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?