Market conduct capable


by Richard Rattue, managing director of Compli-Serve SA

Market conduct regulations are coming to a place near you soon. Do you know how the changes could impact your advisory business?

When the Financial Sector Regulation Bill (Twin Peaks) is finally enacted, the Financial Services Board (FSB) will be divided into two. The formation of a Market Conduct Authority will come into play and a Prudential Authority will also be formed, governed by the South African Reserve Bank. The Market Conduct Authority will, not unsurprisingly, mean that the way industry treats customers and conducts itself in the marketplace, is set to become the FSB’s key focus area and, of course, aims to ensure the outcomes of TCF (Treating Customers Fairly) are met by the industry.

To some, Twin Peaks is overkill and concerns exist around excessive costs of implementation, but to the majority it represents a leap forward, long overdue. Twin Peaks and its supporting legislation will lend hands to this, deterring disingenuous individuals in financial services from accessing or mistreating the consumer.

Consequently, compliance with these new principles blended with a rules-based approach will be tough to get used to for some. Market conduct risk has thus emerged as a primary business risk facing advisers who are not geared up for the changes ahead.

There are several key principles surrounding good market conduct. We can perhaps focus on one of the more important ones, namely the principle of Equivalence of Reward – in layman’s terms “a fair day’s pay for a fair day’s work”. This principle would need to be implemented into an advisory business and measured to ensure that the firm is on the right side of the regulator.

In effect, compliance to this principle will make it difficult to justify excessive charging where the work undertaken simply bears no correlation to the effort involved. One can expect the regulator to spend more time looking at how you earn your fees and the rates involved. It is unlikely that fees will be set, but possible that fees may be capped if industry feedback shows widespread abuse. We need only look at binder holders, and how the regulator can lose patience and move to cap fees.

Our financial services industry as a whole has supported the TCF regime, although there remain some institutions and related stakeholders who are not exactly rushing to make changes. There is also increasing pressure to transform industry, this includes bringing new entrants into the market. This doesn’t seem to be abating in future, in fact quite the opposite. Too many rules can scare off the good guys as well as the bad, and this is where principles with a softer face may help ease the dearth of new entrants.

All advisers must be able to earn a fair remuneration for their work and the regulator will need to strike a balance accordingly.