Annual report 2016 |

Regulatory environment

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Volatile global and local market conditions continue to spur regulators toward the development of tools and mechanism that will ensure a more predictive response to the next potential crisis.

Regulatory context for Sanlam

The Sanlam Business Philosophy recognises that the business functions in a highly regulated industry and shares the regulators’ vision for efficient and effective financial services industries globally. The Group supports regulatory initiatives that benefit clients and strengthen its ability to create value for stakeholders as this strengthens resilience and ensures the long-term sustainability of the business.


The Group is committed to the implementation of new regulation but recognises that some of these create a range of risks, stakeholder concerns and costs to manage, in addition to enforcing and increasing barriers to entry. The Group’s approach is to find opportunity and improve its offering by proactively working with regulators to implement appropriate regulations.

As a member of the G20, the international forum for the Governments and central bank governors from 20 major economies, South Africa participates in studying, reviewing and promoting high-level discussion of policy issues related to the promotion of international financial stability. For the Group, this entails adhering to first world regulation of financial markets and actively engaging the regulatory authorities in all markets in which the Group operates. The cooperative approach further involves proactive engagement and participation in industry bodies such as the Association for Savings and Investment South Africa (ASISA) and the South African Insurance Association (SAIA). The rising tide of financial regulation is regarded as a key risk facing the financial services industry worldwide. A key concern is the breadth of proposed new regulation and the intended pace of implementation, which often appears to be introduced in an uncoordinated manner with consequential unforeseen negative outcomes.

Two main themes related to the Group’s operations in South Africa are:

Twin Peaks

The proposed implementation of the Twin Peaks model in South Africa is contained in the Financial Sector Regulation (FSR) Bill. Twin Peaks is a comprehensive and complete system for regulating the financial sector and involves the creation of two primary regulators:

  • a prudential regulator (the Prudential Authority) and a
  • new market conduct regulator (the Financial Sector Conduct Authority).

The prudential regulator will be mainly concerned with capital and liquidity requirements as defined by a risk-based regulatory regime for long and short-term insurers in South Africa, and implemented through the Solvency Assessment and Management (SAM) project. The delay in the commencement date of the FSR Bill, with subsequent implementation of the Insurance Bill and related legislation, resulted in the SAM implementation date being postponed.

Market conduct regulation under Twin Peaks will primarily be implemented through Conduct of Financial Institutions legislation and will be informed by regulatory initiatives such as Treating Customers Fairly (TCF) and the Retail Distribution Review (RDR). These create standards for advertising, complaints management, language, disclosure, intermediary remuneration and management of conflicts of interest.

Retirement reform and social security

The limited retirement and social security options available in South Africa take the form of old age pensions, unemployment insurance and child welfare grants. While various social security options are investigated and proposed, the more immediate focus of regulatory proposals and implementation is to improve the sustainability of the current system.

The objectives of financial reform are:

  • Reducing the cost of financial services and improving transparency
  • Simplifying retirement saving options
  • Encouraging innovation through more competition
  • Driving improved disclosure to make it easier for ordinary South Africans to understand complex financial products
  • Improving financial regulation and reporting to fight corruption and money laundering, while providing protection against fraud and systemic risks

Regulation as value enabler

Regulation is a key consideration in the Group’s ability to create value as it creates the environment within which the Group operates and competes. Regulations aimed at the fair treatment of clients, fair competition between product providers and the prevention of large-scale corporate failures and financial instability contribute significantly to the trust clients have in the industry and therefore its long-term sustainability.


The major regulatory developments currently being considered are largely in line with these objectives and are supported by the Group. A consequence of the increased regulatory burden is significantly higher barriers of entry, which benefit large established groups such as Sanlam from a competitive perspective.

However, the current scale of regulatory reform also has negative consequences that require a skilful response from the Group. The cost of proposed legislation often does not deliver an equal benefit to clients, thereby challenging the Group’s ability to offer affordable products, in particular in the entry-level market. Additional regulation creates a cost burden that has to be carried by clients and shareholders.

The scale of new regulation also affects management capacity due to the analysis and response required, adding to real and opportunity cost in business. This is further affected by increasing delays in implementation.

The financial services industry is built on a business model that requires long-term valuations and assumptions. The uncertainty created by numerous and uncoordinated regulatory proposals affects strategic decisions, investment choices, innovation and product design.

Multinational regulatory capability

Regulatory changes are tracked continuously through SEM with the most significant reforms emerging in Botswana, Namibia, Malaysia, Malawi, Kenya and Ghana. Saham Finances’ solid management and regulatory skills have been essential in expanding operations into new and different regulatory environments mainly based on the French model.


