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After arriving early for a recent meeting, the second person who arrived on time remarked to me – as others slowly drifted into the meeting room – how easily being late for meetings can creep into the culture of an organisation and become an acceptable norm. Typically, one could laugh this off as a small agitation by those who are good time keepers against those who are not. Seemingly then, this notion of culture might be something small, but is it?
Notably, one of the first things that the new South African president did was to insist on meetings starting on time. This may be considered small in the context of the many large problems that President Ramaphosa faced then, but in terms of instituting a better culture, it should be considered significant, in my view.
A new era has dawned in South Africa, not merely because of a new punctual presidency but, more importantly, also because of SA’s new-era financial sector regulation under the Twin Peaks model.
There has been much recent media coverage of the change from the Financial Services Board (FSB) to the Financial Sector Conduct Authority (FSCA) as of 1 April 2018. As the name indicates, it is a conduct-focused approach by a new regulatory body, which will oversee all financial institutions – banks, insurance companies, retirement funds, effectively everyone in this industry.
Although there are many examples of highly principled people and institutions doing good work within the financial services industry, in general both here and globally, conduct within this industry has been far from exemplary. The FSB too has had its share of controversy, having faced accusations of being ineffectual, not tough enough or not acting fast enough to prevent some past industry debacles. To what extent then is culture responsible for unacceptable conduct in business practices, and what could a new regulatory approach mean for instituting a better culture within the financial services industry, if this is indeed needed?
What is not so new in SA is Treating Customers Fairly (TCF). Introduced some years ago and considered now as the backbone to regulation and supervision, it contains as part of its numero uno principle the idea that all financial firms should have TCF embedded into their corporate cultures.
Still relatively recent in the financial world is King IV, which is intended to instil best practice in corporate governance. Not number one on the list, but not far off is principle number 2 (of 17 principles) which requires that a governing body of an organisation should be concerned about the ethics of the organisation such that an ethical culture is established and supported.
The King Reports have all always been applicable to corporate entities. What is a significant change is that King IV has introduced sector-specific supplements and through this, all retirement funds and their service providers should adhere to the 17 King IV principles. Retirement savings are for many individuals often the single-largest asset on which their retirement depends and thus best practice by those who look after this asset cannot be more important.
Pulling this together means, in simple terms, that the content of the ethical culture referred to in King IV in respect of service providers in the financial industry must be putting the interests of the ultimate client first. In other words, what is right for the client is the most important factor in business strategy, and the profitability of the enterprise secondary. As with most self-evident truths, this makes sense as such an approach must inherently promote the sustainability and profitability of that enterprise. The trick, of course, is how this is worked out in practice. Examples of how this has not been followed, to the detriment of the service provider, can however be found here and in other countries.
South Africa has followed in the footsteps of countries such as the UK in which ‘outcome-focused’ regulation, which both TCF and King IV are examples of, has been introduced under the Twin Peaks model as a means to get financial services industry participants to change their practices and business models. The Twin Peaks model of regulation was embraced as early as 1998 by Australia (followed by the UK and other countries, after the global financial crisis of 2008 caused many countries to re-evaluate their institutional regulatory structures).
Therefore there is much in terms of past experience to indicate whether other countries have been successful in overseeing market conduct and outcomes of good corporate behaviour. As far as culture is concerned, the picture does not look pretty if recent events in Australia are anything to go by.
Against initial resistance by the Australian government on the basis that it was not necessary, a Royal Commission into conduct in the banking, superannuation (Australia’s occupational pension funding system) and the financial services industry was established at the end of 2017. Although still yet to publish its formal interim report in September 2018, the media reports of what has come out of the hearings before the commission have been concerning.
In the banking sector for example, evidence was presented that a bank’s financial planning business had been charging ongoing fees to dead clients. It’s as blunt as this – dead people paying for advice – and in one case for more than 10 years. Another bank knew about the practice of staff members in its financial advice area illegitimately witnessing client beneficiary nominations for their superannuation funds to devolve upon their death. Often transgressions were picked up by junior staff members and reported, but bosses did nothing. Yet another organisation was described as having governance practices reflecting “an absence of a compliance culture.” The responsible Australian regulator in turn was blamed for being “limp” in dealing with these issues. Much of this all comes down to culture.
Of course, in SA, we have little reason to claim moral superiority. An example of an unfortunate culture was the bulking scandal in around 2005. This secret profit scandal revealed how a service provider might cut corners at the expense of clients in order to maximise profits. What is interesting about this episode is how the prominent service provider concerned, as well as other providers involved, corrected the situation and, indeed, may be said to have altered its culture to ensure that such situations did not occur again.
Back to the present and whether a new regulatory approach means a better culture for SA’s financial services industry. Opinions on the change value of adopting the Twin Peaks system of regulation have been mixed. Robert Vivian, professor of finance and insurance at Wits, believes there is cause for concern because on a cost-to-benefit basis he doubts that there will be greater benefits; but at the same time the costs of maintaining this new system will be significantly higher. Others, like Wits alumnus Dr Andy Schmulow, currently in the faculty of law at the University of Western Australia, thinks that the SA version of it will be “manifestly superior” to the Australian model and that Australia will be able to learn from us. Time will tell.
It is worth bearing in mind, however, that few things are one-sided and culture cannot be changed by expectations of the regulator and service providers alone. Retirement fund active members, for example, are notoriously apathetic about their retirement savings, as illustrated by the fact that most members have little interest in knowing who the people are who oversee their money or what goes on in the administration of their benefits. With the recent soccer World Cup in mind, I recall a survey being done around the time of a previous tournament in which fund members were asked to name all the players in their favourite soccer team. They could do this easily, but when asked who the trustees on the board of their retirement fund are, few could name even one person.
A culture of activism as a client is as important as the culture within organisations. There can be little doubt that interested clients, as opposed to apathetic clients, will improve service and the quality of the products offered by service providers.
As a client, being active in making sure that you get the advice that you pay for; that you understand the impact of the costs you pay for your financial outcomes; that you do not pay for advice after death, may be examples of small things but they matter. For example, if you die while being a member of a retirement fund, in terms of the Pension Funds Act, it will usually take 12 months for your benefit to be paid to your beneficiaries and you should not be paying ongoing advice fees.
Many organisations have complained about being overburdened by costly regulation, citing TCF as part of a “regulation rampage”. Having a TCF culture should be embraced, not as a cost to the service provider, but as a means of enabling better service and products. It is not easy for a service provider to promote activist clients, but ultimately that will ensure a better environment.
I would hazard a guess that if culture in organisations was better on its own initiative, there would be less need for overburdening regulation. In the end, culture does matter. There are lessons and warning signs everywhere.
Vanessa Bell is a director of Jonathan Mort Inc, a firm of specialist pension fund attorneys. She is an independent trustee on boards of various retirement funds, and an independent non-executive director.
This article originally appeared in the Collective Insight supplement in the 19 July edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.
