but was only enacted in 2004.
“Before the introduction of FAIS in 2002, the industry was governed by common law and the courts did rather well in regulating the industry by basic principles of Contract Law. What was the result of this? It worked like a dream. South Africa was a shining light in the world and punched well above its weight when compared to its international counterparts. During this time, two major insurers managed to go for 50 years without reporting any losses,” said Professor Robert Vivian, a Professor of Finance and Insurance at the School of Economics and Business Science at the University of the Witwatersrand.
Then came FAIS
Prof Vivian painted a picture of an industry that was thriving and did not need any further regulatory intervention at that stage.
"The Financial Services Board (FSB) alleged this lapse rate was caused by mis-selling by intermediaries. They added that a trained intermediary force would solve the problem of the then improving lapse rate. Further, the FSB said that the savings from the decreased lapse rate would cover regulatory costs 3 to 1; which would basically equate to costless intervention,” said Prof Vivian.
He added that by no means was it clear that concern over the lapse rate gives rise to a valid regulatory objective, and there was no concern raised by the public. Further, there was no evidence that the lapse rate was caused by mis-selling.
Defeating its purpose
According to Prof Vivian, FAIS already fell short of its objective of resolving the lapse rate situation because there was no demonstrable evidence that regulatory action would resolve the mis-selling situation.
But, Prof Vivian said that the biggest failing of FAIS is that it did not bring in the savings that it promised. “The staff at the regulator increased to 600 people and is still rising. Current regulatory interventions have cost the industry R1 billion/year and is set to double with the introduction of Twin Peaks, and a further R2 billion/y in additional costs was imposed on the industry, and ultimately the consumer,” said Prof Vivian.
But the blame does not stop here. Prof Vivian pointed out that it was government – National Treasury (Treasury) in particular – who capitulated and gave these powers to the FSB.
There is no provision in the Constitution allowing parliament to delegate its legislative powers to anyone, it is an implied provision, but it cannot abdicate. And yet it did.
“The only objective of regulatory reform is to create a massive bureaucratic empire that will enrich those who run it substantially,” said Leon Louw, the Executive Director of the FMF who added that there is virtually no skills at the FSB to speak of; “there is virtually nobody there who have, themselves, been successful operators in financial markets, who have run financial intermediary or product providers,” said Louw.
The FSB responds
If we take the above information on face value, it is very damming on the FSB. We gave the regulator a chance to respond to the allegations made against it by Prof Vivian and Louw.
Tembisa Marele, Head of Communications & Liaison Department at the FSB, provided us with the following reply:
“The FSB, Treasury, and the South African Reserve Bank (SARB) have been preparing for these Twin Peaks reforms for a number of years now. This has included an extensive consultation process with the financial services industry,” said Marele.
She added that over the years, the FSB has received very constructive feedback; and has used this to further refine its approach.
“We are encouraged by the support many in the industry have given to these regulatory reforms, and we are committed to continuing with the consultation efforts to ensure that the changes are implemented effectively and optimally, to the benefit of both the industry and consumers of financial products,” said Marele.
She added that if the FMF has any constructive contribution and recommendations they wish to make, they are more than welcome to do so.
At the end of the day, the FMF and the FSB will defend their positions. The only opinion that really matters is yours so take part in our poll. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts email@example.com.
This article was published courtesy of FANews.