Last month President Zuma signed the Financial Sector Regulation (FSR) or ‘Twin Peaks’ Act into law. This is essentially the first step in the implementation of a wide new regulatory framework for the financial services sector.
The basis of Twin Peaks is that it establishes two regulatory bodies for the entire industry. The current Financial Services Board (FSB) will be dissolved and replaced by the Financial Sector Conduct Authority (FSCA), while a Prudential Authority (PA) will be established within the South African Reserve Bank.
The FSCA will oversee the conduct of all financial services companies, which essentially means how they interact with their customers and each other. The PA is responsible for supervising the safety and soundness of financial institutions, and ensuring the stability of the sector.
The FSR Act also sets up a Council of Regulators, which includes the National Credit Regulator together with the FSCA and PA and a number of other regulatory bodies. The intention is to ensure better cooperation and coordination between them.
“At the moment the regulatory structure is quite fragmented, and we are moving to a more consolidated and comprehensive regulatory system,” says partner at EY Abigail Viljoen. “We believe that is good for the industry in its entirety.”
The Twin Peaks legislation is therefore important for financial advisors, not because it affects them directly itself, but because of what it heralds in terms of broader changes to the industry. The Retail Distribution Review (RDR), for instance, is essentially an extension of Twin Peaks.
“The FSR Act as a primary piece of legislation is not in and of itself going to have a significant impact on financial advisors,” Viljoen says. “But there are other pieces of regulation and legislation around it that will emerge over the coming months and years that will.”
One of the first of these is likely to be the Conduct of Financial Institutions (CoFI) Act, the first draft of which is expected this year. This will set the new framework for how financial service providers should conduct themselves, including standards for distribution and advice.
As the deputy executive officer for FAIS at the FSB, Caroline da Silva, explains, this new framework will significantly change the approach to regulation as it moves from a rules-based approach to one focused on customer outcomes.
“It will also move away from one-size-fits all approach of the Financial Advisory and Intermediary Services Act (FAIS),” she says. “That has potentially created unnecessary costs for advisors because they had to follow certain rules even if they were inappropriate for their type of business.”
As Viljoen notes there will still be plenty of rules and specific things that financial services providers will have to do, but the outcome will be far more important than how they get there.
“There will be more flexibility for firms and individuals to operate within the framework, and more opportunity for them to exercise their judgement,” she says. “In the past you could have ticked all the right boxes and still found that the outcome for the consumer at the end is not a good one, so the new approach will rather be that firms have to demonstrate how what they are doing driving fair outcomes.”
All financial services providers will also have to be relicensed under the new regime, and these licenses will be activity-specific.
“One of the activities that will have to be licensed is giving advice,” Da Silva explains. “So every advisor will have to be licensed for that. Then if they are performing administration management, they will be licensed for that. If they perform asset management, they will be licensed for that. These licences will also stipulate for which products they can perform each of these activities, and to what types of customers.”
This might sound like over-complication, but the intention is to allow for more appropriate regulation.
“It allows us to make the law more proportionate to the risks posed by the specific advisory firm,” Da Silva says. “If you are only an advisor on wholesale business to really sophisticated clients, there will be a different set of principles that will apply to you from those that apply to a retail advisor who only advises on short-term insurance products.”
As Billy Seyffert, the COO of Moonstone notes, central to all of this is Treating Customers Fairly (TCF).
“The first principle of the FSR Act is to promote fair outcomes to clients,” he says. “That speaks to financial institutions conducting themselves in a way that clients are treated fairly.”
They can no longer therefore simply rely on ticking all the necessary boxes on compliance. They need to demonstrate that what they are doing is actually working.
“There is going to be a bit of discomfort, and people are going to have to take a lot more responsibility for making sure that the policies and procedures they have are applicable and personalised,” says Seyffert. “They will have to show that what is in the filing cabinet is being implemented on a daily basis.”