The regulators across Africa maintain a good working relationship with the FSB, especially in light of the group supervision being introduced as part of SAM. The benefit of this approach for the Group is that most of the developments in the Rest of Africa follow South African legislation, which makes implementation much more efficient from a Group perspective. The main current and future anticipated developments in the countries where the Group currently operates relate to TCF and risk-based solvency requirements (equivalent to SAM).

Regulation in the UK in the past year focussed mainly on reforms to the UK retirement market, with the most significant impact deriving from the cap on early exit pension charges. New rules and guidance are also being developed to increase transparency and engagement at renewal in general insurance markets. These rules form part of the new accountability regimes introduced in March 2016 for deposit takers, prudential regulation authority investment firms and Solvency II firms and large non-directive insurers.

The Group relies on local boards and management teams to influence and adhere to local regulatory requirements, but with oversight by Group and cluster representatives.

Current, new and upcoming regulatory change

Financial Sector Regulation Bill (FSRB)

In July 2016, National Treasury (NT) released a revised version of the FSRB, incorporating changes pursuant to discussions and issues raised before the Parliamentary Committee. This draft is regarded as a proposal to the Standing Committee on Finance (SCOF), which will make the final decision on any changes to be effected before the Bill is submitted to the National Assembly in Parliament.

The Group’s response

The potential impact of the FSRB on Sanlam includes:

  • Multiple financial services regulators
  • Extended jurisdiction over the Sanlam Group
  • Sanlam is likely to be designated as a Systemically Important Financial Institution (SIFI) which will potentially impact capital requirements, leverage ratios, liquidity, organisational structures, and risk management arrangements
  • Significantly large and enhanced powers are granted to the regulatory authorities
  • The actuary, valuator and auditor of Sanlam will be subject to enhanced reporting obligations

More regulatory changes and responses

Insurance Bill, 2016

The Insurance Bill provides a consolidated legal framework for the prudential supervision of the insurance sector that is consistent with international standards for insurance regulation and supervision.

It aims to replace and consolidate substantial parts of the Long-term Insurance Act of 1998 and the Short-term Insurance Act of 1998. Specific provisions relate to licencing, ownership, governance and micro-insurance. The Bill must be aligned to and follow the enactment of the FSRB.

The Group’s response

In January 2016, a revised version of the Insurance Bill was tabled in Parliament, and has since then been referred to the Parliamentary Committees. Sanlam submitted further comments to ASISA, which is preparing an industry submission on substantive concerns to the SCOF. Technical issues and matters requiring clarity have been discussed separately with both the FSB and NT.

Given that the Insurance Bill will only be considered after the FSRB has been finalised, ASISA will review it once more after the FSRB has been passed to ensure alignment and consistency between these two pieces of legislation.

Solvency Assessment and Management (SAM)

SAM is a risk-based supervisory framework, with the primary objective of improving policyholder protection and contributing to financial stability through:

  • Aligning insurers’ regulatory capital requirements with the underlying risks of the insurer; and
  • Providing incentives to insurers to adopt more sophisticated risk monitoring and risk management tools.

The FSB is in the final stages of implementing the SAM framework, details of which will be provided for through Insurance Prudential Standards, which will form subordinate legislation under the Insurance Bill.

The Group’s response

Requirements have been proactively implemented, with the Group continuing to run two prudential regimes in parallel until the implementation date is finalised – anticipated to be in the second half of 2017.

Sanlam participated in the Comprehensive Parallel Run (CPR) exercise to test resources, processes and systems ahead of full SAM implementation. The CPR encompassed the vast majority of what is anticipated to be the components and requirements of the final SAM framework. This included the development of a Mock ORSA report which assisted the Group in assessing its readiness and enabled the FSB to assess its own supervisory capabilities against the readiness of the overall industry.

The Group remains well capitalised under the SAM regime, as reflected in the Capital and Risk Management report incorporated in the Annual Financial Statements and referred to in the Financial Review on page 155. Opportunities to more efficiently allocate capital within the new regime are continuously investigated, including more sophisticated balance sheet management, strategic asset allocation and the most appropriate capital structure.

Santam received permission from the FSB to enter the formal application phase for its internal capital model.

Draft Taxation Laws Amendment Bill (TLAB) and the 2016 Draft Tax Administration Laws Amendment Bill (TALAB)

During 2016, National Treasury and the South African Revenue Service (SARS) published the 2016 Draft Taxation Laws Amendment Bill (TLAB) and the 2016 Draft Tax Administration Laws Amendment Bill (TALAB) for public comment. These bills give effect to most of the tax proposals announced in the 2016 Budget Speech and the 2016 Budget Review.

