When it comes to regulatory reform, one of the key aspects underpinning the approach of the Financial Sector Conduct Authority (FSCA) under Twin Peaks is that the regulation of the financial sector is being done using an outcomes-based approach, ensuring that regulation and supervision will be risk-based, proportionate, intensive and intrusive.
This could mean anything in the broader scheme of things and brokers have often approached FAnews asking us to engage with the regulator to gain some clarity on these issues. We recently attended a media round table where these issues were discussed.
In the past, the approach to the regulation and supervision of the industry was often reactive and rules-based. This means that there was largely a focus on whether companies were just “ticking the box” in complying with laws without actually understanding the impact of companies’ conduct on customers.
Farzana Badat – Head of Department: Regulatory Framework at the FSCA – said that the regulator felt that this approach was not always effective in addressing the real harm to customers, which is why they opted for an outcomes-based approach.
The old method of regulation was not always effective as it sometimes failed to consider the context and operating environment of different companies. Badat pointed out that there has historically been a perception by some companies that the regulator does not always understand the unique business models and products of different companies.
Therefore, it would not always have enough insight into why companies engage in a specific way with of its customers.
“The point of adopting an outcomes-based approach is that the FSCA wants to understand the behaviour and culture of a company as well as its approach to focusing on customer outcomes. We approach this with a very simple question: is a firm acting in such a way that it could possibly impede the delivery of fair outcomes to customers,” said Badat.
A simple argument
By and large, the industry has accepted the fact that the FSCA wants to engage with them on issues relating to regulation as opposed to dictating to them. However, companies raise one simple concern when it comes to this.
If the industry is being regulated with an outcomes-based approach in mind, then insurers and intermediaries will have to constantly report back to the FSCA on issues related to their business and the industry. This increased administration comes at a cost.
“We acknowledge that the focus on an outcomes-based method of regulation and supervision means that there could possibly be some initial costs for companies especially in respect of systems and having access to data in order to be able to report on how their customers are being treated.”, The FSCA’s position on this is simple; we don’t understand how an insurer or a broker can run a business if they do not have assurances and good insights on the impact of their business on customers and to ensure that they are acting in an appropriate manner in respect of their customers. This means that they must be compiling data regarding their products and the services that they provide. It is unfortunate that this is seen as a compliance cost as this is actually necessary to run a sustainable, responsible and customer centric business. If this is the case, then why not share this type of data with the FSCA to help the regulator pre-empt or identify potential harm to customers before they materialise? Because ultimately, one of the first parties that has to shoulder responsibility if things go wrong in the industry is the regulator,” said Badat.
While this reporting back to the FSCA may seem tiresome and may come at an increased administrative cost to an insurer or intermediary, it will ultimately improve the sustainability of their business.
One of the aspects of the insurance industry that the FSCA has been focusing on recently is binder holder and third-party agreements.
“The FSCA has acknowledged that significant skills may sit outside of an insurer and that it is necessary for an insurer to outsource certain components of its business to other parties. This could pose a problem when it comes to understanding the whole ecosystem of the risks facing your clients. Insurers need to obtain key data points which will be necessary to get a handle on an issue that effects their client,” said Eugene du Toit, Senior Specialist of Regulatory Framework at the FSCA.
He added that this information often sits with the third party and there may be a reluctance to part with this information because there is currently a significant argument within the financial services industry regarding the ownership of data. Does it belong to the third party, the insurer, or the source of the data – the client?
There is another reason why the FSCA has taken this approach.
The decision to move towards Twin Peaks was taken in the wake of the 2008 Global Financial Crisis (GFC) and National Treasury has previously indicated that the GFC was the main driver behind this move. The industry (insurers and brokers) have been critical of the FSCA pointing out that the insurance industry was never the source of the GFC.
However, the FSCA has never accused the South African financial services industry (insurers or brokers) of causing the GFC. Badat pointed out that the move towards Twin Peaks was a deliberate attempt, in line with global trends, to introduce measures to improve governance and culture within the financial services industry so that if another crisis had to develop, the financial services industry would be able to weather the storm with minimal impact to customers. One of the key lessons learnt in the aftermath of the GFC was that many of the losses suffered by customers was as a result of poor customer culture and shortcomings in the governance and conduct of financial institutions.
Insurers are aware of the costs that their business face. They are also aware that in order to deliver improved customer outcomes, they will need to eliminate unnecessary costs. However, the FSCA is extending a helping hand and is trying to engage with the industry on a more collaborative basis. Is this beneficial to the industry? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts firstname.lastname@example.org
Article published courtesy of FANews