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THINKING LIKE A REGULATOR
5TH AFRICAN INSURANCE DISTRIBUTION AND
BANCASSURANCE CONFERENCE
“IT’S ALL ABOUT THE CLIENT”
3 JUNE 2015
Presenter: Farzana Badat
Head of Department: Insurance Compliance
(Market Conduct Supervision)
Financial
Services
Board
FOCUS AREAS
1. THE FSB AS WE KNOW IT
2. QUALITIES OF AN EFFECTIVE REGULATOR
3. THE MANDATE OF THE FSCA
4. EVOLVING APPROACH TO SUPERVISION
5. ORGANISATIONAL IMPLICATIONS FOR THE REGULATOR
Financial
Services
Board
What is the real question?
THINKING LIKE A REGULATOR
OR
WHAT THE
IS THE REGULATOR THINKING??
Financial
Services
Board
The FSB as we know it
• Oversee South African non-banking Financial Services Entities,
which includes:
Retirement funds
Short- and Long-term insurers, funeral insurance
Collective investment schemes, and
Financial advisors and brokers.
• Mission to promote:
Fair treatment of consumers of financial services and products
Financial soundness of financial institutions
Systemic stability of financial services industry, and
Integrity of financial markets and institutions.
Financial
Services
Board
The FSB as we know it
CURRENT CHALLENGES
• Silo – entity based
• Non-banking focus
• Lack of consistency
• Depth of skills
• Reactive
• Ritualistic compliance
• One size fits all approach – not always risk based/proportional
• Adversarial image
• Perceived lack of transparency in decision making
• Perceived inefficiencies and slow response times
Financial
Services
Board
Qualities of an Effective Regulator
1. CLARITY OF PURPOSE
• Focus on outcomes – consumer protection
• Identify risks/harms and strive to control them within limits of governing law
• Balance seemingly unresolvable tensions – business versus consumer
2. AGILITY
• Use of appropriate regulatory tools – risk based and proportional
• Respond to novel and emerging risks, eg use of social media
• Capacity to learn, adapt and adjust – influence legislative change that may
be needed to support enhanced supervision
• Not constrained to “the way it has always been done”
Reference: Malcolm Sparrow – The Art of Harm Reduction –
Kennedy School of Government, Harvard University
Financial
Services
Board
Qualities of an Effective Regulator
3. TRUSTWORTHINESS
• Machiavelli: “Is it better to be loved than feared or feared than loved?”
• Regulators should aim to be neither loved nor feared, but trusted and
respected
• Critical components: consistency, competence, honesty and reliability
• True, clear communication about how and why decisions are made
4. CURIOSITY
• Willingness to question, a desire to learn, and an openness to new evidence
• Curiosity about why - requires access to high quality data and sophisticated
analytical skills
• Understand the source and cause of perceived risks – root cause analysis
• “Science of regulation” - partnerships with external stakeholders offer
valuable insights (industry and consumer groups)
Reference: Malcolm Sparrow – The Art of Harm Reduction –
Kennedy School of Government, Harvard University
Financial
Services
Board
Qualities of an Effective Regulator
5. HUMILITY
• Recognise that we do not operate in a vacuum - there is much to be learnt
from others - there are some problems that regulation alone cannot solve,
e.g. consumer education, financial inclusion
• International collaboration and cooperation to develop standards
• Insights from industry
• Involvement of consumers and consumer advisors to maintain relevance
6. UNBIASED
• Fair, independent, consistent and unbiased decision making
• Avoid regulatory capture
• Value and balance the perspectives of the industry and the consumer
Reference: Malcolm Sparrow – The Art of Harm Reduction –
Kennedy School of Government, Harvard University
Financial
Services
Board
Qualities of an Effective Regulator
7. PROACTIVE
• Create opportunities to prevent harm before it occurs
• Shift away from traditional reactive approach of responding to harm after it
has occurred
• Proactive approach favours harm-reduction over ritualistic compliance
• Requires a strong focus on understanding the factors that predict a future
risk of harm
• Intrusive and robust
Reference: Malcolm Sparrow – The Art of Harm Reduction –
Kennedy School of Government, Harvard University
Financial
Services
Board
The future – From FSB to FSCA
• Twin Peaks - Financial Sector Regulation Bill
• SARB - Prudential Regulator
South African Reserve Bank
Macro-prudential supervision
Micro-prudential supervision of banks and insurers, market infrastructure and financial conglomerates
• FSB FSCA - Market Conduct Regulator
Financial Sector Conduct Authority
Market conduct supervision of ALL financial services entities including banks
Financial
Services
Board
Mandate of the FSCA
• The objective of the FSCA is to protect financial customers by:
ensuring that financial institutions treat financial customers fairly
enhancing the efficiency and integrity of the financial system
providing financial customers and potential financial customers with financial
education programs and promoting financial literacy and financial capability.
• HOW?
