Fund members, product providers and retirement fund administrators encourage FSCA to treat customers fairly
SA’s financial services regulatory environment is built on six principles of Treating Customers Fairly (TCF), which require companies to put their customers first. One of the principles, for example, explicitly states that product providers – including insurers and retirement fund administrators – must ensure customers don’t face unreasonable post-sale barriers, when it comes to either swapping products or switching providers. But what happens when it is the regulators themselves that deserve the blame for situations where customers aren’t being treated fairly?
That seems to be the case today in the retirement fund industry, where transfers that are meant to be taking place under section 14 of the Pension Funds Act are taking months, or even years, to finalise.
Today’s Trustee readers will be familiar with section 14, which sets out requirements for the transfer of someone’s savings from one retirement fund – being a retirement annuity (RA) or pension, preservation or provident fund – to another.
The idea is that this process helps pension fund members to secure a better retirement outcome. Practically however, it requires an often-laborious transfer of assets and liabilities from a product provider, usually an insurer, to a competing firm that has just won new business. While there are numerous factors contributing to the painstakingly slow progress, top of the list is the tremendous bottleneck that has developed at the Financial Sector Conduct Authority (FSCA), which is mandated to put the final stamp of approval on these sorts of transfers. The FSCA admits to this backlog – but it blames a combination of resource shortages and administrative delays from the industry for what’s happening,
So, could the industry itself be partly responsible for putting the brakes on this process? Could there even be a more sinister force behind the delays in what should be a simple administrative process?
One industry source, who asked to remain anonymous, told Today’s Trustee that the ‘losing’ product provider has an incentive to drag its heels during the section 14 process. This is because the transferring provider continues to derive benefits from the assets in its fund, until the transfer is cleared.
It leaves clients immensely frustrated. “At the core of this, we are selling trust in a system in which money remains safely invested. The lengthy delays currently being experienced erodes trust in the system and contributes to the poor financial outcomes that so many stakeholders, including the regulator, are concerned about,” the source said.
Asset managers who are being terminated by their clients are then accused by these customers – whether justly or unjustly – of creating these length delays. This risks alienating those clients for life.
On the other side of the coin, the ‘winning’ product provider, who is securing this new business, is also often raked over the coals for not doing enough to push the transaction through.
It seems clear, then, that everyone would benefit from a smoother process that allows people to seamlessly switch between retirement funds. First, it would be in line with the TSF requirements, and second, it would facilitate greater competition by making it easier, for example, for employer groups to switch between umbrella funds.
Bottlenecks inside the Regulator
Today’s Trustee asked the FSCA about the cause of delays – given the damage it does to trust in the industry, not to mention the fact it escalates tensions between fund members and advisors.
The FSCA put it down to various factors.
- First, it said, product providers often submit incomplete documents, and are slow to respond to follow-up questions from the regulator.
- Often the board resolutions submitted for rule amendments don’t meet the required standard, while outstanding valuation reports, and improperly constituted boards for section 14 transfers, only make things worse.
“If administrators and boards could ensure that documentation is submitted as required, it would allow the review teams to process work much faster,” – Olano Makhubela, the divisional executive for retirement funds supervision at the FSCA.Olano Makhubela, the divisional executive for retirement funds supervision at the FSCA.
But the regulator itself is another problem. Here, the FSCA admitted to its own “capacity constraints”, describing section 14 transfers and rule amendment registrations as “high volume transactions”.
The statistics bear this out. By January 1st, the FSCA was sitting on 2218 applications to transfer assets in terms of section 14 – down from 2486 the previous year, but still high. There was a further 774 “pending cases” on its books, being matters in which the FSCA is waiting for a response after a request for extra information.
It must be said, however, that there is both good news and bad news in the section 14 statistics.
The bad news is that by January 1st, there was still 1030 “extension requests”, made by the transferring product provider allowing them to “submit applications beyond the prescribed 180 days and 60 days requirements”. This extra delay is a deep concern to fund members and receiving product providers.
The good news is that the number of extension requests had more than halved from the previous year’s 2,851 cases. However, when it comes to ‘rule amendments and ‘cancellations’ to existing pension funds, the FSCA is much further behind. Here, there was a staggering 7,240 ‘rule amendments’ outstanding by January 1st – up from 5,771 the previous year. And there were a worrying 2,244 cases marked as ‘pending’.
There were also 612 applications for ‘cancellations, deregistration or participating employer terminations’ in the queue, up from 404 the previous year. And there were 2,929 cases “pending”.
