Market Conduct Regulation of the Retirement Fund Industry in South Africa

Abstract

The thesis analyses the regulatory reforms on market conduct regulation of the retirement fund industry in South Africa. The position before and after the regulatory reforms brought by the introduction of the twin peaks model of financial regulation in the style of the Financial Sector Regulation Act 9 of 2017 (“the FSRA”), are evaluated against the objectives of the government for the retirement industry and the vision of a new and reformed market conduct framework for the retirement fund industry. The research benchmarks the South African market conduct framework for retirement funds against international best practices and the Australian framework. The research finds that financial regulation has been introduced internationally, to ensure sufficiency and effectiveness in the financial sector, and is an ongoing task aimed at achieving global and economic stability. Research conducted prior to the twin peaks identified that there is inadequate financial inclusion in the retirement fund industry, as retirement fund benefits are mainly accessible to individuals who occupy formal jobs and earn a good income, and entrepreneurs. Despite South Africa’s large and stable retirement fund industry, there is a substantial number of people who do not have access to retirement benefits. There is also a substantial number of people who do not contribute to retirement funds due to various reasons such as due to their being a seasonal worker, a part-time worker, an informal worker, a self-employed individual, being employed by a small legal entity or earning a low income. There are numerous people who, despite having access to retirement benefits, do not have sufficient retirement savings. Some members of retirement funds are not fully aware of the retirement benefits that they have, and some may not be aware that they have retirement benefits, which results in a high number of unclaimed benefits. It is argued that this trend in the retirement fund industry contributes to poverty in the South African economy to a large extent and places a burden on the government of having to provide pension grants to citizens without sufficient retirement savings or without retirement savings. Research identified that these inefficiencies in the retirement fund industry are caused by improper remuneration on the retirement products (commonly referred to as “financial products”), complexities of retirement products, lack of sufficient and simplified disclosures to retirement fund customers and improper governance of retirement funds. It is also suggested that some of the inadequacies may have resulted from early withdrawals of retirement savings, unsuitable financial products and financial laws that do not provide sufficient protection to retirement fund customers. It is also believed that the inadequacies may have resulted from defective market conduct regulation of financial institutions, lack of knowledge of financial products by financial customers (given the complexities of financial products), lack of guidance to retirement fund customers and lack of harmonisation of laws governing private and government retirement funds. Due to these reasons, the South African government set objectives to commence regulatory reforms in the financial industry, which comprises the retirement fund industry, the insurance and investment industry and the banking industry. The objectives identified for the retirement fund industry include, inter alia, a strong market conduct regulation to monitor the conduct of retirement fund stakeholders (such as insurers, financial advisors, principal officers, board of trustees of retirement funds and participating employers in the retirement funds), the enhancement of the protection of retirement fund customers and the support of fair outcomes for customers. Other objectives are regulatory reforms which will implement sufficient disclosures to retirement fund customers, the enhancement of governance of retirement funds, data requirements, to achieve better communication with retirement fund customers, financial literacy programmes, and harmonisation of retirement fund laws for private and government retirement funds. The objectives are intended to alleviate poverty, achieve financial inclusion, and ensure efficiency and stability in the retirement fund industry. The study finds that the twin peaks financial regulation which introduces market conduct regulation for retirement funds has been adopted by many countries, such as Australia, Canada and the Netherlands. The comparative analysis of the twin peaks financial regulation in South Africa and Australia found similarities between the regulatory models. The study established that the introduction of the twin peaks regulatory model in each country was motivated by the need to ensure sufficiency and stability in the financial industry, including retirement funds and the need to advance the protection of retirement fund customers. The study also identified similarities in the twin peaks regulatory structures of South Africa and Australia and their market conduct regulatory frameworks, but also identified differences in the laws which establish the market conduct regulators in the respective countries and the laws that regulate market conduct regulation. The study also finds a similarity in some of the types of the Australian and South African retirement funds, but there is a major difference on the other categories of the South African retirement funds which provide retirement benefits to a group of employees. The failures experienced under the Australian twin peaks regulation is a significant indicator that the twin peaks financial regulation and the market conduct regulation laws should be constantly monitored to assess their efficiencies and areas that may pose risks to efficient regulation. The study finds that South Africa adopted international best practices in the new and reformed laws and in the objectives to promote the protection of retirement fund customers. It is established that South African regulators under the twin peaks adopted the strategies of the international best practices in its models of regulation, such as the outcome and risk-based principles of regulation. The research finds that the new and reformed market conduct laws in the retirement fund industry are strong and incorporate international best practices. The introduction of the new and reformed market conduct laws has, to a certain extent, achieved and set the standards for the provision of proper disclosures to retirement fund customers, changes on data requirements, the governance of retirement funds, and financial literacy programmes. However, the shortcomings identified by the study include the fact that there are challenges for insurers and retirement funds to obtain the required data for retirement fund customers. To name two such challenges: there is still a lot of data missing, and insurers and retirement funds are still not able to communicate with all retirement fund customers to provide them with the required disclosures on their benefits, and for the regulators to provide them with financial literacy programmes. There is still a long road ahead to achieve financial inclusion, as there a high number of South Africans that do not have access to retirement fund benefits. Laws prohibiting retirement fund members from withdrawing their retirement fund benefits before reaching retirement have not been promulgated. Laws obliging customers to contribute to a retirement fund, and the still National Social Security Fund (“NSSF”) need to be implemented. The harmonisation of the market conduct laws in the retirement fund industry is still in its initial stages and has yet to be achieved. The delays in finalising COFI can cause delays in achieving the objective of market conduct regulation to monitor the conduct of financial institutions. The laws that will be amended through the COFI also imply that there is still a long way to go to achieve harmonisation of the market conduct laws, given that they are largely segmented. The recommendations posed by this study aim to enhance the existing framework and provide guidance to legislators in respect of those market conduct areas that require focused intervention.