The vice is slowly but surely clamping tighter on a financial services industry that has sought ways to exploit consumers by finding ways around the law rather than complying with both the spirit and the letter of the law.
Regulator and other speakers detailed at the annual Pension Lawyers Association convention in Johannesburg this week how the days of the financial services industry treating you unfairly are now numbered. The convention was titled “A paradigm shift in consumer protection”.
The backbone of the new approach was spelt out by the National Treasury in its document “A Safer Financial Sector to Serve South Africa Better”, published last month when Finance Minister Pravin Gordhan delivered his annual Budget to Parliament.
At this week’s convention, speakers detailed how the greater plan to protect you is coming together, with legislation ranging from the already implemented Financial Advisory and Intermediary Services (FAIS) Act, which regulates the behaviour of intermediaries in advising and selling financial products, through to the proposed Treating Customers Fairly (TCF) legislation, which will govern the way financial product providers treat you.
In between there is legislation and regulation governing conflicts of interest, looming requirements that companies properly protect any of your personal information that they have acquired, and the Consumer Protection Act, which comes into force on April 1.
Leanne Jackson, the newly appointed head of TCF at the Financial Services Board (FSB), told the convention that the government is of the view that more stringent standards of conduct are necessary for the financial services industry than those generally applied to non-financial goods and services.
She says that to achieve better protection for you there is also a determined move towards co-ordination between the various government departments and regulators to stop miscreants abusing overlaps and particularly underlaps in the regulation of the financial services industry.
A key part of the overall plan to protect you is the proposed TCF regulation, which, she says, will require a culture change at financial services companies from top management down to “demonstrably” treat you fairly and equitably (see “Objectives of the campaign”, below).
It will not be sufficient for companies to put a poster up on a boardroom wall alongside their mission statement saying that they are treating you fairly – they will have to prove it, and demonstrate that there has been a change in culture.
Among other things, companies will have to show how TCF has been included in their management plans, how they measure success, and how they act on the information received from the measurements.
The legislation is both principles-based and rules-based, putting the onus on financial services companies to treat you fairly in providing you with products and services, from cradle to grave.
Jackson says broad outcomes will guide TCF implementation but clear, enforceable rules and regulations also need to be in place to ensure these outcomes are achieved. Reliance on firms “doing the right thing” is insufficient.
She expects a regulatory framework to be in place by the end of next year. However, it could still be some years before the full force of TCF comes to fruition.
She says a road map for the introduction of TCF will be published before the end of the month.
And in another move to close gaps, the government has indicated that it intends to publish its next retirement reform policy document by mid-year, after a long four-year hiatus since the government published its second paper.
There will be workshops to debate TCF and get stakeholder perspectives – including one with the UK’s Financial Services Authority.
Jackson says a pilot project is already under way with a number of companies representing a cross-section of the financial services industry currently being selected as guinea pigs.
The TCF road map will provide:
* A summary and response to comments received after the publication of the first TCF proposals document in April last year. The framework for TCF is based on a similar system in place in Britain.
* Details of the planned implementation approach the initial phases and timelines for future phases, which include providing the industry with a TCF self-assessment tool, conducting a benchmarking study against which companies can be measured, and providing guidance for the industry appropriate to the various phases.
* Aligning TCF with ombud roles and FSB consumer education initiatives.
In implementing TCF, the FSB will focus first on the areas of highest risk to consumers.
She says there were still a number of questions being asked by the financial services industry that need to be answered including:
* The scope of industry sectors affected, and especially how the banks and “wholesalers” of financial products will be affected;
* How to deal with retirement-related issues;
* How to deal with overlaps and underlaps in existing legislation;
* The conceptual approach of regulating “fairness” and “ethics” rather than the letter of law; and
* How to deal with “legacy” products and practices that are currently in place and that do not meet the requirements of TCF.
Jackson says the aim is to have appropriate products and services as well as enhanced transparency and discipline that will ensure your needs are met and your confidence in the financial services industry improves, ensuring a sustainable industry. She says some TCF outcomes are already quite well addressed in existing legislation, especially the FAIS Act, but others are inadequately addressed, with more focus needed on the conduct of product suppliers while creating a culture of compliance.
TCF will complement other consumer protection legislation including the Consumer Protection Act, the National Credit Act and the Protection of Personal Information Bill.
The Council of Financial Regulators will ensure the co-ordination of all consumer protection legislation and regulation and information-sharing between regulators, covering enforcement, market conduct and legislation.
She says the various ombud schemes, in fact, deliver “ultimate fairness”, but these are focusing on individual cases, whereas TCF will apply holistically to the industry.
OBJECTIVES OF THE CAMPAIGN
Treating Customers Fairly (TCF) is based on six elements. These are:
* Customers must be confident they are dealing with firms where TCF is central to the corporate culture.
* Products and services marketed and sold in the retail market must be designed to meet the needs of identified customer groups and targeted accordingly.
* Customers must be provided with clear information and kept appropriately informed before, during and after point of sale.
* Where advice is given, it must be suitable and take account of customer circumstances.
* Products must perform as firms have led customers to expect they will, and service of an acceptable standard must be provided that meets the expectations of customers.
* Customers must not face unreasonable post-sale barriers imposed by firms to change products, switch providers, submit a claim or make a complaint.
Leanne Jackson, the head of Treating Customers Fairly at the Financial Services Board, says to achieve these objectives requires a regulatory framework that focuses on the spirit, intent and principles as well as rules, with a significant onus being placed on the financial services industry.
She says measures have to be put in place to embed a TCF culture within the industry. This should not be a compliance function, but something driven by the senior management of companies. “Company boards, senior and middle management need to provide direction and monitor delivery,” Jackson says. “All decisions impacting on customers must be subject to the TCF challenge. Staff must also be able to challenge decisions without repercussions.”
Jackson says TCF will also entail the appropriate recruitment, training and evaluation of staff.
RETIREMENT FUND FOCUS
Particular attention on retirement funds is likely to be included in Treating Customers Fairly (TCF) legislation, Leanne Jackson, the head of TCF at the Financial Services Board (FSB), says.
She says the National Treasury has highlighted particular policy challenges for retirement funds, many of which relate – directly or indirectly – to the issue of fair treatment of retirement fund members, potential members and their dependants.
She says areas of concern where TCF regulation could be used to provide better protection for consumers include:
* Member and trustee education; and
* The need to enhance choice through disclosure and transparency.
Jackson says the “high and opaque” costs of retirement products remain a concern. The Treasury has specifically signaled these issues as a focus of TCF.
She says, however, that the legal structure of retirement funds, with their complex combination of member, fund trustees, sponsor (employer), insurer and investment administrator inter-relationships, raises questions about the application of TCF as a retail consumer protection tool.
But administrators of retirement annuity and preservation funds will be expected to deliver TCF outcomes for members.
Financial advisers dealing with individual members will clearly have TCF accountabilities, but there is not yet clarity on TCF expectations for fund-level advisers.
She says these issues will be raised with various stakeholders to ensure consistent delivery of fair member outcomes, within an efficient and enforceable framework.