As we are all aware South Africa was recently downgraded to ‘junk’ status by two of the three major ratings agencies amid allegations of poor macro governance and related matters that are beyond this article.
As a compliance professional who eats, drinks and sleeps governance, this is disturbing to say the least, and brings to mind the fact that the FICA Amendment Bill remains unsigned by the President despite being cleared from a constitutional perspective and further rattles nervous stakeholders
At the same time the Financial Sector Regulation (FSR Bill) is progressing through Parliament at a relatively benign pace although in fairness the legislative traffic is queued out of the doors.
Once the FSR Bill is (finally) enacted the functions of the current Financial Services Board, which regulates financial institutions, will be split in two. A Market Conduct Authority and a separate Prudential Authority will be formed, with the latter falling under the auspices of the South African Reserve Bank. Thankfully the Constitution requires the South African Reserve Bank to perform its functions “independently and without fear, favour or prejudice.” However, it also requires there to be regular consultation between the Bank and the Minister of Finance which one can only hope will be a positive relationship.
The new Conduct Authority will essentially become a revamped FSB and will focus, as its name suggests, on the conduct of financial institutions to ensure that the outcomes of the Treating Customers Fairly framework are being felt by the person in the street and that customers receive a fair deal. This is long overdue as sadly the conduct of certain firms remains ultra vires of the TCF Principles and indeed specific regulations. The new Prudential Authority’s objective will be to promote and enhance the safety and soundness of regulated financial institutions.
Twin Peaks, and all the legislation that will support it, is there to make it much more difficult for nefarious individuals to come into the financial service industry with a view to plunder and pillage, rather than build the wealth of their customers. But will this objective be fulfilled, in the real world?
Indeed the Prudential regulations were recently attacked in Parliament for reinforcing barriers to entry, as interventionists urged radical transformation of the insurance industry; a call which was apparently supported by MPs across the political spectrum.
However, to my mind, the Regulator has in fact made efforts to relax the so-called licensing entry requirements for the micro-insurance industry in the Bill, yet for very good reasons, maintaining strict prudential standards for mainstream insurers. Of course legal firms, actuarial consultants etc, are quite happy to have additional regulation, which will inevitably lead to increased spending on professional fees; however, the point of equilibrium must always be borne in mind where the rules get to a stage where the complexity thereof makes it extremely difficult and excessively expensive for firms to meet all the requirements.
The need for economic transformation can only be denied by those individuals who have their heads firmly buried in the sand and all stakeholders would no doubt argue the positive benefits of an inclusive and transformed financial services industry. This is of course the correct view but the manner and form of such transformation is important to ensure that we do not completely throw away hard won gains in international markets.
We are moving to an increasingly principles/outcomes-based regulatory model; indeed this is at the heart of TCF where the Regulator will reduce the number of rules in an effort to move away from box-ticking and give firms principles that they will need to demonstrate are entrenched in their culture, and are measuring the outputs to ensure that these principles are being applied.
Of course regulation, no matter how well intended, can have unintended consequences. Moving away from the old rules based, tick-box mentality puts the onus on financial services companies to take full responsibility for their actions and their outcomes and makes it harder to get away with simply saying ‘well I followed the rules’.
Regulations are often drafted far away from the real world; however, in recent times this has changed dramatically with the Regulators engaging with industry in a meaningful manner and engaging with government, which has led to more balanced outputs, which are less likely to have unintended consequences or fall victim to real politick.
We are no doubt heading at speed for interesting times … wear your seatbelt or you risk being thrown out of the car and left behind.