Risk-based supervision (RBS) is a widely adopted approach among pension regulators worldwide, including members of the International Organisation of Pension Supervisors (IOPS). It aims to focus regulatory efforts on areas of greatest risk to ensure the stability and integrity of pension systems.
However, when applied excessively or without proper checks and balances, this approach can lead to unintended consequences, such as regulatory overreach, arbitrary decision-making, and a disregard for established legal principles and practices.
The negative impacts of overreaching regulatory supervision
Overreaching by a regulator creates legal uncertainty for pension funds. The extend to which NAMFISA has been going over the past 3 years or so, since adopting the risk-based supervision approach to turn down applications for registration of pension fund rules and pension funds rule amendments has most at times bordered on acting ultra vires. In South Africa and even other country’s, courts have intervened when regulators have acted beyond their legal mandate or applied rules inconsistently.
In the case of Financial Services Board v. De Beer (2006) in South Africa, the court criticised the regulator for overstepping its authority by rejecting applications based on criteria not provided for in the legislation. Such actions undermine the predictability and stability that is crucial for our pension fund industry and the non-banking financial sector in general.
The disregard for administrative justice and procedural fairness is a serious concern. In Canada, the case of Canada (Attorney General) v. Mavi (2011) highlighted the importance of procedural fairness in administrative decisions. When regulators ignore established practices without providing proper rationale or violate principles of natural justice, they not only act ultra vires but also erode trust in the regulatory framework. This can obviously lead to undesirable but increased legal challenges and a lack of cooperation from industry participants.
Excessive regulation can stifle innovation and growth within the pension industry. Some basic research shows that in the United Kingdom, the introduction of overly stringent rules by that country’s Financial Conduct Authority (FCA), in certain sectors led to a backlash from the industry, prompting a review and eventual relaxation of some measures.
If current practice by our regulator persists unabated, our pension funds and their service providers will find themselves unable to innovate or adapt to changing market conditions due to the regulator’s heavy-handed approach.
There is no doubt that when a regulator acts in a manner which is clearly or perceived to be unjust or overly restrictive, it will diminish confidence in the regulatory environment. As pension fund service providers, clients and prospective pension fund clients start to doubt if the problem lies with the service provider that rules and rule amendments take up to longer than 12 months with many backs and forth written submissions, just for an application to be turned down.
In Nigeria, the National Pension Commission (PenCom) faced criticism for its rigid enforcement of certain rules, which led to a decline in the registration of new pension funds and amendments to existing ones. This not only hampers market participation but also risks driving certain pension fund service providers out of business.
What are some of the practical solutions to consider?
Engagement and dialogue with the Regulator are key. Whilst our Regulator to their credit has been willing to engage and listen to concerns raised, unfortunately, it remains just at that. It is as if, our Regulator is only prepared to meet to agree to disagree.
Where the regulator acts ultra vires, legal challenges may be necessary to protect the interests of service providers, pension funds and their beneficiaries. However, experience has shown that this does not go down without major delays in resolving the matter, frustration, and subsequent resentments. Ideally, our industry associations are probably better placed to mount strategic challenges as a check on regulatory overreach, but the set up of our industry body probably impedes this.
Unfortunately, some industry attempts that were aimed at seeing that some changes in FIMA are made to clarify the limits of the Regulator’s powers were ignored and completely unsuccessful. A genuine effort by Regulator and policymakers will be required to consider industry input on the relevant sections that deal with the Regulator’s excessive powers. We must also encourage our Regulator to undergo peer reviews or audits by international bodies to provide an external perspective and potentially curb overreach.
There may be exceptions, but most pension funds and their service providers have bolstered internal compliance and risk management frameworks to ensure they meet regulatory expectations without the need for excessive intervention. If funds and service providers can demonstrate robust internal controls and risk mitigation strategies, this should reduce the need for arbitrary rejection of applications by the regulator.
Conclusion
While risk-based supervision is essential for maintaining the integrity of our pension industry, it must be applied with care and within the bounds of the law. NAMFISA must balance the need for oversight with respect for established legal principles and industry practices. Our Regulator should seriously adhere more closely to the IOPS standard which emphasises proportionality and the need for a risk-based approach that does not infringe on legal rights.
By engaging constructively with the regulator, challenging overreach through legal means without fear or risk of stigma, all parties can ensure that the regulatory environment remains fair, predictable, and conducive to the growth of our pension funds sector.
*Marthinuz Fabianus is Managing Director of RFS Fund Administrators.
He recently concluded his MBA thesis, which evaluated the sustainability of pension funds in Namibia
