Over the years, the South African insurance industry has experienced significant events that have subsequently evoked a change within the insurance market as well as the need for development of the insurance regulatory sphere. Various trends and regulatory developments have become apparent such as an increase of business interruption claims and high-profile cyber attacks on organizations, and critically, insofar as the regulatory sphere is concerned, the execution of principles imposing the fair treatment of policyholders, commonly known as the Treating Customers Fairly (“TCF”) principles.
The industry has implemented three main regulatory responses, namely,
- that insurers are required to give consideration to fair treatment of policyholder principles,
- the continuity of business objectives and compliance with regulatory requirements; and
- the maintenance of financial soundness.
Such principles have been brought about by the implementation of what is widely known in the industry as, the Twin Peaks. The adoption of the Twin Peaks model was as a result of seeking to construct an increasingly resilient and stable financial system; provide transparency, market integrity and consumer protection; and to strengthen South Africa’s approach to market conduct regulation. The Twin Peaks model birthed the notion of the Conduct of Financial Institutions (“COFI”) Bill designed upon supporting the TCF principles.
COFI is aimed at consolidating the conduct standards of financial institutions (including insurance institutions) housed in various pieces of legislation into one statute. This is a move away from the regulation of conduct according to the specific activity undertaken by that institution. Over and above the streamlining of the financial sector conduct regulation, COFI is also aimed at the codification of the abovementioned TCF principles, therefore, becoming legally binding and enforceable across all financial institutions.
Moreover, in a further step to promote TCF principles the Financial Sector Conduct Authority, as established through the Twin Peaks model replacing the then Financial Services Board, has proposed Retail Distribution Review (“RDR”) legislation which is founded upon the TCF principles and essentially ensuring that customers are treated fairly when purchasing financial products. RDR is aimed at ensuring greater fairness, clarity and transparency around the provision of financial advice and the costs associated therewith. RDR, as proposed by the FSCA, will however be incorporated into the broader regulatory framework as the industry transitions, albeit eventually, into COFI. Before then however, public participation is key before such principles and regulatory framework are enacted. Our recent experience with the COFI bill is that industry comments are taken seriously and feature significantly in what ultimately becomes the final product.
That being said, there is no doubt that members of the insurance industry will be required, or at the very least, be advised, to align their goals and processes with the TCF principles and, eventually COFI. Therefore, aligning, and moreover, harmonizing policies sooner rather than later with the TCF principles in mind will ensure a smooth transition to COFI, and essentially prepare industry players for the upcoming changes to the regulatory environment.