Where financial products do not perform in line with expectations, regulatory and litigation risk is increased, agreed panellists at The Regulatory developments affecting your business, are you compliant? discussion at the SRP Africa conference in The Maslow in Johannesburg on November 2.

The global financial crisis resulted in sharp rise in allegations of misselling, according to Matthew Grigg (pictured), partner, Clifford Chance, who moderated the panel. "Since the crises there have been unprecedented levels of regulatory enforcement action worldwide and we have seen the introduction of tighter regulation on banks and financial institutions," said Grigg who added that there have been widespread civil claims that have sought to rely on regulatory breaches and the findings of regulators.

One of the new regulatory initiatives is the retail distribution review (RDR) which was pioneered in the UK since 2006. "The UK regulator saw an opportunity to reshape how retail products were going to be distributed," said Grigg. The reasons behind the introduction of RDR were two fold, according to Grigg. "The first was numeration, hidden fees, transparency and the second was about the professionalism of the sales forces involved in the distribution of products."

According to Marius De Jongh, senior specialist, collective investment schemes, Financial Services Board (FSB), RDR in South Africa perhaps does not follow a step by step process as seen in other countries. "You have to bear in mind that the regulator learned that a lot of the legislation did not achieve what it intended to do. There was a lot of criticism." Apart from the RDR process, South Africa has also the 'treating customers fairly (TCF)' process, a regulatory and supervisory approach designed to ensure that specific clearly articulated fairness outcomes for financial services consumers are delivered by regulated financial firms, according to De Jongh.

"Firms are expected to demonstrate that they deliver six TCF outcomes throughout the product life cycle, from product design and promotion, through advice and servicing, to complaints and claims handling. RDR, however, is a process and a document that gives more practical information in terms of what we want to achieve in terms of retail distribution," said De Jongh.

RDR in South Africa is intended to be implemented in phases, according to De Jongh. "First phase is recognised as containing a number of issues which we could address under the sectoral legislation. Most of that has been implemented," he said. Phase two and phase three are more problematic, according to De Jongh. "It was intended that phase two would be dealt with within the FSRA, the Financial Sector Regulation Act, which has not happened."

De Jongh admitted he finds it difficult to predict when RDR will be fully implemented in South Africa. "We started in 2014. Our best estimate is the switch to move us from a Financial Services Board to a Financial Services Conduct Authority would be in June next year," he said.

According to Brett Gallie, head of global markets Legal, Fixed Income, Structured Products & Africa Region, at Standard Bank, RDR certainly has an impact on the banks. "All the large banks are impacted on a number of different fronts, from the financial advisers at a branch level, through to the increasing number of online offerings which the tied-banking industry is moving towards, as well as products which are offered on long standing online share broking terminals," said Gallie.

"The way we see it is the guys which are going to succeed in the new regime will be those that offer advice that creates a long standing relationship with the clients, who provide advice that is worthwhile and valuable and through that create a relationship. I think it is fair to say there will be a shake-up," said Gallie.

Grigg questioned what impact Mifid 2, which is due to be implemented in January 2018 in Europe, would have in South Africa. "[Mifid 2] is primarily a piece of prudential legislation that forces the financial community to properly categorise customers and then dictates the nature of services that can be provided whether those customers are categorised as retail or professional," said Grigg. "Mifid 2 is also mandating transparency around pricing of products sold in the market and mandating that certain products must be traded on a platform basis," he said.

According to Gallie, Mifid 2 doesn't apply to anybody in South Africa. "We are not regulated by the regulators bringing in this regulation. However, a vast number of banks and other institutions in South Africa do transact with European banks," said Gallie. "Whether this is a case of transaction execution or research or other information behind the scenes, all of that is impacted by Mifid," he said. "What we are seeing is that, although we are not directly impacted, we are being sucked into the regulations because in order to continue those relationships we are going to be asked to comply. That's the more direct impact," said Gallie.

The second impact, according to Gallie, is that any kind of regulation that seeks to improve transparency and improve quality in the industry also sets a standard. "We are seeing enquiries from buy-side clients where they are themselves starting to question why we don't adopt the same policies."

There one or two very important aspects which everybody in South Africa in the industry needs to know about, according to Gallie. "Mifid seeks to improve transparency but it also seeks to create a huge volume of data. Mifid is about what is the pricing level at the time of transacting, who are the parties, all that kind of immediate data."

According to De Jongh, the benefit of Mifid being implemented in Europe is that "we can see what others are doing wrong and doing right". "It is more of a European issue and dealing with cross borders. We have other concerns. The OTC commodity instruments, what is going to happen with that? Those are questions we cannot answer until we see what happens in Europe," said De Jongh.

As part of Mifid 2, South African parties who are transacting with European counterparties need to have an LEI (Legal Entity Identifier), a key indicator that is unique to an institution, said Gallie. "I don't think there are many institutions in South Africa that haven't been contacted by their European clients about this. You need to make sure that your counterparties are aware of your LEI so that when you end up transacting with them the LEI becomes the ticker that goes on the data," Gallie concluded.

Click the link to view the presentation: Regulatory and product placement risk management.

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