Twin Peaks: Breaking down the siloes

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“The days of silo regulators within the financial services sector have ended. Twin Peaks has established a dedicated prudential regulatory authority (the Prudential Authority) in the Sarb and a new Financial Sector Conduct Authority (FSCA). The current FSB will be transformed into the FSCA. The Prudential Authority, will be responsible for regulating financial institutions’ solvency and liquidity, while the FSCA will regulate how firms conduct their business, design and price their products and treat their customers,” say Lesego Mafadza, Derek Vice, Finn Elliot and Nicky Kingwill of the South African Institute of Chartered Accountants (Saica) Banking Group Project.

“This will assist with the prudential supervision of financial services groups – many of which currently include banks, insurers and other financial institutions and consequently have more than one prudential regulator.

Licences

The setup of the Prudential Authority is an essential precursor to enacting the new Insurance Bill, which will replace the existing Long-Term and Short-Term Insurance Acts (the Insurance Acts), although certain sections of the Acts will remain in force until the appropriate conduct legislation is promulgated. The legislation is expected to be implemented on 1 July 2018. It will also introduce regulatory supervision that does not exist in the current framework.

One of the significant changes to be introduced is a new licencing regime. All existing licence holders under the existing Insurance Acts will be required to apply for licences in terms of the new framework. Licences will not be granted automatically; therefore, the regulator must be satisfied that an applicant has the necessary resources and expertise to conduct a particular line of business prior to issuing a licence.

The new licensing regime will allow for branches of foreign reinsurers. Historically, these have not been allowed under the Insurance Acts. In contrast, branches of foreign banks already operate in South Africa. Branches have specific types of risks, which a prudential regulator needs to consider.

Supervisory regime

The conduct regulator will place significant emphasis on the concept of “show us, don’t tell us”. Implications for industry participants under the new conduct-focused supervisory regime include the monitoring and reporting on:

• Conduct risk indicators
• Adequacy and quality of data
• Continuous improvement in product design and general customer experience through analysis of data
• Consequence management of non-compliance and/or practices relating to poor customer outcomes by outsourced partners

It is interesting to note that (according to Section 291 of the FSR Act) the Council for Medical Schemes will remain the de facto prudential and conduct regulator for medical schemes registered under the Medical Schemes Act. Although the conduct of relevant intermediaries will be regulated under the FSCA.

Furthermore, the National Credit Regulator (NCR) will continue in existence and operate alongside the Twin Peaks structures.

With the Twin Peaks model of regulatory supervision being implemented, insurers along with other financial institutions will embark on a journey which aims to protect their financial consumers by ensuring that financial institutions treat them fairly, enhance efficiency and integrity of the financial system and provide financial customers with financial education programmes, ultimately promoting financial literacy.