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Is There a Future for the External Compliance Practice?







By Associated Compliance (Pty) Ltd

If the FAIS Act (section 17) hatched the ‘FAIS’ compliance officer, it follows that the forthcoming Conduct of Financial Institutions Act (CoFI) is likely to dispatch it. So where to from here for the external compliance practice, and the ‘FAIS’ compliance practice in particular?

Some years ago, when we were first confronted with ‘treating customers fairly’ (TCF), suppliers and providers, large or small, were requested to complete the TCF self-assessment tool published by the Financial Services Board (FSB). The tool notably omitted any reference to compliance and at that time the industry was categorically informed by the Regulator that TCF was a culture issue, not a compliance issue.

Despite this, the proposed changes to the Regulations, coupled with the proposed Policyholder Protection Rules (PPR) and ‘Fit and Proper’ requirements, comprehensively address TCF and bring compliance to the forefront. When these proposals become entrenched in our laws, the FSP will be forced to comply with a range of new compliance requirements; all of which have to be measured and tested on an ongoing basis. For many suppliers (which include binder-holders and underwriting managers) internal resources are too limited to carry out these additional monitoring tasks. On the contrary, the external compliance officer is suitably well equipped and qualified to do so.

Despite the early hype around TCF, the Regulator now concentrates on ‘Conduct of Business’ with recent industry presentations (and there have been many) referring to this new term. It will also have been noticed by the entire industry that within its conduct philosophy, the Regulator is gradually passing total responsibility for the distribution of insurance products to the insurer, even if the insurer uses a ‘broker orientated’ business model.

The UK Regulator followed a similar course of action a couple of years ago, and eventually published its principles of business by which it assesses the standards of practitioner conduct.  Interestingly, TCF is only one of the eleven principles of business to which they refer when imposing fines and penalties, so it is not unrealistic to expect our local Regulator to follow a similar path. The insurers’ conduct of business returns demanded by the Regulator (commenced end June this year), together with the conduct of business reports which will be demanded from brokers in the very near future, is clear evidence of this.

Although this metamorphosis of our industry is nowhere complete, nevertheless compliance forums around the country are speculating the future of the external compliance practice. From the very beginning, the Compliance Institute made it clear that in their opinion compliance was not confined to the FAIS Act, but referred to compliance with all regulation. Indeed, the qualifications recommended and/or offered by the Compliance Institute have always followed this approach.

Whilst there is consensus that ‘all regulation’ is probably the arena in which compliance officers will have to ply their trade, there is still much debate as to what the term ‘all regulation’ entails. One view is that it applies to all Acts, whether relating to the insurance laws or not. Another view is that it relates solely to the insurance laws, this latter view stemming from the draft fit and proper requirements which specifically refer to compliance with ‘applicable’ legislation rather than ‘all’ legislation. If the forums’ conclusions prove correct, there can be no doubt that the life expectancy of the ‘FAIS’ compliance practice will be limited if a much wider range of services is not provided.

The Retail Distribution review (RDR) currently being undertaken by the Regulator also provides insight into the future of the external compliance officer. In the first of the Regulator’s RDR proposals published in 2014, the Regulator stated that “more than a third of all registered representatives are tied agents of insurers”. With this in mind, the Regulator proposed that a ‘tied adviser’ (proposal R) should be recognised at law. Although there have been a number of changes to the original proposal, it is evident that this will remain in Phase 3 of RDR implementation. The tied adviser will inevitably operate under the control of the insurer, in which case there will be no necessity to appoint a compliance officer. It is, of course, possible that the insurer under whose license the tied adviser operates, may need assistance with compliance monitoring, but this will require a minimal service.

The new binder regulations place extreme pressure on insurers to implement strict controls on its binder-holders and prior to entering into any agreement, an insurer must carry out full a due diligence investigation on the proposed outsourced party. In respect of current binder-holders, an insurer is expected to regularly assess a binder holder’s adherence to the binder agreement, specifically also the binder holder’s –

  • governance, risk management and internal controls;
  • fitness and propriety;
  • ability to comply with applicable laws and the binder agreement; and
  • operational and financial capability, including but not limited to the binder holder’s capability to provide access to timely, comprehensive and reliable data to ensure that the insurer is able to comply with any regulatory data management requirements.

There is no definition of ‘regular’ but it would not be unreasonable to assume that this will require a full compliance monitoring visit at least twice yearly, conducted by a team of specialists who have in-depth knowledge of market practises, binder agreements and operational management.

The compliance practices that are equipped with these skills and resources and who can operate country-wide will not only survive but will prosper, whether the new CoFI Act demands the appointment of a compliance officer or not.

For more information on the services provided by Associated Compliance (Pty) Ltd, visit our website at or call us on 011 678 2533.

Source: Associated Compliance
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