Twin Peaks,

Market Conduct

and TCF

April 2015

Presentation for:

BATSETA conference

Leanne Jackson

Head: Market Conduct

Strategy, FSB

Financial

Services

Board

Slide 2

Agenda

• The shift to Twin Peaks – a new approach

• The Treating Customers Fairly (TCF) framework

• Current key market conduct related projects

• Our vision for 2016

Financial

Services

Board

Slide 3

Regulation – where we are coming

from….

Supervisory approach

• Backward-looking, rules and compliance-based approach

• “One-size-fits-all” – not risk-based

• “Silo” approach – FSB currently structured along sector lines

Firms

• Mixed bag of governance & risk management

• Who’s the customer?

Conduct

Despite rules, too many examples of poor customer outcomes

Financial

Services

Board

Slide 4

Twin Peaks

Consumer Education

Market Integrity

Conduct of Business(TCF framework)

Banking

Insurance

Financial Conglomerates

Financial Stability Oversight Committee

Financial Market Infrastructure

Resolution Authority

MARKET CONDUCT PRUDENTIAL FINANCIAL STABILITY

FSCA SARB

Financial

Services

Board

Slide 5

Mandate of the FSCA under

Twin Peaks

The objective of the Financial Sector Conduct Authority

(FSCA) is to protect financial customers by:

• ensuring that financial institutions treat financial customers

fairly

• enhancing the efficiency and integrity of the financial system,

and

• providing financial customers and potential financial customers

with financial education programs, and otherwise promoting

financial literacy and financial capability.

Financial Sector Regulation Bill, 2014

Financial

Services

Board

Slide 6

What is conduct regulation?

Market conduct regulation and supervision -

• Is concerned with the way financial institutions conduct their business and whether this conduct delivers fair customer outcomes (TCF) and supports the integrity of the financial markets

• Considers product and service relationships (retail and wholesale) between financial services institutions and between financial services institutions and customers, to assess customer outcomes and market integrity outcomes

• Monitors and seeks to mitigate conduct risk – the risk that an entity conducts its business in a way that does not deliver fair customer outcomes or undermines the integrity of the financial markets.

Financial

Services

Board

Slide 7

Future - guiding principles

Market conduct regulation and supervision needs to be:

• Transparent

• Comprehensive and consistent – no gaps, no arbitrage

• Intensive and intrusive

• Outcomes-based (embedding TCF principles)

• Risk-based and proportional

• Pre-emptive and proactive

• Credible deterrent

• Aligned with international standards

Financial

Services

Board

Slide 8

Market Conduct Policy framework also

requires an outcomes based approach

“Regulated institutions should be evaluated on

customer outcomes rather than just through a tick-

box compliance approach. This means that customer

protection regulation will require financial institutions

to comply with both principles- and rules-based

standards. These should be legally binding and

enforceable. The regulator should gather information

necessary to evaluate the extent to which customer

outcomes are improving and should report findings

to stakeholders.”

Treating Customers Fairly: A Draft Market Conduct Policy Framework for SA (NT, December 2014)

Financial

Services

Board

Slide 9

TCF Outcomes

1. Customers (primarily members) can be confident they are dealing with firms (funds, administrators, service providers) where TCF is central to the culture

2. Products & services are designed to meet the needs of identified customer groups and are targeted accordingly

3. Customers are provided with clear information and kept appropriately informed before, during and after point of entry

4. Where advice is given, it is suitable and takes account of customer circumstances

5. Products perform as firms have led customers to expect, and service is of an acceptable standard and as they have been led to expect

6. Customers do not face unreasonable post-sale barriers imposed by firms to change product, switch providers, submit a claim or make a complaint

These outcomes are to be demonstrably delivered throughout the

product life cycle, from product design and promotion, through advice

and servicing, to complaints and claims handling – and throughout the

product value chain.

Financial

Services

Board

• Significant lack of appreciation, across the value chain, for TCF accountability (“not my job!”)

• Trustees see TCF as implicit in their fiduciary duties – but seem to “outsource” some of the TCF outcomes

• Non-trustee roles do not see TCF outcomes for the “end customer” (member) as their responsibility

• On average, Outcome 1 (culture and governance) scores lowest on TCF self-assessment

Baseline study observations

Financial

Services

Board

11

Retirement fund value chain

The regulatory framework will hold all regulated entities in this value chain accountable to deliver TCF outcomes relevant to their role.

Sponsor / Employer

Fund & Trustees

(Rules, Benefits, Eligibility)

Administrator (Benefit &

Investments)

Insurer / other

product provider

Fund advisers /

other service

providers

Member adviser

Financial

Services

Board

12

TCF journey so far:

A consultative approach

The principles of TCF have been consistently communicated for five

years. The FSB therefore expects regulated entities to already be

applying these principles in the way they conduct business

FSB publishes TCF

discussion

document

March 2010

FSB TCF Roadmap

published

March 2011

TCF Baseline Study

Jan – Aug 2013

TCF Regulatory

Framework SC

starts work

July 2011

FSB TCF Self-

assessment pilot

July 2011

TCF Self-

assessment tool

published

Aug 2012

NB: No formal start

date – incremental

implementation

TCF Baseline

Study Findings

published

Dec 2013

2010 2011 2012 2013 2014

Financial

Services

Board

What does “incremental implementation” mean?

• Introducing TCF principles into existing regulation (e.g. revised governance standards, revised disclosure standards)

• On-site testing of TCF commitment – focus on effectiveness of implementation

• Reporting on TCF indicators – for e.g. new Insurance “conduct of business” reports, revised FAIS compliance reports, etc.

• Challenging TCF commitment when investigating concerns

• In time, TCF principles will be fully reflected in overarching legislation – but existing frameworks already allow for application of many aspects

• Specific regulatory projects - reviewing existing regulatory frameworks to test whether they support fair outcomes

TCF needs to be embedded not only in firms’ culture, but also in regulatory and supervisory frameworks

Implementing TCF

Financial

Services

Board

Some significant current market conduct projects

in lead-up to Twin Peaks are:• Retail Distribution Review (RDR) – significant reforms to

distribution & intermediary remuneration landscape

• Consumer credit insurance (CCI) review

• TCF aligned customer complaints management

requirements

• Key information documents (KID’s) and other improved

disclosure standards

• Broader retirement reforms

• Review of the self-regulatory model for financial

infrastructures (e.g. the JSE)

Complemented by key prudential reforms – SAM, group

supervision, new fit & proper & governance standards

Key regulatory projects

Financial

Services

Board

The vision for 2016 is:

Twin Peaks, SAM, TCF, RDR all implemented -• Forward-looking, pre-emptive, risk-based and outcomes-focused

regulation and supervision

Firms and financial advisers -• Customer-centric

• Enhanced enterprise risk management – not only financial risks

but also conduct risks

• Raising the bar - but competition on a level playing field

• No more elaborate schemes for advisers to earn extra income

• Less compliance focus, more outcomes focus

Customers (members) –• Can have confidence and trust that they are dealing with firms

that will treat them fairly

Where we are going….

Qu

esti

on

s?