This article was initially published in the 2nd-quarter 2019 edition of Personal Finance magazine.
It is a tough ask to discuss financial services regulation in a consumer magazine, but the protections offered by South Africa’s world class regulatory framework are worth exploring. Thanks to concerted efforts from National Treasury, the South African Reserve Bank (SARB) and the Financial Sector Conduct Authority (FSCA) – collectively referred to as regulators – you can buy financial products secure in the knowledge that every possible safeguard is in place. Each of these regulators has a clearly defined role.
National Treasury is responsible for developing the overarching regulatory framework. Its long term plan for the financial services sector is outlined in a policy document titled “A safer financial sector to serve South Africa better”, published in 2011. Treasury has made significant changes to achieve the desired framework in the eight years since. Each change – whether achieved by tweaking an existing law or introducing a new one – takes the country closer to its vision of sustained economic growth underpinned by financial stability, consumer protection and financial inclusion. An important milestone was reached following the recent enactment of the Financial Sector Regulation Bill to create a ‘twin peaks’ model for financial sector regulation. From April 2018 South Africa has a Prudential Authority housed in the SARB (the first peak) and a Market Conduct Authority (the second peak) to oversee the behaviour of financial institutions. The market conduct function is performed by the FSCA, previously the Financial Services Board.
The need for comprehensive financial sector regulation is starkly exposed by the tongue-in-cheek urban dictionary definition of insurance: “Business that involves selling people promises to pay later that are never fulfilled.” This negative perception has been formed by decades of poor conduct by financial institutions, some of which was profit driven and some purely criminal. Add to this a media that often focuses on negative insurance outcomes without due consideration of the underlying circumstances and you have all the ingredients for widespread consumer mistrust.
For these reasons our regulators have placed consumer protection at the heart of their law making. This led to the adoption and incorporation of the principles of treating customers fairly (TCF) throughout the financial services sector. “The TCF principles are not new to the insurance and advisery market and were introduced by the South African regulators in 2011,” says Samantha Williams, the head of legal and regulatory affairs at the Financial Intermediaries Association (FIA). “The key intention behind these principles is to ensure fair outcomes for customers throughout the customer journey – from ensuring that the appropriate culture is embedded within organisations, to the product design, sales and disclosure process; and the claims and complaints experience.”
There are six principles (see “The TCF principles”, below) that have been embedded in most regulatory interventions since their adoption.
Although you seldom think about financial sector regulation, there are multiple laws in force to protect you from financial market upheaval or unscrupulous market conduct. The Insurance Act, 2017 sets out the licensing requirements, operating structures and prudential standards for insurers, insurance groups, microinsurers and reinsurers, whether they operate in the life or short-term markets. The Act ensures both the appropriate capitalisation of these firms and the long-term sustainability of the sector. It gives you peace of mind that the insurer you deal with will not go “belly up”. The law governing insurers’ conduct is presently under review and will eventually be enacted as the Conduct of Financial Institutions Act (COFI). But there are plenty of other conduct regulations currently in effect to govern how your insurer treats you. Principle among these is the Policyholder Protection Rules (PPRs).
Policyholder Protection Rules
The PPRs are issued in terms of the in-force insurance legislation and give specific instructions on how an insurer should treat its policyholders. They were first introduced decades ago under the Short-Term Insurance and Long-Term Insurance Acts (these Acts will eventually be replaced by the new Insurance Act and COFI) to see that “insurance policies are entered into, executed and enforced in accordance with sound insurance principles and practices in the interests of the parties and in the public interest generally”. The PPRs are updated from time to time with the two most recent amendments published in December 2017 and September 2018.
“The latest PPR revisions are all pro-consumer,” says Rhett Finch, financial director and managing director of broker business at King Price. “Top of the list must be the requirements for all insurers to now disclose how benefits and ‘bonuses’ are calculated – consumers are realising that these benefits are not ‘free’ and making more considered insurance choices as a result, forcing top insurers to rethink their business models.” The PPRs also introduced stricter governance of advertising and marketing practices. “Statistics and accolades must now be referenced and dated while advertisements that rely on comparisons (whether of price or benefits) may now only compare like policies with like,” Finch says.
The PPRs are extremely prescriptive in detailing how insurers must treat you. “They detail requirements in relation to product design, advertising and disclosure, intermediation and distribution, product performance and acceptable service, and no unreasonable post-sale barriers,” Williams says. “These rules set out how your insurer should interact with you, in line with the overarching TCF principles”.
Under these rules your insurer must instil a TCF culture; design products to meet your needs; keep you appropriately informed before, during and after the time of purchasing your policy; ensure that any advice given is suitable and takes account of your circumstances; ensure that products perform as you have been led to believe they will; and eliminate any unreasonable post-sale barriers should you wish to change or replace a policy, submit a claim or make a complaint.
