An umbrella law for the financial services industry

03 April 2012 | | Gareth Stokes

A while back a debate raged as to whether or not South Africa could implement a super Ombudsman scheme for the financial services industry. Nothing has come of the proposal to date because – or so the experts say – it will be difficult to accommodate five

Some commentators have dubbed the bill as an “umbrella” financial services legislation to monitor industries covered by the raft of existing industry-specific Acts. It exists to amend and update (and you will pardon the long list of legislation), the following: the Pension Funds Act, the Reserve Bank Act, the Financial Services Board Act, the Long-term Insurance Act, the Short-term Insurance Act, the Inspections of Financial Institutions Act, the Financial Institutions (Protection of Funds) Act, the Financial Advisory and Intermediary Services Act, the Collective Investment Schemes Control Act, the Co-operative Banks Act, and the Financial Services Laws General Amendment Act of 2008, the Medical Schemes Act and the Co-operatives Act. The proposed changes will improve the stability of the financial services sector and ensure consistent regulation and effective supervision across the industry.

Running to 280 pages, the Bill will “close regulatory gaps, effect improvements to certain provisions, provide for increased supervisory capabilities, rationalise and align the supervisory functions afforded to the Registrar, and align the aforementioned Acts with the Companies Act, 2008.” The Financial Intermediaries Association of Southern African (FIA) has welcomed the bill and says that the provision for stronger actions to protect the investments of consumers proposed in the draft is a necessary step towards enhancing the integrity of the South African financial services industry.

Protecting the financial services intermediary

How will the Act help? Over the past decade the media has reported on numerous failed investment schemes. “These failed products and institutions have resulted in uncertainty for both investor and intermediary,” says Justus van Pletzen, Chief Executive Officer of the FIA. “In some cases the products in question were deemed an acceptable financial product and offered through properly controlled distribution channels. From the intermediary’s perspective, the risks involved in recommending such products include institutional failure, product failure or simple investment failure where the yields do not match the expectation created.”

The Financial Advisory and Intermediary Services (FAIS) Act means that the intermediary – the individual representing institutions and products at the front line of the industry – has to account to consumers for both failed institutions and products. “While it is fair to expect that an independent intermediary should perform a reasonable investigation into products before recommending them to potential investors, as well as an evaluation of the investment risks in general terms in order to describe and disclose these to clients, even the largest intermediary organisations are not sufficiently resourced to undertake such exhaustive investigations,” said Van Pletzen. The feeling is that an independent intermediary should be able to rely on the regulating authorities to have effectively assessed the institutions’ capability to offer sound products at the licensing stage.

One of the major concerns raised by Van Pletzen is the inability of intermediaries – in their attempts at due diligence – to obtain documentation and information other than that selectively released by the product provider. An absurd situation develops wherein the intermediary is forced to make a decision whether or not to market a financial product based almost entirely on what the product provider says… “Furthermore, should an intermediary advise a prospective client against investing in a particular institution on the grounds that it may be untrustworthy they place themselves at risk of legal or commercial action – which action could spread around the market and possibly trigger the very failure that was feared,” he adds.

Is this a solution – or an additional burden?

Does the domestic financial services industry need additional regulation? The FIA believes that further intervention by regulators “makes sense” and has called on all industry stakeholders to support the initiative. It is hoped tighter license conditions on retirement fund administrators (one of the proposals in the bill) will create additional protections for investors, for example. Van Pletzen also welcomes the proposal that the registrars of Long- and Short Term Insurance will be able to take action against insurance companies that publish “any advertisement, brochure or similar communication … which is misleading or contrary to the public interest or contains an incorrect statement of fact.”

“Not only are intermediaries often put in a position of having to spend time debunking false claims with clients, but sometimes intermediaries witness consumers actually falling for misleading offers, which could have serious implications, especially if consumers are dealing without a suitably equipped broker,” he said. “The FIA has offered its support to the FSB in identifying these untrustworthy schemes and institutions in order to prevent more financial hardship for investors,” concludes Van Pletzen.

Editor’s thoughts: A while back, while listening to a talk radio show, somebody mentioned that the average Internet user would need 57 years to read all the “terms and conditions” they might encounter while transacting online. The trouble with staying abreast of financial services law is the sheer volume of regulation and amendments brought about in a given year... Do you think financial services professionals should read this 280 page draft amendments bill? Add your comment below, or send it to gareth@fanews.co.za

Comments

Added by Ayanda, 03 Apr 2012

What Hendrick Verwoerd thought was in the "public interest" and what Nelson Mandela thinks is in the "public interest" are two entirely different things! This is because the term "public interest" is altogether a subjective concept. To leave "public interest" decisions to civil servants is extremely dangerous, to say nothing of the fact that it opens to door to arbitrary decision making. Worse, descretion in the hands of civil servants is the sole cause of corruption in government: When a clause in an Act starts with "The Registrar may make rules ..... in the public interest generally", as section 99 of the draft Bill does, you know immediately that we are all in deep trouble.It seeks to substitute existing section 62 of the LT Insurance Act with a section giving the Registrar complete carte blanche in specifying what an insurance contract may and may not contain! Can you credit it! An FSB civil servant, almost all of whom have never worked in the industry and fewer still (if any) have industry qualifications, is going to be able to arbitrarliy write clauses in the private contracts of private people (or corporates) wishing to enter into private insurance contracts with private insurers. God help us all!
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Added by Eligos, 03 Apr 2012

