Update on Twin Peaks and Treating Customers Fairly

• Ensure that financial institutions treat financial customers fairly
• Enhance the efficiency and integrity of the financial system
• Provide financial customers and potential customers with financial education programs
• Promote financial literacy and financial capability.

Prudential Authority (within SARB)

The objective of the Prudential Authority is to promote and enhance the safety and soundness of financial institutions that provide financial products, market infrastructures and payment systems, to:

• Protect financial customers, including depositors and policyholders, against the risk that those financial institutions may fail to meet their obligations; and
• Assist in maintaining financial stability.

Important provisions in the revised Bill

Enforcement and appeals

• The new authorities will be more:
• Proactive and intrusive in their supervision
• Principles-based in taking action where necessary
• The new authorities have additional powers over and above those set out in legislation, to prevent these authorities from being limited by gaps in existing legislation
• The new authorities must adopt written administrative action procedures.

The Bill allows the authorities to access necessary information from regulated institutions, routinely and on an ad-hoc basis.
Investigations

• If “material wrongdoing” is suspected, the institution will be investigated
• The new authorities’ powers will be stronger than those afforded with inspection and may need to be carried out with a warrant.

• If the new authorities pick up a breach in a financial sector law in relation to either prudential or conduct standard, they can take remedial or punitive action
• The Bill gives the new authorities the power to issue directives, enforceable undertakings, interdicts, debarment orders and impose administrative penalties
Criminal prosecutions may be instituted for breaches of the revised Bill or a financial sector law.

• Current licensing requirements set by all industry-specific laws will remain as they currently exist, during Phase 1.
• The Bill allows the new authorities to license new financial products and services set out in the Bill, rather than through existing legislation
• An agreement on licensing collaboration will be put in place between the Financial Sector Conduct Authority (FSCA) and the Prudential Authority (PA).

• The new authorities will be able to issue and supervise standards over all financial institutions, regardless of which authority licenses the institution
• The Bill allows the new authorities to issue standards without ministerial approval
• Provisions will be made to ensure transparency and accountability as well as a consultation process to be followed before standards are issued
• The new authorities will be required to consult with one another, before issuing any standards.

• The current Financial Services Ombuds Schemes Act governing existing ombuds schemes will be repealed and relevant provisions will be included in the Bill. Discussions will take place on the effectiveness of the existing ombuds schemes and the viability of centralising these ombuds

B. Treating Customers Fairly (TCF)

In conjunction with the revised Financial Sector Regulation Bill, the National Treasury issued a discussion document called ‘Treating Customers Fairly in the Financial Sector: a market conduct policy framework for South Africa, in December 2014. The Financial Sector Conduct Authority (FSCA) will implement and supervise this policy.
The discussion document covers various financial sector industries. This publication focuses only on the proposals affecting retirement funds.

TCF is an activities-based and outcomes-driven approach to regulation and supervision, designed to ensure that institutions comply with specific standards of fairness, in respect of all financial customers. Funds must demonstrate that they deliver the specified outcomes to their members, including design and promotion, advice and servicing, claims handling and complaints.

Timing of Promulgation and Implementation: It is anticipated that this will be tabled in Parliament in 2016, and implemented in 2017.

Short summary:

• Government is concerned about financial service providers’ market practices and treatment of customers
  
• Existing laws will be strengthened to support the TCF principles
• The Conduct of Financial Institutions (CoFI) Act will be introduced to focus on customer outcomes and to empower the FSCAto take remedial action if poor conduct practices occur
• The FSCA will be able to act intrusively to change the culture or attitude of financial institutions, to be more customer focused
• A project plan has been put forward to promote better outcomes for members of retirement funds.

Important provisions in the Discussion Document

Project plan to promote better outcomes for savers.
This project plan aims to promote:

• Strong, representative and independent boards of trustees, which are properly trained and have sufficient capacity
• Clear fiduciary duties for trustees, including mechanisms to avoid conflicts of interest
• A strengthened regulatory framework for retirement fund service providers, including clear fiduciary duties and ways to avoid possible conflicts of interest
• Independent, expert evaluation of the governance function, from time to time
• Investment products being compared across the sector by:
• Incentivising product simplification and portability
• Introducing standardised point-of-sale disclosure documents for all investment products
• A standardised measure for calculating and disclosing charges for investment products and the impact of those charges on benefits in consultation with industry
• Improved governance of commercial umbrella funds and union funds, by:
• Improvements in member representation
• Banning fund rules that make use of a specified service provider compulsory
• Strengthening governance and reporting requirements where the trustees utilise the services of the sponsor or related company, in order to address potential conflicts of interest.

The FSB and TCF

The TCF framework is currently being implemented by the FSB and they are already inserting TCF in their regulatory and supervisory frameworks, slowly, to form the basis for the new Financial Sector Conduct Authority (FSCA).

Improving internal complaints mechanisms

The new Financial Sector Conduct Authority (FSCA) will require funds to develop, implement, monitor and report on an appropriate and effective internal process to manage complaints, called a Complaints Management Process (CMR). This must contain:

• A simplified outline of the Complaints Management Process (CMP) for members to understand who to contact, what is required from them, what the firm will do and any waiting periods
• A detailed description of the Complaints Management Process (CMP) which clearly sets out how the system works and the way in which it is maintained and overseen
• Standards for record keeping and reporting, to make sure complaints are captured correctly and reported correctly. This will enable the Financial Sector Conduct Authority (FSCA) to oversee publications of complaints data, which will enable the financial sector to learn from Complaints Management Process (CMP) feedback
• Standards for funds to demonstrate how they are monitoring and learning from customer complaints, including those captured by their own system as well as from data published by the regulator.

Ombuds reform

An integrated ombuds system is envisaged. Problems identified with the current ombuds include:

• Consumers’ lack of knowledge regarding ombuds
• Inadequate transparency and accountability of the ombuds
• Customer confusion regarding jurisdictional boundaries of the various ombuds
• The need for greater coordination and consistency between ombuds.

C. Board Notice 154 of 2014: Appointment of a valuator

Board Notice 154 of 2014 issued by the FSB in December 2014, is effective from 15 December 2014. It sets out the conditions to appoint a valuator, as follows:

• Every fund which is not valuation exempt must inform the Registrar within 30 days of the fund’s registration or 30 days after the fund appoints a valuator in writing of this appointment
• The valuator’s information and the terms of the appointment must be included in the above application
• Funds registered after 15 December 2014 which are not valuation exempt and do not have valuators, must appoint a valuator within 90 days of Notice 154
• The valuator must be a natural person living in South Africa
• An actuary applying to be recognised as a valuator must complete an affidavit in a prescribed format. The affidavit must be submitted with the above application
• Existing valuators must submit the abovementioned affidavit within 90 days from 15 December 2014 or they will not be recognized as valuators any longer
• A valuator who resigns or whose appointment is terminated must submit a written report to the Registrar detailing the reasons for the termination.