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Its overriding objective is to protect consumers from the dark side of the financial services industry, to ensure they are treated fairly, that the system is efficient, trustworthy and inclusive, and to prevent financial crime.
No formal effective date has been set but, given the enormous scope of its content, the new Act is expected to be rolled out in instalments, starting early next year.
Why bring it in now, you may ask, when we seem to have done okay without it? One reason is that the UK has this, and we tend to follow what they do.
The other is the legal sprawl that shapes the current regulatory environment. The various sector regulations have grown wild and independently of each other, creating gaps, overlaps and inconsistencies in our law. The new Act provides for central oversight and cohesion, and pulls in industry segments that previously operated under the radar.
It’s referred to as the Twin Peaks Regulatory Framework because the authority vests in two separate bodies.
The Financial Sector Conduct Authority (FSCA) oversees market conduct or how financial service providers interact with their clients. Its mission is fair treatment of customers and financial education. Formerly known as the Financial Services Board (FSB), the name change adds gravitas and pre-empts future comparisons with the Russian secret service. The FSCA will continue to oversee the retirement fund industry, in accordance with the new law and the Pension Funds Act.
The Prudential Authority will be administered by the South African Reserve Bank. It will promote the safety and financial soundness of financial institutions and sound the alarm on potential failures.
The new law also calls for an Ombud Regulatory Council to further the statutory ombud system. For example, the council will establish a call centre to help customers formulate complaints and identify the appropriate ombud. It will also seek more consistent rulings among different ombuds and have all kinds of powers such as issuing directives, taking legal action and debarring people.
As a further safeguard, the Act provides for a Financial Services Tribunal, which will be able to reconsider decisions made by a regulator, the Ombud Council, a statutory ombud or a licensed financial services provider. All good news for consumers who want to avoid formal legal action.
Also welcome is the Financial Sector Information Register, especially by those frustrated by the legal sprawl. An electronic register will provide access to accurate, authoritative, and up to date information on financial sector laws.
In broad outline, the Act promises to live up to its original ambition, which is “a safer financial sector to serve South Africans better”.
But it’s taken us six years to get here, underlining what a complex undertaking this has been. That must also reflect in the implementation.
And, importantly, says Tracy Jensen, chief operating officer at 10X Investments, “the risk is that proposed layers of bureaucracy and control lose sight of what really matters to consumers: simple, affordable and effective financial services”.
“You won’t find those features in the new framework. Instead, be prepared for a string of new acronyms, abbreviations and oversight bodies that will confuse all but those involved,” she adds.
The Financial Stability Oversight Committee will support the SARB. It will be assisted by the Financial Sector Contingency Forum to identify systemic risks and ways to mitigate these. The Financial System Council of Regulators will act as liaison between regulators and Government, while the Financial Sector Inter-Ministerial Council will facilitate co-operation between cabinet ministers. The Prudential Committee will oversee the management and administration of the Prudential Authority.
Jensen says: “There will be no shortage of meetings or fancy titles under the new order. And none of this will come cheaply.”
The set-up costs are estimated at some R5bn; the annual running and additional industry compliance cost at around R3bn. “One way or another, these additional charges will be recovered from the consumer,” says Jensen.
There’s more than a hint of over-spec’ing here, as though we are routinely flattened by financial storms and scandals. That hasn’t been the case.
Jensen adds: “Despite its flaws, the current system has served us pretty well; it’s doubtful that the new set-up will strengthen the sector to the extent that justifies the additional cost and effort.”
It’s also unlikely to deliver improved outcomes for consumers. That’s because, in the end, consumer protection will still lean heavily on the “fairness outcomes” mandated by the Treating Customers Fairly requirements. But a “fairness outcome” is very different from a fair outcome.
Jensen says: “It’s the difference between form and substance, between the letter and the spirit of a law, between disclosing that fees are 3% pa and disclosing the impact of paying 3% pa in fees.”
“It’s these subtle differences that make the financial services industry tick and Twin Peaks won’t change that,” concludes Jensen.