Banks and insurance companies are increasingly being slated on social media for decisions they make that are within the law but plainly unfair.
These include instances where major banks have auctioned people’s homes for as little as R10. More recently, Momentum changed its mind after initially declining to pay out a life-insurance claim to the family of a man killed in a hail of bullets, because he had high glucose levels he had not disclosed.
Now the champions of a draft bill aimed at policing conduct of these companies say the only decisions that will be legal in future are those that will be fair to both consumers and financial institutions. The Conduct of Financial Institutions Bill was published by the National Treasury for comment in December.
“Historically the sector looked at what is legal as opposed to what is fair. What this bill seeks to do is to say: your legality now relies on whether your decision was fair. Even if they are right in terms of contract laws, financial institutions now have to ask themselves if the contract itself [is] fair,” said the Treasury’s Katherine Gibson on Wednesday.
The bill is part of the Twin Peaks architecture established by the Financial Sector Regulation Act that became law in 2017. The act proposed two regulatory houses: the regulator-facing Prudential Authority and the Financial Sector Conduct Authority (FSCA) which would monitor conduct of all financial institutions that face customers.
Under the FSCA, the bill proposes that only one piece of legislation should govern market conduct of all financial services companies, whether they are in the banking space, insurance or other areas in the investment sphere. In the past, the FSCA, which used to be called the Financial Services Board, only monitored conduct of insurers and pension funds, while banks were regulated under a different law. Conduct of institutions such as debt collectors, debit order administrators and forex dealers was not regulated. The Conduct of Financial Institutions Bill wants to bring these and other nontraditional players such as fintech companies under the same regulatory umbrella.
The bill proposes a shift from rules-based regulation of financial services companies to an outcomes-based regulatory framework. While the Treating Customers Fairly (TCF) principles have governed the insurance industry since 2014, there have always been room for companies to wiggle in, by using contract law. Even when ombudsman and pension funds adjudicators found that customers were not treated fairly, their ultimate decision to compel companies to pay complainants or abolish investment penalties was in line with the law, as opposed to the TCF principles. The FSCA says the Conduct of Financial Institutions Bill seeks to bring those ombuds and adjudicator findings around to fairness within the law.
“In anticipation of this outcomes-based approach we started the conversation, for example, with banks on what this will mean. Even now, certain institutions are still coming to us when we raise concerns about certain behaviour, saying until we tell them they can’t do it, they will continue. That in itself is very telling of how the industry operates,” said Gibson.
Even now, certain institutions are still coming to us when we raise concerns about certain behaviour, saying until we tell them they can’t do it, they will continue. That in itself is very telling of how the industry operates.
Head of regulatory framework at the FSCA’s regulatory policy division Farzana Badat said the shift was needed because of the power imbalance between consumers and financial service providers. “The thing about the law is that it does not take into account power asymmetry between institutions and customers.”
Badat said the bill was not about creating a “big bad” financial services industry against “innocent” consumers. “We have to make sure that whatever we do is in the interests of the consumer but also in the stability and sustainability of business. It’s not about the customer being right. We cannot force an insurer to do something that will potentially impact stability. But it’s about arresting conduct that an institution engages in that could potentially impact consumer outcomes as a whole or the stability of the industry.”
If the Conduct of Financial Institutions Bill is finalised without too many changes, it will also go a long way in dealing with confusion among consumers about where to go when they are not satisfied with a financial services company. There are currently six ombudsmen in SA where people can lodge complaints about their financial service providers. The FSCA said often people go to the bank ombud only to be told later that their issue can only be handled by a credit ombud and they have to start the process all over again. Badat said one of the proposals being considered under the Financial Sector Regulation Act is setting up an ombud council which will be a single point of entry to all ombuds.
The National Economic Development and Labour Council task team which reviewed the Conduct of Financial Institutions Bill recommended that the government investigate the possibility of using municipal offices to increase accessibility to ombuds’ services.
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