First steps taken to ensure customers are treated fairly
But woe betide firms that think this is going to be a woolly, soft-touch approach to how regulators will assess their conduct.
The treat customers fairly initiative, will form a major part of the shift towards what is known as a twin peaks approach, according to the head of the initiative at the Financial Services Board (FSB), Leanne Jackson.
Under the system the state will regulate the industry through two so-called ‘peaks’. The first relates to macro-prudential governance, which will be regulated by the Reserve Bank. The second relates to market conduct, which will be regulated by a beefed up Financial Services Board.
It is through these legislative and regulatory reforms that the retail banking sector will be regulated for market conduct for the first time.
Although the new framework will apply to the industry as a whole, other financial services forms such as long and short-term insurers, asset managers and financial managers have been regulated for market conduct by the FSB, under the provisions of the Financial Advisory and Intermediary Services act.
The treat customers fairly initiative is in line with similar shifts across the globe in the wake of the financial crisis.
The industry, although broadly supportive of the need for reform, has raised concerns that it will come with additional compliance burdens that will add to their costs. The extent to which regulators can intervene and regulate the type, and cost, of financial services products, and the impact this will have on areas like costs and innovation, is a question being asked in jurisdictions across the globe.
The treat customers fairly approach is based on six outcomes, including that appropriate products and services are marketed, sold and targeted accordingly; customers are given clear information and are kept appropriately informed before, during and after the time of contracting; customers are given suitable advice, appropriate to their circumstances; and customers do not face unreasonable post-sale barriers to change a product, switch a provider, submit a claim or make a complaint.
According to the Financial Services Board’s 2011 road map document on the initiative, enforceable rules and regulations are required “to ensure that firms clearly understand the regulatory expectations,” it said.
Peter Dempsey, deputy chief executive of the Association for Savings and Investment South Africa, said the advantages of the initiative were that it was in line with global trends and clarified rights and obligations for both customers and firms. But aside from cost implications for companies, there were other difficulties with implementing the changes.
This included the subjective nature of how firms were evaluated in meeting the objectives. This was perhaps reflected in a draft self-assessment pilot project report, which was released in December. The report revealed distinct differences in how firms viewed their ability to meet the six outcomes, and the risks the FSB identified in their responses.
A good deal of work remained in establishing the regulatory framework and aligning it with other aspects of the twin peaks process said Jackson. But the pilot project did reveal the extent to which firms were underestimating the “rigour that the treat customers fairly implementation would require”.
She said firms would be “unwise” to wait for the legislative process to be complete – which is broadly expected in 2014 – before assessing the strategic implications these principles would have across all levels of their operations.