1. Evaluation of the Financial Advisory and Intermediary Services Bill
Presentation to
Portfolio Committee on Finance
Council for Medical Schemes
9 October 2001

2. Purpose of Presentation
FAIS Bill has significant implications for the Medical Schemes Act
Through inclusion of definition of a health benefit as a “financial product”
Proposals by FSB
Inclusion in general framework requires that the implications of this framework are properly assessed
Key concern: adequacy of checks and balances
Key concern: process followed

3. Key Issues Arms-length relationship between regulator and regulated
Ability for all parties to participate evenly in the development of legislation
Credibility of regulatory framework depends fundamentally on:
Independence of regulators
Appropriateness of the powers allocated to regulators
Even-handedness in the legislation (linked to process)
Even-handedness in the subordinate legislation (linked to process)

4. Topics Covered Conflicts with the Medical Schemes Act
Anti-competitive behaviour
Delegations
Ombud
Exemptions
Subordinate legislation
Other issues
“Cost benefit analysis”

5. Conflicts with the Medical Schemes Act
Issues
FAIS creating regulatory confusion
Definition of “health benefit”
Unintended regulation of medical scheme administrators
Reform process underway in terms of Medical Schemes Act
FSB recommendations

6. Medical Schemes: broker market
80% of medical scheme beneficiaries in open schemes
7,000 brokers accredited by Council
1 broker for every 640 open scheme beneficiaries
1 broker for every 214 principal members
Pressure to increase commissions to accommodate new entrants
Act requires a maximum of 3% + VAT for admission with no provision for ongoing commissions (many administrators forced to pay more)

7. Medical Schemes Brokers: Concerns
Primarily an issue of broker remuneration and incentives
Member movements strongly linked to broker remuneration – scheme swapping, “co-administration”
Group movements are most important (unlike ST and LT Insurance)
Brokers in a position to pressure administrators and schemes into paying higher commissions
Brokers own shares in administrators

8. Large-scale Member Churning
In the first nine months of 2000, some existing beneficiaries changed schemes
Member movement:
drives up non-healthcare related costs
destabilises industry, especially through erosion of stable restricted membership pools

9. The Response
Discussions with AHBA/SAHIA, and other stakeholders, regarding mechanisms to grow medical scheme membership and reward value added to environment, while reducing perverse incentives in the environment for churning, including such options as:
Promotion of greater transparency through Code of Conduct
Linking payment of commission to use of brokers
Promotion of negotiated professional fees for ongoing services to clients

10. Medical Schemes: Concerns with FAIS Bill
Inadvertently includes medical scheme administrators – as they provide advice on medical scheme benefits
Administrator and broker will be faced with confusing situation
Dual regulatory environment
Incorporation under the ombud has clear problems (within the current formulation)

11. Medical Schemes: Concerns
FAIS already provides for extensive exemptions
Additional legislation and regulations in MSA will eliminate FAIS legislation – so why regulate in the first place?
FAIS inclusions and FSB recommendations will undermine holistic approach to regulation in terms of MSA
Not cost-efficient as FAIS will undermine effectiveness of structures set up in terms of the MSA

12. Medical Schemes: Concerns
Functional approach in FAIS implies that medical scheme brokers doing other business will fall under FAIS in any case – why then create a dual arrangement?
The independence of the ombud is in question and the use thereof cannot be regarded as beneficial
The legislative framework for inclusion under the ombud needs review

13. Medical Schemes: Recommendations
All references to the regulation of medical scheme brokers and intermediaries must be removed from the FAIS Bill
Proposed amendments by the FSB must be disregarded
Use of the ombud should be considered through amendments to the MSA, and not through provisions in FAIS

14. Protection from Anti-competitive Behaviour
Issues:
Horizontal collusion
Vertical collusion
Usefulness of increased transparency and conduct regulation
Measures that need to be considered

15. Product 1 Public Agent Product 2 Product 3
Upsets principal-agent relationship and results in market distortions
Product 3
Incentive for product supplier to provide kickbacks to agents (brokers, advisors, intermediaries)

16. X Financial Products No discount Commissions Public
No bypass or discount permitted via arrangments with Financial Product Suppliers
Commissions set collusively by intermediaries
No discount
Commissions
Public

17. Anti-competitive behaviour
Commission and remuneration of brokers
Conflicts of interest
Collusive and anti-competitive practices
The right not to use a broker or intermediary
Claw-backs need to be considered

18. Issues: Wide powers to delegate Independence of the Regulator
Delegations
Issues:
Wide powers to delegate
Independence of the Regulator

19. Any other Treasury Official
Minister of Finance
Any power
Any power
Head of Treasury
Any other Treasury Official
Any power
Financial Services Board
Any power & duties
Any power
& duties
Chairperson
Any person appointed by the Board
Any power including delegated powers
Executive of the Board
Registrar
Any power including delegated powers
Any person recognized by or under this Act
Any power including delegated powers