So, in the final analysis, this represents a mixed story: an improvement in the section 14 transfer statistics is offset by a worsening in the rule amendments and cancellation categories.
But there may be light at the end of this tunnel: the FSCA has apparently awoken to the need to dedicate more capacity to dealing with this.
“We have only recently decided to increase the number of staff dealing with these issues, especially for section 14 transfers, and remain mindful of the financial burden that such steps impose on regulated entities,” said Makhubela. The regulator is also reviewing its internal processes, which it hopes will help it reduce the delays.
But overall, the statistics will do little to quell consumers’ distrust in the system.
So how does the FSCA reconcile these lengthy delays in finalising urgent retirement fund issues with the need to treat customers fairly?
“We need to balance the speed of processing, and the verification of information received, so that member interests can be safeguarded,” said Makhubela. “Unfortunately, reliance cannot be placed solely on information received from administrators or the funds’ boards … a major area of focus for the FSCA will be on ensuring that employers, funds and administrators maintain proper records to minimise potential member prejudice”.
This, of course, only deflects the question, rather than answers it. Still, the FSCA has long complained about the quality of data held by retirement fund product providers, arguing that these shortcomings are largely to blame for the fact that there is still R47bn in unclaimed benefit funds.
Need to think creatively
So, could it be time for a total redesign of the section 14 transfer process?
Some of the industry players contacted by Today’s Trustee described the current process as unnecessarily cumbersome. A simpler process would benefit both consumers, product providers and the regulator.
But when Today’s Trustee asked the FSCA why it isn’t possible to speed things up, the regulator said that hastening the process may prejudice some fund members.
“Section 14 transfers can be complicated at times, as the membership benefits at that particular point in time must be captured correctly,” Makhubela said. “There are also a number of requirements that are imposed by the conduct standard and the PFA, which must be observed”.
This includes a requirement that a cost-benefit analysis be undertaken by the employer or fund and communicated to fund members. And where there are differences of opinions at the board of trustees, these add to processing complications.
Nonetheless, the FSCA said it was trying to identify possible improvements that could be made administratively, including possibly exempting an individual’s transfer from one retirement annuity fund to another from the section 14 process.
Clearly, there’s a need to think creatively about this problem. So, on March 10, various industry stakeholders met to thrash out these issues, and find pragmatic solutions, while keeping in mind the imperative not to compromise the TCF outcomes.
When asked how the FSCA planned to address the situation where a ‘losing’ product provider benefits from delaying the fund transfer process, it responded: “This is an area of concern, and delays insubmitting a section 14 by any party is a major violation that should be [referred to us] for action”.
The regulator plans to issue a guidance note soon to address this issue specifically. It should not delay. As it is, fund members are losing out twice: often having to pay huge penalties on early terminations, and then being forced to sit in a poorly performing fund for months, despite their desire to reinvest in a better-performing, lower cost alternative.
How about treating providers fairly too?
Today’s Trustee asked the FSCA whether it believed it also owed the same duty of care to financial advisers, product providers and retirement fund administrators that it expects these service providers to show towards the public.
“We provide services to regulated entities in the form of licensing and authorisations, but also provide a service to the broader public by holding regulated entities to account [with due consideration for our] broader responsibility of market integrity and the protection of consumer interests,” Makhubela said.
But it added that does believe it remains accountable to regulated entities for the time taken to process transactions.
It’s unclear whether the FSCA is living up to this pledge, however. In particular, there are concerns over whether the FSCA’s Service Level Commitments (SLCs), which were agreed on with the industry back in 2013 and commit it to a minimum service level, are being met.
The FSCA’s spokesperson assured Today’s Trustee, however, that the institution has been reviewing its processes internally to ensure it improves.
“In our latest business plan, we have committed to improving our SLCs. The first step [will be] to review the current SLCs across the organisation, as most are more than 10 years old,” Makhubela said. “We have further committed to … setting new targets for the monitoring and implementation of these during the current financial year”.
So, what can the industry do to help? According to the FSCA, the industry could ensure better efficiency by submitting applications in the right format and on time. This will reduce the time spent by verifying compliance and allow it to focus on the substantive issues contained in the various applications.
“There is a great need for enhanced efficiencies in the administration of section 14 transfers by both industry and the regulator,” said Makhubela. “System changes are not quick solutions, and we are going through a process to review our processes and systems [to improve outcomes].”
Will this be enough to make a difference for retirement fund members? It’s hard to say – but it’s clear that there are some easy wins that could be had to vastly improve the system for everyone.
THE ARTICLE IS FROM THE JUNE-AUGUST 2022 EDITION OF TODAY’S TRUSTEE