The removal of post-sales barriers is an important win for consumers. Andrew Coutts, head of intermediated distribution at Santam, says: “We have a dedicated client care team that registers every complaint lodged with Santam and ensures a timely and robust complaints monitoring and management process. The head of this department reports on the complaints volume, key complaint causes and mitigating actions to our quarterly ‘Conduct of Business’ committee”. Santam also proactively monitors keywords on social media and makes use of sentiment analysis technology to measure and respond to customer “mood” on its key customer engagement email addresses.
“From a regulatory point of view, transparency on the part of insurers is an imperative and plain language a requirement,” says Finch. “The PPRs are about fairness and transparency – they prevent insurers from hiding behind fine print and require that consumers be provided with all relevant information around premium calculations, benefits and pay-outs.” He says the enforcement of the PPRs has assisted in the TCF principles becoming entrenched in every aspect of business and market conduct.
The PPRs impact on your adviser or broker too. “These rules place an onus on the insurer to ensure that intermediaries are fit and proper and appropriately licensed to sell their products; meet the Financial Advisory and Intermediary Services (FAIS) Act product knowledge competency requirements in respect of the policies offered by the insurer; as well as ensuring the suitable intermediary agreements are in place that detail the terms and conditions of their appointment,” says Williams. There are clear rules on the flow of insurance premium and commission between brokers, insurers and policyholder with the aim to enhance the level of industry-wide professionalism and to ensure that customers are treated fairly throughout the customer journey.
Rule 12.2 clearly sets out the oversight responsibilities of an insurer over its brokers. “At the onboarding of any broker we need to confirm that the broker is licensed as a financial services provider (FSP) and is authorised to render financial services in respect of the types of policies offered,” says Coutts. The insurer must ensure that all persons performing intermediary services on the broker’s behalf meet the FAIS product knowledge competency requirements. There are also strict rules governing how an insurer may facilitate the deduction or charging of any fee payable by you to your broker. “After concluding an agreement with the broker, we remain accountable to monitor whether the broker’s FSP license is still active and if it is still authorised for the product categories and financial services as agreed on,” he says.
“Rule 12 is all about-insurer-intermediary relationships,” adds Finch. “We support our brokers by helping them with the administrative requirements of changing legislation; we prepare communications for them to send to their clients to assist with getting broker fees approved; we have changed some of our processes to help make signing up new clients faster and less onerous; and we underwrite our brokers’ clients directly, which relieves a huge broker pain-point and enables us to ensure fair treatment in that part of the client journey.”
What other pro-consumer business practices have resulted from the implementation of PPRs? “We’ve gone to great pains to write our policy documents, and all other communication, in easy-to-understand English so that our clients know exactly what they’re signing up for – there is no fine print and no hiding behind confusing legalese,” says Finch. “We are also busy translating our ‘get a quote’ process into five vernacular languages, which, we hope, will make entering the insurance ambit more comfortable for a larger segment of the local consumer market.”
Santam has a dedicated communications team to assist its various business units in ensuring that plain language is used in all customer documentation and marketing material and that the type of communication is appropriate for the relevant customer group. “Some of the specific initiatives introduced to ensure the fair treatment of customers include embedding ‘good and proper’ in every aspect of our business; including TCF outcomes in performance contracts and staff incentive schemes; the active measurement of customer satisfaction with learning circles to drive ongoing improvement initiatives; a strong TCF governance structure ensuring that all projects consider TCF and customer impacts; and mandatory TCF training for all new staff,” says Coutts.
It is common practice for insurers to develop scripts for staff members who deal directly with customers: these scripts are vetted by both communications and compliance resources to ensure that all the correct disclosures are included in engagements with customers. The quality assurance function assesses staff members based on their interactions with customers and the lessons learnt are fed back via the necessary channels. Coutts adds that the disclosure documentation sent to customers is regularly reviewed in order to ensure that customers are aware of where to lodge their claim, how to complain and how to engage with either the industry regulator or ombudsman scheme.
The value of financial advice was acknowledged at the beginning of our regulatory evolution. South Africa’s financial intermediaries – including employee benefit consultants, financial advisers, healthcare brokers and short-term insurance brokers – have been subject to the FAIS Act since 2004. “Since its introduction, the FAIS Act has had the effect of ensuring a more structured and intrusive set of disciplines for those offering services to the buyers of insurance products with offerings being more appropriate to customer needs,” says Williams. The FAIS Act is enforced by the FSCA which has broad powers to issue any sub-regulations it deems necessary to ensures that the advice, products and services offered to you by intermediaries meet your needs. It is currently working on new legislation – the COFI Act – to govern the market conduct of all financial institutions in the sector.
