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