As part of an assessment of the commitment to conduct standards in the sector, DB & Associates has had over 100 meetings with the executive leadership of the top 25 firms in South Africa’s financial sector over the past 18 months. This culminated in a Royal Commission of Inquiry into misconduct in the financial industry, which delivered its final report earlier this year. The commission’s findings were, to say the least, sobering. Initially, the assumption was made that, because South Africa is a developing country with high levels of corruption in government, as bad as things were in Australia, they would be worse in South Africa. This prediction could not have been more wrong.
Forming part of the discussions with leading financial institutions were Dr Andy Schmulow, senior advisor at DB & Associates, who has in-depth experience in Australia’s financial industry. His extensive knowledge about the Australian landscape is relevant for two reasons: the financial system regulatory reforms currently underway in South Africa are modelled on Australia’s Twin Peaks regime; and secondly, because Australia’s financial regulation is in crisis – the product of system-wide failure to enforce anything approaching good conduct, pervasively evident for over a decade, with misconduct, and at times serious criminality, perpetrated on an industrial scale.
What was encountered is a financial services industry which, while not perfect by any means, nonetheless comports well with standards of good conduct. The reasons are many and varied. They include a far deeper awareness that the financial industry must serve the community in which it operates, not the other way around. An understanding of the need to contribute to redressing economic inequality embedded by decades of discrimination, for both social justice reasons, and to create the kind of economic prosperity that firms themselves need, in order to grow. But doubtless also the treating customers fairly (TCF) regime has played an important role in readying financial firms for the forthcoming introduction of new conduct legislation: the Conduct of Financial Institutions Act (CoFI).
However, gaps remain. These relate chiefly to requirements to transform culture and governance, and the disjuncture between TCF and CoFI. With regards to the former, CoFI will require a shift in corporate governance from what, to how and why. This shifts culture ad governance from being process-driven to becoming values-driven. TCF compliance similarly requires shifts to plug gaps. For example: the six TCF pillars do not map exactly to the nine pillars of CoFI.
The three pillars that will be new under CoFI present significant challenges. In the case of product or service distribution, a regulated entity will be responsible for misconduct committed by brokers, including brokers wholly independent. This will be tricky. How should a firm enforce its obligations on an independent broker – especially a highly successful one – without the risk of that broker ending its relationship with the firm, and henceforth, selling only its competitor’s products? How will a firm impose, if need be, close scrutiny of a broker’s activities, especially one located remotely? There are answers to these questions, but they are imperfect.
To date, TCF compliance has been a matter for the firm to judge, but self-assessment is a complacency trap writ large. For one thing, self-assessment will never be as searching or as critical as an independent review. Unavoidable cognitive biases, with which we are all afflicted, guarantee that. The only credible form of assessment is arms-length (which must preclude, for example, being undertaken by a firm’s auditors; such assessments merely embed leveraged conflicts of interest). Reviews must be grounded in methodologically rigorous, credible, and critical recursive reviews, conducted independently. As such, current TCF assessments present the risk of being a complacency and self-affirming trap.
Set against all of this is a conduct authority – the FSCA – whose remit and powers – especially as compared to its progenitor, the Australian Securities and Investments Commission – make it fully weaponised. It can punish, and can do so severely (and has already), whereas the recipients of FSCA sanctions are severely limited in their avenues for appeal. This enables the FSCA to move swiftly, and come down hard. In the process, firms that incur its wrath, even if they mount successful appeals, will be tarnished, and their reputations damaged.
A better and more prudent approach would be to leverage existing TCF adherence, not in a vein of complacency, but rather as a good start to a real and much deeper change journey. A journey in which compliance is reconceptualised, firm values are implemented (not simply articulated), and corporate culture is strengthened and enhanced towards customer centricity, at every level of the organisation.