20. Delegations: Shortcomings
Scope of delegations:
No limits placed on what can be delegated
No limits placed on what can be delegated to “any person recognised or regulated by the Act”
Registrar has powers of exemption, which according to the Act can be delegated
Conclusion:
High risk of regulatory capture

21. Delegations: General Recommendations
The scope of delegations need to be specified within the Act
Powers that can be delegated
Powers that cannot be delegated
The basis upon which any power can be delegated needs to be specified within the Act
No power in respect of this Act should be delegated to any stakeholder representatives
Guidelines concerning the exercise of any powers need to be transparent in the Act (to ensure impartiality at all times)

22. Delegations: Specific Recommendations
No delegations should be allocated to a “representative body”
The delegation of a Minister’s powers should be very carefully assessed
Regulations
Key appointments
The blanket provision dealing with the delegation of delegated powers needs to be reviewed

23. Issues: Judicial independence Rules (the establishment thereof)
The Ombud
Issues:
Judicial independence
Rules (the establishment thereof)

24. Ombud: Requirements for Judicial Independence (from case law)
Objective: ensure a reasonable perception of impartiality
Conditions of independence:
Security of tenure (decision-maker removable only for just cause);
Secure against interference by the executive or appointing authority
Basic degree of financial security from arbitrary interference by the executive in a manner that could affect judicial independence
Institutional independence with respect to matters that relate directly to the exercise of the tribunal’s judicial function

25. Ombud: FAIS Framework Advisory Committee Board Registrar Ombud
Could be the chairperson of the Board, and therefore exercise the same powers
Powers:
Appoint ombud
Remove ombud
Make rules
Establish levies
Financial oversight
Board makes decisions after consultation on:
Appoint ombud
Remove ombud
Rules
Ombud

26. Ombud: Pension Fund Adjudicator
Minister
of Finance
Auditor General
Financial accountability
Powers:
Appoint ombud
Cannot define a complaint
Make regulations
Pension Fund
Adjudicator

27. Ombud: Short-comings with Respect to Independence
Executive interference:
Board determines the complaint and the manner in which complaints are to be dealt with
Financial independence: accountable to Board, and levies established by the Board and therefore not free from arbitrary interference
Establishment of rules: wide scope rests with the Board to establish rules in any manner it sees fit.
Conclusion:
Independence of the ombud is significantly in question!

28. Ombud: Recommendations
Financial oversight: the Ombud should be audited by the Auditor General and be independent from the Board, the Registrar and the Minister of Finance
Appointment of Ombud: should be by the Minister of Finance, “after consultation” with all regulatory authorities (not just the FSB) affected by the decision
Advisory Committee: No relationship to the Advisory Committee of any form should established
The provisions relating to rules should be replaced by requirements for regulations (basis: more transparent and require Ministerial approval)
Guidelines and principles for the establishment of regulations relating to the ombud need to be set forth in the Act itself

29. Powers to Exempt
Power to exempt should rest with the Board and not the registrar
Exemptions should apply to persons, and not to provisions of the Act – such amounts to an amendment of plenary legislation
The basis for permitting exemptions should be more clearly stated in the Act
In public interest
Not provide preferential market treatment
Etc.

30. Issues: Independence Make-up “Veto rights” and powers
Advisory Committee
Issues:
Independence
Make-up
“Veto rights” and powers

31. Advisory Committee: Recommendations
More guidance given to Minister in appointing members
Should not contain representatives
Should have no powers
Should not have veto rights over codes of conduct or any subordinate legislation

32. Subordinate Legislation: Recommendations
More complete framework of enabling legislation needs to be provided
Proposed rules should instead be provided for in regulation
Codes of conduct should be promulgated in regulation (after consultation with relevant stakeholders)

33. Issues: Potential bias in the establishment of the Codes of Conduct

34. Codes of Conduct: Concerns
Drafting is responsibility of the Registrar
Must be drafted “in consultation” with the Advisory Committee, Representative bodies of the Financial services industry and “client and consumer bodies determined by the Advisory Committee
Code of conduct can be vetoed by the Advisory Committee and stakeholder interests
Conclusion:
Code of Conduct will be biased in favour of industry interests

35. Codes of Conduct: Recommendations
Should be in regulation
Made “after consultation” with Advisory Committee and relevant stakeholders
Power to make codes of conduct should not be delegatable

36. Other Issues
Power of the registrar to declare an application or resolution contrary to the Act – wide ranging, open-ended and will probably be struck down (Clause 38)
Fit and proper
Conflicts of interest: Clause 16(1)d is inadequate
Enforceable consumer rights framework entrenched in the main Act and not in subordinate legislation
Need appropriate governing principles in the main body of the Act

37. “Cost-benefit analysis”
Results of study based on unmotivated assumptions
2% saving from inappropriate sale of LT insurance
1% saving from increase in return on premiums invested due to “increased competition”
1% reduction in ST insurance premiums
Benefit = R1,155 billion???
Alternative scenario sees consumers out of pocket by R3,664 billion (conservative estimate)
4% increase in ST and LT commissions