Contributions to the Supervisors on Supervision Stocktake
Why have some jurisdictions invested in and leaned into culture supervision while others have not?
“The 2008 global financial crisis resulted in a seachange in financial sector regulation across the world, with a particular focus on conduct regulation.
South Africa experienced the crisis from a slightly different perspective, as its financial sector weathered the stability crisis well, reflecting the strong prudential and stability framework already in place. Nevertheless, the role of the financial sector in supporting the South African economy and the country’s citizens was put under review, in particular looking at the conduct and culture of financial institutions.
The financial sector could and should be doing more to drive better outcomes for South Africa’s citizens and economy. High-profile cases of outright fraud and misconduct have been endemic, alongside poor practices such as opaque pricing structures, ineffective disclosures, poor claims and complaints practices, and complicated product offerings. This has resulted in high levels of mistrust among financial customers.
More active participation in the sector was required in order to drive improved outcomes for customers, and to ensure that the financial sector plays its facilitative role in the economy well.”
What are the structural challenges to integrating culture supervision into standard oversight practices?
“South Africa’s market conduct regulatory reform process entails more than the creation of a new regulator. Another key focus is to streamline and harmonise the legal landscape within which financial institutions, and their regulator, will operate. This entails a comprehensive review of existing financial sector laws, with the aim of developing a single, holistic legal framework for market conduct regulation that is consistently applied to all financial institutions in South Africa.
The draft Conduct of Financial Institutions (COFI) Bill represents this new legal framework. It puts in place a market conduct framework that is more principles-based, allowing for regulation that is flexible, proportionate, and focused on the achievement of outcomes rather than the mere compliance box-ticking that characterized the previous regulatory regime.”
“The creation of the new FSCA involved a significant change management process, shifting from the organisational, regulatory and supervisory approach of the Financial Services Board to an entirely new institution, focused on a relatively new area of financial sector regulatory interests, i.e. conduct and financial sector outcomes.
A further shift in approach was necessary, away from the traditional compliance-driven model to one that is proactive, pre-emptive, risk-based and outcomes-focused.
Banking conduct regulation, and particularly appropriate governance practices and culture outcomes, remains a key focus area of the FSCA and a crucial success indicator of the newly adopted Twin Peaks regulatory framework.
The FSCA has promulgated Conduct Standard 3 of 2020 (‘Conduct Standard’), the underlying regulatory instrument for the conduct of banks … Amongst its key requirements and provisions is the obligation for banks to have in place proper governance and culture-focused structures, and related policies conducive to good customer outcomes.”
What emerging techniques and tools offer promise to improve culture measurement and risk assessments?
“Financial technology (fintech) has grown exponentially, and advancements in areas such as blockchain, cryptocurrencies, artificial intelligence (AI), machine learning and open banking, among others, have unlocked valuable opportunities to identify and address the most critical issues facing the sector and its regulators, including the promotion of growth and widespread financial inclusion.
Our main role is to ensure that customers and the broader industry thrive by defining controls that protect all South Africans and prevent and pre-empt unfair treatment of customers. We also have a critical role to play in ensuring that advances in technology do not exacerbate or create new areas of exclusion or negative ethical, legal, social or political consequences associated with these technologies.
On our part, we are taking steps to provide the correct technology solutions — such as AI — to do business with financial services providers and drive the growth of the wider sector.
Ultimately, technology will continue to gather pace, and devices, objects, people and organisations will become increasingly interconnected. Machines will become more ‘intelligent’ as they start drawing on past experiences to inform future decisions — although the true impact on humans remains unknown.
But, with the right governance and guidelines in place, there is potential to leverage technology to improve business operations and lives across the continent significantly.”
What steps should regulators consider to enable more effective culture risk supervision?
“Despite the successes of the Financial Services Board, [there was a] clear need for South Africa to reform its regulatory architecture, and to improve the conduct oversight of its financial institutions. South Africa required two regulators to make financial services safer, to reduce potential threats to financial stability, and to ensure that the sector is working in the interest of all South Africans.
This was implemented through a Twin Peaks regulatory model — the FSCA being one of the two regulating bodies, with the Prudential Authority (PA) being the other. The FSCA supervises how financial institutions conduct their business and treat their customers, and empower customers to make better financial decisions through financial literacy initiatives, while the PA supervises the safety and soundness of all financial institutions.”