Consumers will be the losers if the Financial Sector Regulation Bill (FSRB) is enacted and parliament should demand a socio economic impact assessment (SEIA) before this bill goes any further. This is the message from the Free Market Foundation (FMF) executive director Leon Louw who led oral evidence to the Standing Committee on Finance yesterday, 25 November.
Impact assessments are required by the Cabinet, the Presidency and the Treasury’s own Minister Hlanhla Nene, who made mention of them in his recent Medium-Term Budget Speech.
Louw said, “The FMF uses a consumer-centric approach regarding financial policy therefore we pay special attention to the cost-benefit implications for consumers of market conduct regulation of the kind envisaged in the FSRB.”
Louw stated that, although the 2011 National Treasury Policy Document claims, under the heading “A Safer Financial Sector to Serve South Africa Better”, that “The financial services sector is at the heart of the South African economy and touches the life of each and every citizen,” little or no input has been received from consumers and their rights and interests are scarcely mentioned.
Without a professionally, properly and independently conducted SEIA, government has no way of knowing whether benefits are likely to exceed costs, what those benefits and costs are likely to be, who will enjoy benefits and who will endure costs, what the nature and extent of costs and benefits might be, and how society and the country’s economy will be impacted.
The Bill under consideration proposes the “twin peaks” system of regulation. The first, prudential regulation peak has been the norm in most countries for many years. It is the second peak, “market conduct”, which will regulate the behaviour of the financials services industry, including insurance, under the FSB that is in particular need of a SEIA. The intention is to have to “intensive and intrusive” interference in the operations of insurance companies.
Under Twin Peaks, South Africa will be importing failed regulation from the UK introduced to address an earlier problem, which arose from the UK equivalent of FAIS.
Since neither the Bill nor any of the voluminous documentation surrounding it provides any detailed or objective criteria for what market conduct regulation might be, parliament is being asked to empower the Financial Services Board (FSB) to do something unknown and unknowable.
The only solution to avoid this situation would be for parliament to undertake a comprehensive and independent SEIA to clarify, specify and quantify the anticipated benefits, costs and outcomes. “After all, there is legal opinion to the effect that section 33 of our Constitution (the administrative justice clause) could mean that all legislation must be preceded by something amounting to a SEIA”, said Louw.
“It is not even clear whether there is a problem in need of a solution, the “mischief factor” which all legislation must be designed to address has not been identified. As long as consumers have any freedom of choice at all, they will make mistakes. Freedom is the right to be wrong. All regulatory (as opposed to educational) attempts at improving consumer behaviour, raise costs and reduce choices. Why should insurance be regarded as a special case? There are no regulations aimed at reducing “mis-selling” of houses, cars or wedding rings, even though the implications for consumers of making sub-optimal decisions are usually more severe”.
For over 100 years, South Africa’s system of regulation has been successful with few failures in financial services. It is based on a simple golden rule: one market, one regulator. Splitting oversight between two regulators will create enormous and expensive compliance issues for companies already straining under excessive and burdensome existing regulations and red tape. In the end the consumer will pay in higher premiums, reduced choice and limited independent expert advice.
“Parliament should return the FSR Bill to Treasury with an instruction to resubmit it only with a properly conducted, independent and professional SEIA, and should make it clear that, in the absence of such a SEIA, parliament is in no position to perform its legislative function properly. By doing this, parliament will do justice to the country and all who live in it,” said Louw.