During the year under review, there was a significant volume of proposed legislation and amendments to existing legislation, all of which will impact on the governance and reporting of governance within the PPS Group. This has placed additional responsibilities on the boards and management to ensure adherence to, and compliance with, the new requirements.
The most important legislative changes for PPS are highlighted below:
During 2011, the Financial Services Board (FSB) introduced a new methodology for statutory reporting of assets, liabilities and solvency capital requirements for South African insurers, aligned to the European Union Solvency II standard. The official target date for SAM implementation is 1 July 2017. The SAM project at the FSB has entered the final phase of implementation. The initial parallel run commenced in July 2014 and will continue in 2017. PPS continues to use its project team to ensure the successful implementation of SAM and the PPS Group is fully prepared for the anticipated 1 July 2017 implementation.
The PPS Group participated in the FSB’s consultative process preceding the implementation of SAM and numerous SAM returns have subsequently been submitted, including Quantitative Impact Studies, Annual Returns, Quarterly Returns and an Own Risk and Solvency Assessment (ORSA). Based on these, PPS Insurance would remain financially sound under the SAM framework and is well-positioned to deal with SAM requirements. The challenge faced is around embedment to ensure that measures designed are entrenched in decision-making and the day-to-day operations of the business.
The ‘Twin Peaks’ model is a strategy to divide the financial regulatory system into two regulatory regimes. These two regimes will be headed by a Prudential Authority and a Financial Sector Conduct Authority. The FSB will regulate market conduct and the prudential regime will be regulated by the South African Reserve Bank. The objectives of this model are financial stability, consumer protection, combating of financial crimes, and transparency. These changes will be funded, amongst other things, by increasing the levies paid by financial institutions.
2015 saw the introduction into Parliament of the Financial Sector Regulation Bill, which is an overarching Bill that confirms the mandates and structures of both regulators and includes TCF principles (phase 1). National Treasury has published an updated Financial Sector Regulation Bill based on matters raised by the Standing Committee on Finance (‘SCOF’) hearings in July 2016 in Parliament. The updated Bill sets out Treasury’s responses to the comments of the SCOF and various stakeholders. The Bill is intended to give effect to the decision to shift to a twin peaks model of financial sector regulation for South Africa.
The third draft Regulations were published in October 2016, which will be finalised and gazetted after taking account of the required parliamentary process. The draft Regulation is intended to take effect from 1 April 2017. The Regulations specify which types of contracts are regulated under the Long-term Insurance Act, No 52 of 1998 and Short-term Insurance Act, No 53 of 1998, as health policies and accident and health policies, and accordingly excluded from the Medical Schemes Act, No 131 of 1998, despite such contracts meeting the definition of the business of a medical scheme. The Regulations seek to clearly demarcate the responsibility for supervision of medical schemes and health insurance products, and ensure that health insurance products do not undermine the medical scheme environment. The draft Regulations do not allow insurers to continue to provide Primary healthcare insurance policies, but allow insurers to continue to provide Medical Expense Shortfall policies and Non-medical Expense cover as a result of hospitalisation policies in a manner that complements medical schemes, subject to strict underwriting and marketing conditions.
The FSB released a discussion paper outlining the Retail Distribution Review (RDR) in 2014.