If ever financial services providers needed to add the Promotion Of Administrative Justice Act 3 of 2000 to their learning curriculum, the time is now. This Act is designed to ensure that administrative action is lawful, reasonable and procedurally fair and provides legislation that entrenches the right to written reasons for any administrative action. This law also provides for judicial reviews and remedies. Legislators must be held as accountable as any other institution and should have to face the reality of the impact their powers have on those affected.
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Added by Investor, 03 Apr 2012

I am an investor who invested money through the failed Sharemax scheme who contravened the bank act " illegal deposit taking " and other regulatory laws that were broken as contained in the FAIS Act 37 of 2002. The attorneys released funds from our Trust account without ensuring that the buildings we invested in were transferred into /our names as investors. They have now regulated an Illegal scheme through a rescue plan " 311" which should be there to ensure that the companies ( I think it is 33 ) are not liquidated. One dares not question the Directors of the old Failed Sharemax Scheme and the current directors now incharge who were Sharemax directors as well about what progress has been made since January 2012. ( Two months later and we still haveless than a month left days to decide and make an informed decision about choices regarding our investment through Sharemax /Frontier) Advertisemenst, brochures and similar communication … which was misleading and contrary to the interest of us the investors were presented to us before we decided to make the investment.( They contained False/ incorrect statements and facts. that our funds would be kept in the attorneys trust account until registration of the buildings in our names ) The prospectus also contained false guarantees ( Paragraph 25.3 ) that our investments would be refunded if the scheme does not go ahead. None of those statements which were made prior to taking our money is true. we still own nothing and have not received the income /interest promised since the end of 2010.Many other promises made by the Directors of Sharemax could not be kept. after the Reservebank intervened and said they must stop taking in new investments from 01 may 2010 which they simply ignored. They even invited about thrity of us after that date for us to participate in a TV advertisement at their office which was supposed to have been screend on TV. All these new and additional and current legislation are useless if you do not have enforcers that know the law to act against the Product Provider that mislead us the investors. Their styaements promisies and forcast were fraydulent < untrue and misleading> The FSB failed to take action against the Directors and complince officers of Sharemax who were the providers of the "Socalled Proerty Syndication " They say we authorised them to use our money for bridging finance and could do with our funds as they please ! To read the 280 page draft amendment bill would not help if you have regulators , a Minister of Finance and the FSB including the NPA and SAPs not taking criminal action. The late Journalist Deon Basson exposed these wrongdoings years ago to the authorities and he was sued for R20 million for being a whistle blower ( RIP ) How many of the FSB's staff/enforcers have passed the regulatory exams is anothe question still to be asked ?
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Added by KC, 03 Apr 2012

If you visit a newly opened restaurant the chances are that everything will be very much "in order" and the venue, food, staff and service will be of a very high standard however, visit that same restaurant 6 months or a year later and you may find that the initial level of food and service you witnessed previously are no longer being maintained. The same it true, I believe, in many other things we encounter in our lives, not leats in the financial services industry and so, the comment in your article that "an independent intermediary should be able to rely on the regulating authorities to have effectively assessed the institutions' capability to offer sound products at the licencing stage." is very revealing. As, it is not necessarily at the licencing stage that the issues arise but at a later stage in the life cycle of the licenced person, company, service or product. Is it not the ongoing maintenance of the initial standard achieved at the licencing stage, that is perhaps where we should be focussing our minds. Any legislation cannot be a bad thing, no matter how much of it there is, if it is needed, sound and proves to serve the common good but, no matter how much sound legislation is put in place, it is the ongoing enforcement and monitoring of the legislation by, in the most part, those responsible for the introduction of the legislation itself that must be sound in order for the intended outcome to be successfully achieved. With specific reference to advisers being able to rely on the approvals by the regulatory authorities, perhaps the question to be asked and answered is "are we confident in the knowledge that all of the right risk management and monitoring systems and enough resource and qualified people are in place on the side of the regulating authorities to achieve this?" A question that, without question, is required to be answered in the affirmative by those being governed by this legislation, with servere consequences if not. So, a key element of the effectiveness of existing legislation and this additional proposed legislation, along with the question raised in your article as to whether an adviser can rely on the regulating authorities may be answered, in part, by the answer to the following question - Quis custodiet ipsos custodes?
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Added by Deon, 03 Apr 2012

Well written, Ayanda. At least someone else feels the same way about civil servants. Scourge of the earth sent to test us!!!!
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An umbrella law for the financial services industry

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