Twin Peaks: A New Regulatory Era

The Financial Sector Regulation Act (FSR Act) was signed into law by the President on 21 August 2017. The Act aims to consolidate the regulation and supervision of the financial sector and its various subsectors - namely banking, insurance, financial products and services and market infrastructure - to ensure that each subsector is subject to financial regulation. This regulation requires financial firms to control risks and hold adequate capital as defined by capital requirements (Prudaential requirements) and consumer protection rules in the form of market conduct supervision.

The FSR Act provides for the Minister of Finance to determine the commencement date of the FSR Act, by notice, in the Government Gazette. The promulgation of the act ignited the implementation of the Twin Peaks regulatory structure. 

The Twin Peaks structure is designed to make the financial sector safer and to better protect financial customers in South Africa. It is really a hangover from the 2008/2009 global financial crises. This structure has already been adopted by many other jurisdictions, including Australia, the Netherlands, United Kingdom and Canada.

What does Twin Peaks mean for the Insurance Industry?

The current Financial Services Board (FSB) will have a new name, the Financial Sector Conduct Authority (FSCA), and will be responsible for the management of business conduct and consumer protection. The FSB will become a dedicated market conduct supervisor over all financial institutions. The first change that will be seen or felt by the sector will be in the Insurance space. All the Insurance prudential staff will still report to the FSB and fall under Caroline Da Silva, who is the acting Deputy Executive Officer for Insurance at the FSB. They will continue to report to the FSB under the current Long-term and Short-term Insurance Acts, until the Prudential Authority (PA) goes live. This is anticipated to be at the end of the first quarter of 2018.

The FSCA will have the authority for licensing financial services and advisory, and will set conduct standards for product design, advice, disclosure and transparency.

The Market Conduct regulator will be responsible for the regulation and supervision of the conduct of business of all financial institutions, and the integrity of the financial markets. Market Conduct is very much an expansion and enhancement of the TCF approach. Market Conduct challenges and practices, unfair treatment of customers and poor customer outcomes in South Africa’s financial sector have highlighted the need for stronger regulatory oversight of how institutions conduct their business and treat their customers.

The (PA) will be responsible for the oversight and maintenance of financial stability. It has the authority for licensing Long-Term and Short-Term Insurance Acts and will set the prudential standards for risk Management and Capital.

The Act has been subject to severe criticism, as many believe it has profound and damaging consequences for the financial services sector, in particular the insurance industry, one of SA’s oldest, most established and most economically necessary private sector functions. In order for the Twin Peaks structure to do what it is intending to do, the regulator will need to be highly data-enabled, with strong research capabilities, requiring the recruitment of a different skill set to ensure that we move forward and shift our approach to meet these objectives. 

There is an estimated R6bn additional administrative cost on consumers, which Parliament deems necessary to protect consumers and prevent another international financial crisis.

A simplified depiction of the model is shown in figure 1
How to prepare for the change:

The promulgation of the act means compliance with the legislation will be non-negotiable. 

Firms should give thought to their current risk function structure and examine whether it is appropriately aligned to the new supervisory model.

Firms should implement the necessary governance structures, policies, processes and procedures to be able to manage, monitor and control conduct risks. A Market Conduct risk framework should be established, within which the governance structures and policies will operate.

The division of the Prudential and Conduct Authority will mean that firms need to prepare for a much more intrusive and challenging style of supervision, with increased reporting and data requirements.

This could lead to short and medium-term skills shortages, as more specialised skills will be required. Investment in suitable training and development of personnel, together with the use of specialised consultants, will be needed.