The RDR paper sets out a total of 55 specific proposals that cover:
RDR will have a significant impact on how product suppliers and financial service providers conduct their business. During December 2016 the FSB published a status update document on progress with implementing the proposals of the RDR. The document provides an overview of the status of specific regulatory instruments that will give effect to the RDR Phase 1 proposals and an update on current thinking for proposals in Phases 2 and 3. RDR Phase 1 is being given effect to through proposed amendments to the following regulatory instruments:
The Draft Financial Intelligence Centre Amendment Bill was released during 2015. The Bill follows National Treasury’s and the FIC’s Consultation Paper on the Review of the Financial Intelligence Centre Act (FICA) which was released in May 2014. The Bill will amend the Financial Intelligence Centre Act and aims to enhance South Africa’s ability to combat financial crimes by proposing measures to address threats to the stability of South Africa’s financial system posed by money laundering and terrorist financing. The Bill also seeks to more closely align South Africa’s anti-money laundering and counter terrorist financing legislation with international standards. During 2016 the FIC published an Issue Paper on guidance required to implement the FIC Amendment Bill as well as proposed amendments to Schedules 1 to 3 of the Act to widen the scope thereof to include certain businesses or institutions which, in the FIC’s view, may present a higher risk of being used to facilitate money laundering or terror financing activities. Amongst the list of new possible inclusions are persons who provide trust and/or company services and short-term insurers.
On 17 April 2015, the National Treasury and the FSB released the Draft Insurance Bill 2015 for public comment. The Bill has been in development for the past six years. The Bill gives effect to the SAM framework and provides a consolidated legal framework for the prudential supervision of the insurance sector that is consistent with international standards for insurance regulation and supervision. It is envisaged that the Bill will replace those sections of the Long-term Insurance Act and the Short-Term Insurance Act that relate to prudential supervision.
The objective of the Bill is to establish a legal framework for insurers and insurance groups that:
The Bill was tabled in Parliament on 28 January 2016. Comments on the Bill are to be submitted to the SCOF by 3 February 2017 and it is envisaged that its promulgation is imminent.
A new version IV of the Code on Corporate Governance issued by the King Committee (King IV) was launched on 1 November 2016. The King Reports, of which this is the fourth iteration, contain the philosophy, principles and leading practices for corporate governance in South Africa. King IV differs from King III in several ways. The Code is now integrated into the Report, with a clear differentiation between principles and practices, which is intended to make it user friendly. King III’s “apply or explain” principle has been elevated to “apply and explain”. King III’s 75 principles have been distilled to 16 principles in King IV, with an additional 17th principle which is applicable to institutional investors such as retirement funds and insurance companies. Disclosure on the application of King IV is effective in respect of financial years starting on or after 1 April 2017, but immediate transition is encouraged. King IV replaces King III in its entirety.
In October 2016, commentary was received on the first publication of the proposed fit and proper requirements published in 2015 and the Registrar, where appropriate, incorporated these comments into the current proposed amendments to the fit and proper requirements published in 2016. The amendments proposed in the first publication did not address those aspects of the competency framework that were under review. The proposed amendments are designed to meet the consumer protection objectives of the FAIS Act, 2002, and to ensure clarification of applicable requirements. The Registrar clarified that the honesty and integrity of a juristic person must be demonstrated through its corporate behaviour and through the personal behaviour of its directors and key individuals.
A proposed replacement of the Policyholder Protection Rules (PPRs) under the Long-term Insurance Act and Short-term Insurance Act was published in December 2016. The amendments to the Regulations and the PPRs are steps towards Government’s move to a ‘Twin Peaks’ model of regulation and the implementation of the TCF approach to improved customer protection in the financial services industry. The conduct of business reforms that will be given effect to through the PPRs are: RDR, enhanced disclosure requirements facilitating TCF, improved claims management processes, rules regarding advertising, brochures and similar communications, enhanced complaints management processes, premiums reviews, minimum data governance requirements and no negative option marketing. The intended effective date of the regulatory changes is 1 May 2017, with appropriate transitional provisions, where necessary.
Proposed amended regulations under the Long-term Insurance Act and Short-term Insurance Act were published in December 2016. The conduct of business reforms that will be given effect to through the regulations are: limitations on persons who may enter into binder agreements, as well as prescribed maximum fees to be paid to binder holders and other outsourced relationships, general principles for determining remuneration, minimum data governance requirements and reducing maximum causal event charges from between 30% and 40% down to 5%, over time. The intended effective date of the regulatory changes is 1 May 2017, with appropriate transitional provisions, where necessary.