By adopting a primarily pre-emptive, outcomes focused and risk-based
approach in terms of which it focuses its resources in areas that pose
significant risks to the achievement of its objectives
Without fear, favour or prejudice
Reference: Financial Sector Regulation Bill, 2014
Sections 52 and 53
Financial
Services
Board
FSCA – Guiding Principles
• Regulation and Supervision must be:
transparent
comprehensive and consistent
intensive and intrusive
outcomes based (TCF, market integrity and other policy outcomes)
risk based and proportional
pre-emptive and proactive
a credible deterrent
aligned to applicable international standards
Reference: A safer financial sector to serve SA better,
TCF Roadmap; FSR Bill; NT Market Conduct Policy Framework
Financial
Services
Board
Outcomes based supervision
• All elements of the supervisory framework must be tested against
and aligned with the FSCA’s Guiding Principles:
licensing and authorisation (incl. termination/withdrawal)
on-site inspections (routine)
off-site monitoring (prescribed reporting)
ad hoc and third party information sources
thematic reviews (on-site and off-site)
co-ordination with other regulators
information management
regulatory guidance, support to regulatory framework development and
consultation processes
regulatory action and enforcement
Financial
Services
Board
Alignment of supervisory approach
Forward looking
Pre-emptive and proactive
Outcomes focused
Risk based and proportionate
Comprehensive and consistent
Intensive and intrusive
• FSCA / firms to identify future conduct risks
• Market and consumer research
• Not just responding to complaints
• On-site visits, thematic reviews, off-site
reporting, mystery shopping
• Addressing risks at source
(culture, governance, structural interventions)
• Firms to demonstrate delivery of
TCF outcomes
• On-site / off-site testing of TCF commitment
• Testing TCF in complaints handling
• Tiered regulatory framework based on
risks to customer outcomes
• Expanding scope of conduct supervision
• Cross-cutting activity-based focus areas
• Consolidated legislative framework
• Build up a centralised “conduct profile”
of entities & groups
• Visible enforcement
Financial
Services
Board
Cross-cutting activity-based focus
Culture and governance
Product value
Unfair contract terms
Misleading advertising/marketing
Ineffective disclosure
Conflicted advice
Poor claims handling
Poor complaints handling
Empowered customers
Testing outcomes, rather
than compliance „tick-box‟
Rebalancing of responsibilities:
Increased scrutiny of the way
firms develop products;
Product provider oversight of
chosen distribution channel
Fair outcomes can be achieved
in different ways, through
emphasising different TCF elements
Financial
Services
Board
Outcomes based regulation
• To ensure that the regulatory framework supports the delivery of
the desired outcomes, the regulator must:
Assess the current regulatory framework against its ability to drive TCF and
market integrity outcomes
Make structural interventions to better align the framework with the desired
outcomes
• Current examples of this more interventionist approach are:
The Retail Distribution Review (RDR) – proposes far-reaching changes to
the regulatory framework for advice and distribution
The Consumer Credit Insurance (CCI) Report – proposes structural
changes to the way in which credit consumers are protected against “bad
luck” defaults
The Retirement Reform process
Financial
Services
Board
Market research and analysis
• In addition to analysing outcomes delivered by specific entities,
the FSCA needs to analyse outcomes delivered by the sector as a
whole.
• Skills required:
proactively monitoring emerging conduct risks and trends – locally and
internationally
analysis of “big data” – what is all the data really telling us?
behavioural economics
business model analysis – quantitative / financial and qualitative
assessment
deep industry and sector knowledge to allow credible judgement based
supervision
The transition to Twin Peaks provides the Regulator with an excellent opportunity to
enhance its skills in order to deepen its understanding of those risks that may threaten
the fairness and integrity of the country’s financial system.
Financial
Services
Board
Implications for the FSB/FSCA
• Centralised capacity along ‘functional’ lines Regulatory framework (standard setting), licensing, supervision and
enforcement functions organised centrally to ensure consistency
• IT system support to drive efficiency Information system upgrades to support efficient business processes and to
enable analysis and identification of risks
• Skills development to drive ‘judgment-based’ supervision
Outcomes focused approach requires supervisory judgment - specialist
support teams and skills development
• Enhanced checks and balances Expanded powers and „judgment-based‟ approach require a robust system
of review for consistency of regulatory decisions
• Robust mechanisms for consultation and cooperation
Stakeholder consultation on standard setting - coordination with other
regulators
Financial
Services
Board
Organisational re-design
• Not an overnight process – more than just a name change
• Independent international and local expert input
Promontory: high level organisational structure
KPMG: detailed work on organisational design, operating model, business
process re-engineering, cultural factors, change management, skills audit
and transition
• Rigorous internal processes and consultation
Oversight by Regulatory Strategy Committee
Dedicated internal task teams
Change management and staff communication strategy
Weekly town hall sessions
Business transformation committee (longer term)
Co-ordination with SARB re prudential staff move
Financial
Services
Board
CLOSING SUMMARY
THINKING LIKE AN EFFECTIVE REGULATOR:
A clear focus on purpose, an agility of response, a reputation for trustworthiness, the curious mind of a scientist, an attitude of humility, a commitment to unbiased decision-making, and a
proactive approach to managing risk are qualities that may not be compromised in order to ensure effective supervision.
Reference: Malcolm Sparrow – The Art of Harm Reduction –
Kennedy School of Government, Harvard University
TH
AN
K Y
OU