Regulating the conduct of banks is one of the FSCA’s new areas of responsibility, and one where we have already made significant strides. Being actively aware of the risks to fair customer outcomes in the retail banking sector, the FSCA identified the need to develop a Conduct Standard for Banks that will effectively supervise these institutions. This is the initial step in implementing a comprehensive market conduct regulatory framework.
The draft Conduct Standard is also consistent with the objective of the FSR Act, particularly the mandate of protecting financial customers. It will effectively balance out principle-based and rules-based requirements to ensure that banks deliver these fair customer outcomes in a manner that is transparent and consistent. As a mechanism of monitoring compliance, banks will be expected to design and implement appropriate governance arrangements and other controls that show that fair treatment of customers is central to their organisational culture.
What does the current banking environment present?
According to the South African Reserve Bank Supervision Department report on Selected South African banking sector trends, in the current landscape there is a total of 71 financial institutions that will need to comply with the requirements of the draft Conduct Standard for Banks, with a total combined asset amounting to R5 157 billion at the end of 2017. These assets are mainly funded by deposits, current account and other creditors. The 71 banks are comprised of:
- 19 Registered banks
- Mutual banks
- 3 Co-operative banks
- 15 Local branches of foreign banks
- 31 Foreign banks with approved local representative offices
Why the need for a draft Conduct Standard?
The Competition Commission undertook a banking enquiry where some of the findings highlighted a clear gap in the regulation of the conduct of retail banks, which resulted in retail banking customers experiencing poor customer outcomes. The National Treasury commissioned the World Bank to undertake a diagnostic study focusing on the identification of potential deficiencies.
The Retail Banking Diagnostic Report presented similar conduct concerns as those mentioned in the Jali Commission Report, such as potentially unfair penalty fees and opaque product pricing and bundling. The diagnostic report also pointed to consumer education campaigns that may be required.
The draft Conduct Standard follows the sequencing of the six Treating Customers Fairly (TCF) outcomes and the process of the typical financial product lifecycle. One of the six TCF outcomes speaks to customer confidence often dealing with financial institutions. In relation to this outcome, section 3 of the draft Standard sets out the way banks would be expected to demonstrate that fair customer treatment is central to their culture and incorporated into their governance and oversight frameworks.
Even though the legislation is not yet in place, work has started in this area and engagement with the banks has been quite robust in the past month. The great thing is that the principles of Treating Customers Fairly is not new to the banking sector as it was first introduced in 2011.
We recently published the draft Conduct Standard, and we are currently evaluating some of the comments received from the public. We will monitor compliance with the draft Conduct Standard through the use of pro-active supervisory approaches in which potential areas of concern, with a greater emphasis on pre-empting negative customer outcomes where possible, are identified. This will cover both emerging risks within a specific bank (micro conduct risks), as well as concerns at sector or business model level (macro conduct risks). Once risks have been identified, the FSCA will have engagements with the bank concerned to try and remediate the situation and pre-empt consumer harm or seek redress where harm has occurred.
To implement this pro-active supervisory approach, we will develop a reporting framework, and data obtained through this framework will be used as an offsite supervisory tool to identify conduct risks and trends specific to a particular bank and for benchmarking purposes across the banking sector. Furthermore, measures such as “mystery shopping”, interactions with banks, and surveys of customers, to test customer experience will be undertaken. On-site supervision will also be conducted to examine and assess processes and management information relating to the fair treatment of customers.
The FSCA invited comments from the public on the draft Conduct Standard and after careful consideration of all the comments, the necessary changes will be made and will either submit the updated draft Conduct Standard to Parliament for a period of at least 30 days while Parliament is in session or, depending on the materiality of any such changes, publish the draft Conduct Standard for another round of public comments.
Sindiswa Makhubalo, Head of Bank and Payment Providers Department (FSCA)