Fit-and-proper regulations for advisers
For a recent example of consumer protection in action we turn to the updated fit-and-proper regulations, issued by the FSCA under the FAIS Act. “The fit-and-proper regulations require intermediaries to fully understand all the details in respect of the products which they are authorised to sell and ensure that they are kept up to date so that they may provide the most appropriate products to the clients they service,” says Williams.
“Insurers are obligated to ensure that your broker – and any persons rendering services as an intermediary on its behalf, meet the product knowledge competency requirements in respect of the policies offered by the insurer,” says Coutts. “This means that the insurer is not allowed to let your broker market its products without ensuring that he or she has undergone the necessary training on the insurer’s products and completed an assessment as proof that he or she understands the product section, criteria, excesses, additional cover and other nuances”.
There is a requirement for ongoing monitoring and evaluation of this product training. Santam notes that whenever there are product changes your broker and its representative must undergo training on the amendments to the product before being allowed to market it. This enables your broker to provide detailed and adequate advice to you, building on professionalism in the insurance market.
Another welcome development under the fit-and-proper regulations is the finalisation of continuous professional development (CPD) requirements for intermediaries. “The existing fit-and-proper legislation requires that CPD activities must be recorded – this ensures that the insurer and broker remain up to date on developments related to the financial services and products that he or she is authorised for, to provide excellent financial services to customers,” says Coutts.
The overarching objective of CPD is to maintain the required level of competency and professionalism required by intermediaries to render financial services. All FSPs are required to track the various competency requirements, including CPD, in a competency register as proof of compliance. “The CPD requirements ensure that brokers are kept up to date with industry development, which should give them a more holistic view of the market in which they operate – better informed advisers will ultimately be able to better sell to their customers,” adds Williams.
Stakeholders across the financial services sector are cognisant of the trade-offs between regulation-backed pro-consumer outcomes and costs. While acknowledging that recent amendments will result in positives for consumers, Finch observes that compliance with new regulation will lead to higher costs. “The industry will have to work together to minimise the impact of compliance-linked costs on policyholders,” he says.
The FIA – which represents approximately 2000 FSPs active in the healthcare, long-term insurance, short-term insurance, employee benefits and investment advice disciplines – is supportive of the new operational ability requirements introduced for FSPs, key individuals and representatives under the latest fit-and-proper regulations. “The current changes to the fit-and-proper requirements, which apply to all brokers, will further entrench the principles of TCF and create shareholder value throughout the financial services sector,” says Williams. “What still needs to be considered is that ongoing changes to regulation are balanced and do not create barriers to entry for brokers, in particular as we enter a stage where financial inclusion and the emergence of new broker practices become essential.”
THE TCF PRINCIPLES
Treating Customers Fairly (TCF) is an outcomes-based regulatory and supervisory approach designed to ensure that regulated financial institutions deliver specific, clearly set out fairness outcomes for financial customers. Regulated entities are expected to demonstrate that they deliver the following six TCF outcomes to their customers throughout the product life cycle, from product design and promotion; through advice and servicing; to complaints and claims handling:
Customers can 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 are designed to meet the needs of identified customer groups and are targeted accordingly;
Customers are provided with clear information and kept appropriately informed before, during and after point of sale;
Where advice is given, it is suitable and takes account of customer circumstance;
Products perform as firms have led customers to expect, service is of an acceptable standard and as they have been led to expect; and
Customers do not face unreasonable post-sale barriers imposed by firms to change product, switch providers, submit a claim or make a complaint.
MICROINSURANCE IN THE SPOTLIGHT
Consumers in low-income groups can breathe a sigh of relief following the widespread inclusion of microinsurance in new insurance regulation. Recent changes are aimed at protecting the most vulnerable consumers – those who typically buy credit life insurance, funeral policies and other low-premium products.
“The adoption of microinsurance within the regulatory framework aims to improve financial inclusion and enhance insurance penetration rates,” says King Price’s Rhett Finch. “Low-income earners will benefit from a paradigm shift in which insurance competitors will have to innovate and improve their product offering with an emphasis on simplicity and accessibility.” He says that a regulatory framework for microinsurance introduces protections for both low-income earners and financially illiterate consumers.
The operational and governance standards for microinsurance are outlined in the new Insurance Act and backed up by the introduction of product standards for credit life and consumer credit insurance in the latest amendments to the Policyholder Protection Rules. “The addition of microinsurance regulation will play a major role in opening up of markets previously unavailable to a large section of the consumer market and will support principles of financial inclusion,” says Samantha Williams at the FIA.
There is still much to be done to ensure comprehensive protection for consumers in the microinsurance sector. The formal recognition of this type of insurance is a welcome first step in achieving National Treasury’s objective of extending access to valued formal insurance products that meet the needs of low income households. “An enhanced, formal and regulated environment will deliver superior consumer protection and enhanced trust,” concludes Finch. “This trust will allow brands, both big and small, to begin unlocking value in and engaging with the low-income market”.