The Group’s response

The amendments will oblige Sanlam to collect and report information to allow SARS to implement agreements under international tax standards, such as the Organisation for Economic Cooperation and Development (OECD) Standard for Automatic Exchange of Financial Account Information in Tax Matters, which encompasses the Common Reporting Standard. This will impose more onerous on-boarding requirements for new clients of all Sanlam entities.

Taxation Laws Amendment Act 2015 and Revenue Laws Amendment Bill, 2016

The Revenue Laws Amendment Act, 2016 gives effect to the decision by Government to postpone the annuitisation requirement for provident fund members (as contained in the Taxation Laws Amendment Act, 2015) for two years until 1 March 2018.

The Group’s response


Retail Distribution Review (RDR) Phase 1

The RDR proposals are aimed at reforming the regulatory framework for the distribution of retail financial products in South Africa and will change current incentives, relationships and business models.

The proposals require extensive amendments to the regulatory framework and form part of a broader review of the legislative architecture necessary to give effect to a Twin Peaks regulatory model. It will be implemented in a phased manner.

As part of Phase 1, the FSB published revisions to Regulation 5 of the Long-term Insurance Act. These are aligned to National Treasury’s broader reform of financial regulation in terms of the Twin Peaks regulatory model and will enforce a gradual reduction in causal event charges from 22% in September 2017 to a maximum cap of 5% over a period of 12 years.

The Group’s response

A new RDR roadmap was being developed by the FSB to align with the evolving timelines of the broader Twin Peaks legislative reforms, in particular the enactment of the FSRB and the subsequent Conduct of Financial Institutions (CoFI) Act. This included a review of the full set of RDR measures to determine whether all aspects need to be deferred or whether some measures could be feasibly implemented, or at least consulted on at an earlier stage. Since the initial publication, very little progress has been communicated and indications are that the most significant changes will only be implemented under Phase 3 of RDR, after the Conduct of Financial Institutions (CoFI) Act has been enacted (expected in 2018).

Sanlam expects a high impact on distribution management over the medium to long term, particularly relating to the categorisation of intermediaries and the introduction of fee-based advice.

The Group is actively engaging with the regulator through ASISA to manage the implementation to prevent unforeseen negative consequences.

Sanlam proactively adapted its approach to causal event charges three years before a 2013 FSB directive (for products sold before 2009, causal event charges on retirement annuities would be capped at 30% and those on endowment policies limited to 40%) and in 2014, reduced early termination charges on almost all affected products in a measured way. The approach followed was similar to the one currently proposed by the FSB, except that Sanlam’s reductions were more substantial that those currently proposed by the FSB: a maximum charge of 2% over nine years.

The impact on Sanlam will therefore be immaterial.

Financial Intelligence Centre Amendment Bill, 2015

The Bill aims to enhance South Africa’s ability to combat financial crimes, addresses regulatory gaps identified and enhances South Africa’s anti-money laundering (AML) and combating of terrorist financing (CFT) regulatory regime. The Bill places an obligation on accountable institutions to give effect to United Nations Security Council (UNSC) resolutions by reporting to the Financial Intelligence Centre (FIC) if any property in its possession or under its control is owned or controlled by or on behalf of a person or an entity identified in the UNSC sanctions list. As a member of the UN, South Africa is bound to domestically give effect to UNSC sanctions resolutions issued in terms of Chapter VII of the UN Charter.

The Group’s response

The Bill is currently waiting for assent by the President. It will become effective on a date determined by the Minister of Finance.

The proposed risk based approach will demand more resources than a rules-based approach and will add to the cost of doing business, especially in other jurisdictions. Sanlam’s main concerns were raised via ASISA.

The Protection of Personal Information Act, 4 of 2013 (POPI)

The Act aims to protect individuals’ right to privacy of personal information, and to align South Africa with international data protection laws. There will be a grace period of one year from the date of commencement to ensure that all processing of personal information complies with the Act.

The Group’s response

Although POPI became law in 2013, confirmation of the POPI commencement date is still awaited. The delay in the promulgation of an effective date for POPI frustrates Sanlam’s efforts to implement measures to ensure compliance with the Act. Sanlam businesses have been revisiting all gap analysis previously performed to identify measures that can be implemented as part of business as usual initiatives without any dependencies on POPI regulations or codes of conduct.