In 2007-8 the world was hit by a devastating financial crisis. Had it not been for government intervention and massive bailout packages, the crisis could very well have brought large international financial institutions to their knees.
Although the reasons for the financial crisis are manifold and complex, it is now unanimously accepted that a big part of the meltdown was caused by widespread failures in regulation and supervision. Perhaps not surprisingly then, the immediate post-crisis years internationally saw a marked increase in regulation in the financial services industry as governments and regulators all over the world scrambled to ensure that the recklessness that caused the crisis in the first instance, is curtailed by introducing more and stricter rules to govern the soundness and conduct of industry participants.
The United Kingdom and Australia were amongst the countries that were fast to move and has progressed significantly along this path. Closer to Namibia, in South-Africa the Financial Services Board (the South-African regulator of non-banking financial services) took many a leaf from the books of these jurisdictions and have also started implementing considerable regulatory reforms.
Namibia is no different and the wheels have been set in motion to bring Namibia’s generally outdated regulatory regime up to date with the requirements and challenges it faces from the complexity of financial services and products in the twenty-first century. Namfisa, the Namibian regulator for non-banking financial services, spearheads these reforms for the insurance industry.
Why do we need regulation?
At its core, the aim of regulation is to maintain the integrity of a country’s financial system. To do so, what a regulatory regime should broadly try to achieve, is to:
Foster and maintain market confidence; Adequately protect consumer rights; Protect and improve the stability of the country’s financial system; and Reduce financial crime.
In simple terms, a regulator should thus ensure that all industry participants keep to the rules of the game, as contained in laws and regulations and ensure that those who do not are reformed or removed from the field of play.
Making the rules
The rules that form the basis of a country’s regulatory regime are to be found in legislation. As already mentioned, in this respect Namibia’s legislation is quite outdated and in dire need of rejuvenation. This rejuvenation is on the horison in the form of primarily three draft pieces of legislation: The Financial Institutions and Markets Bill, which will effectively amend or replace most existing non-banking financial services legislation; The Namfisa Bill, which will govern the powers and duties of the regulator; and the Financial Services Adjudicator Bill, which will create, empower and govern an Ombudsman to whom aggrieved customers can complain if they have been unfairly treated by an insurer or financial adviser.
All of these pieces of legislation are already at an advanced state of completion.
All insurance regulations fit into one of two broad categories, namely those dealing with prudential standards and those dealing with market conduct rules. If this sounds quite complicated, a simplistic way to look at it would be to say that prudential standards determine the minimum requirements an insurer must meet before being allowed “to play in the game” to ensure we have financially sound insurers; whilst market conduct rules determine the “way the game should be played” by both insurers and financial advisers, which in turn ensures that undesirable practices are rooted out of the industry and that healthy competition prevails. Internationally, the trend is to house the prudential and market conduct supervision separately – this ensures a dedicated regulator looks after just one aspect of the regulatory spectrum, increasing focus and transparency as well as adequate consumer protection and market integrity.
As it stands, Namfisa regulates both prudential standards as well as market conduct for insurance industry participants and this is a situation that will prevail under the expected new legislation. Given international trends and the very good reasons put forward in its support, this puts Namibia out of step with the rest of the world and it may very well be revisited in future.
History, common sense and good sustainable business considerations dictate that there is a definite need for regulation in the insurance industry. The challenge will be to do this at the correct level so as to cause as little disruption as possible and to reduce the costs thereof as far as reasonable, as these costs inevitably trickle down to consumers. But perhaps more importantly, both the regulator and insurers should not become so pre-occupied with rule-making and rule-keeping, that they take their eye of the true prize – namely to provide great products and services to every client for whom they are collectively responsible.