If it’s too good to be true...

05 June 2017 Jonathan Faurie
Caroline da Silva – Deputy Executive Officer at the FSB

Caroline da Silva – Deputy Executive Officer at the FSB

One of the mantras that government is reminding the public about on every possible occasion is that there needs to be radical economic transformation in South Africa.

What does this mean for the financial services industry? It is no secret that the Financial Services Board (FSB) has said that there needs to be a major drive towards greater financial inclusion in the country.

The returning criminal

Let’s look at this in more detail. One of the bugbears that government and the FSB refer to all the time is that levels of financial education within the industry are severely low, and this leaves South Africans very vulnerable.

We have seen our fair share of Ponzi schemes in the past. The likes of Sharemax and MMM have tried to coax money people who are desperate to see drastic returns on often small amounts of investments. In the case of the schemes mentioned above, the investment amount wasn’t that small, but it was significantly less than the promised returns.

More recently we saw the rise of Kipi, an investment platform which was presented as a stokvel, but was actually a Ponzi scheme in disguise.

Some people would argue that it is very hard to be caught out by a Ponzi scheme in this day and age while others will argue that these schemes mainly catch out those who invest directly with the company and not through an adviser.

Words of warning

While this may be true, it is not the golden rule. In a recent media interview, Caroline da Silva – Deputy Executive Officer at the FSB – said that often these schemes are expertly disguised and will catch even the most diligent adviser off guard.

“A new trend with Ponzi schemes is that they adopt the names of tried and trusted methods of investing and attach it to their brand. With the case of Kipi, stokvels are trusted within the communities and are popular because of shared costs,” said Da Silva.

Another reason why Ponzi schemes are not spotted immediately is because early investors do see a measure of the return that they were promised.

 “Ponzi schemes rely on new investors to pay out the returns of old investors. So while there is a steady inflow of new investors, the system cannot fail. But when old investors and new investors are not being paid their returns, that is when we see cracks starting to show,” said Da Silva who added that this is unfortunately when some of the criminals slip through the cracks and avoid prosecution. However, there is some action currently being taken out against Ponzi schemes.

A reason for change

We are all aware of the words of warning that the FSB give us. If it’s too good to be true, then it probably is. Or, if it looks like a duck and sounds like a duck, it’s a duck. However, the regulator exists to assist people who are vulnerable by coming down hard on these companies.

While not the sole reason, the vulnerability that the public faces every day was one of the reasons why government decided to move towards the Twin Peaks method of regulation. This would focus the attention of the FSB (which would become the Financial Servicers Conduct Authority) and would allow it to focus purely on market conduct as opposed to the dual concern of drawing up legislation as well as implement it.

Widely welcomed?

Once again, this is not news to anybody who has been in the industry for any amount of time. However, the move towards Twin Peaks has split the industry down definite lines with many insurers and brokers questioning the future success of the move.

Where does this leave the powers that be when it comes to supporting Twin Peaks? In a recent media interview, Jonathan Dixon – Deputy Executive Officer at the FSB – said that the move has been widely welcomed.

“The move has been widely welcomed by industry because there is a realisation that there are things that insurers and advisers can do to improve the stability of the industry. There is also a definite recognition that Twin Peaks is suited to South Africa because the country has got such a concentrated sector with lots of banks owning insurers and vice-versa,” said Dixon.

Editor’s Thoughts:
Do we want to look back in five years time and lament not making any changes to improve? No. So maybe instead of fighting Twin Peaks lets establish how we can exist and thrive within it. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts


Added by Derek Smorenburg, 05 Jun 2017
The whole problem of who should conduct a "Due Diligence" on these Ponzi Schemes when they first start with many IFA's believing that it should be the FSB/FSCA who should police these Product Providers whilst the FAIS Act makes it clear that the IFA must fulfill some form of "diligence" on the Product Provider! SAIFAA will Post-Launch be providing our Founder Members with a suitable "Due Diligence" Tool to help partly address this challenging problem!
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Added by Edsaid, 05 Jun 2017
Twin peaks is too good to be true. It's definately a duck!
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