In December 2013 the FSB released a document entitled TCF implementation update and baseline study feedback report – a 129 page document. Whilst much of the report focussed on providing feedback on the two, what they refer to as “baseline” studies, there was some interesting commentary in the first two introductory sections that provide interesting insight into the road ahead.
We have extracted these for you. We have added no commentary at this stage as we feel the comments themselves adequately set out the intentions of the regulator in different areas in and around the TCF space.
We will no doubt see many of these take shape and acquire detail as the year progresses. If anyone would like a copy of the full report please submit a request to info@associatedcompliance.co.za
Although overarching future regulatory framework recommendations need to be developed in line with the still evolving Twin Peaks legislative architecture, two specific regulatory projects the Committee structures are working on currently are the development of compulsory, reasonably standardised Key Information Documents (KID’s) for all retail products, and the development of consistent, cross-sectoral standards for customer complaint management and reporting.
The FSB is increasingly referring to TCF related objectives in the subordinate regulatory measures it issues, such as FSB board notices and directives5. This approach will continue to be followed.6 Examples include references to fair treatment principles in the insurance Binder Regulations, Outsourcing Directive and recent Directive addressing early termination charges on the happening of multiple causal events, as well as the draft provisions on advertising and marketing under the Collective Investment Schemes Act. The authority conferred on the Registrar of Insurance under the Financial Services Laws General Amendment Bill, 2013 to issue Policyholder Protection Rules will, for example, be a key tool for embedding TCF into the insurance regulatory framework.
The FSB is reviewing its approach to risk-based supervision to ensure that the approach is designed with reference to market conduct risk, recognising that historically risk assessment methodologies have focussed primarily on prudential and financial risks. A focus on conduct risk requires an increased focus on the risks to customers caused by the regulated entity as a result of its business model and processes. A prudential focus, on the other hand, mainly considers risks posed to the entity’s financial soundness and ultimately to stability of the financial system as a whole. A conduct perspective on risk assessment is therefore likely to produce a different risk rating for an entity to the risk rating that would be reached by a prudential risk assessment. It is possible for example that an entity may persistently fail to treat its customers unfairly for a considerable period before its financial soundness would be impacted, if ever. Equally, an entity that poses minimal if any risk to the financial system, could for example be serving a highly vulnerable customer group and thus pose high conduct risk.
The FSB’s supervisory focus will be on the effectiveness of the firm’s approach in demonstrating delivery of fair outcomes for its customers, not the sophistication of the approach.
The FSB has challenged firms on the fairness of specific products or practices which call into question their commitment to TCF principles, over and above any decision as to whether a legislative breach has been committed. The types of situations where TCF consideration have been brought to bear include: The impact of product charges (including but not limited to early termination charges) on reasonable customer benefit expectations; misleading or confusing claims or slogans in advertising material; conflicts of interest inherent in some distribution models and distribution support models; obstacles to product transferability; the extent and application of some insurance excesses and exclusions; and the transparency of some “value added” product features.
Consultation is also in progress on proposed new cross-sectoral customer complaints management requirements, which will include TCF aligned categorisation of complaints, and submission of complaints data to the FSB. Next steps include review of the compliance reports required to be submitted for intermediaries regulated under the Financial Advisory and Intermediary Services (FAIS) Act, to determine how they can be enhanced to provide insight on TCF delivery progress as opposed to their current “rules-based” focus.
Although market conduct enforcement tools will be strengthened under future legislation, the majority of material failures to treat customers fairly will already constitute a contravention of existing legislative or regulatory requirements, and will be actionable as such10 . The TCF Outcomes serve as a yardstick for identifying such breaches and assessing their impact, to inform the appropriate regulatory action For financial advisers, for example, s.2 of the FAIS General Code of Conduct already obliges FSP’s to “at all times render financial services honestly, fairly, with due skill, care and diligence, and in the interests of clients and the integrity of the financial services industry.” In practice, a material failure to deliver one or more of the TCF Outcomes will already constitute a breach of this obligation, and would therefore be actionable by the regulator. A number of the more specific obligations in the General Code, for example those relating to disclosure, suitability of advice, etc. are equally consistent with the TCF principles.
Financial advisers are reminded that, although compliance with the spirit and rules of the FAIS framework will go a long way in ensuring that they deliver TCF Outcomes, they should nevertheless carefully consider the relevance of a number of the questions in the self-assessment tool that go beyond technical FAIS obligations. In particular, they should consider their relationship with product suppliers and the extent to which they demand TCF delivery from product suppliers as a prerequisite for recommending a supplier’s products to their customers.
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