Because it happened in Australia

Gareth Stokes, FAnews Online Editor

If you want a preview of likely regulatory changes then you can do worse than scan the Australian, British or New Zealand press. In recent years South African regulators have closely mirrored developments in the offshore financial services environment. Debates over the remuneration of financial services intermediaries, bodies of legislation (think of the FAIS Act) and the Treating Customers Fairly (TCF) concept were all ‘imported’. It makes sense, therefore, that our industry will mirror the trends as they develop in these countries – with a slight lag for our ‘delayed’ implementation.

What does this mean? One of the likely consequences of increasing compliance costs and declining commissions is a significant reduction in the number of independent financial intermediaries plying their trade locally. This trend has already played out in Australia and the United Kingdom as the risk versus reward equation for providing financial advice ‘skews’. The cost of compliance will undoubtedly drive practices to investigate merger or acquisition opportunities and force individual financial advisers to seek out partnerships in order to achieve cost efficiencies.

The big fish will thrive in this regulatory ‘sea’

A decade from today the financial services landscape will be unrecognisable. In Australia fresh concerns have surfaced over the likely impact of fee-based advice as proposed in the country’s Future of Financial Advice (FOFA) reforms. A survey by Beaton Research says life insurance intermediaries will end up losing their clients to the banks if commissions on life products are banned. Website http://www.insurancenews.com.au/ reports that 77% of advisers expect the commission ban will result in a decrease in the amount of business they write… And only 2% expect an increase (perhaps they didn’t read the question properly!

The Beaton report states: “Advisors believe banning life insurance sales commissions will result in widespread changes to current market dynamics, competitive landscapes and consumer behaviour. They predict a flight to retirement from the industry due to the challenges of selling insurance with a direct fee to end-customers.” And banks will be happy to pick up the ‘abandoned’ clients. Although we have to be careful to draw conclusions from a couple of press articles and a research report, it seems the Australian intermediary force is extremely suspicious of banks and product providers right now. Advisers are concerned the banks, large insurers and industry superannuation funds will be able to disguise their fees to distort the true cost of advice, the report says. Sound familiar?

A few quick steps to product provider dominance

Whether we admit it or not, the mushrooming of regulation and subsequent burden of compliance favours big companies. Every stakeholder in the financial services industry is aware, on some level, that the FAIS Act introduces a far heavier burden on the intermediary than the product provider. It appears that South Africa’s ‘blue chip’ businesses – regardless of the industry they ‘play’ in – will do whatever it takes to carve out a regulatory framework favourable to them. Disagree? Here are two examples…

The first is courtesy the National Credit Act (NCA) that was widely applauded for the consumer protections it introduces. Although the NCA stamps out many abusive practices it also opens the door for a flood of previously unheard of charges. Go ahead – stop at any of the financial services companies offering vehicle finance and ask them about the charges on their motor finance packages… These companies made sure the Act included ‘minimum charges’ for contract initiation and monthly administration. Before the Act you could ‘barter a deal’ when financing your vehicle – subsequently some snotty salesman tells you the fees are “legislated in the Act!”

The second example vests in the Consumer Protection Act (CPA) – a little gem we spotted after reading two articles by Fin24’s technology journo, Simon Dingle. It seems the cellular services providers got hold of the draft CPA and virtually rewrote the section on contract cancellation to their benefit. Instead of improving the onerous exit conditions put in place on their two-year-long cell phone contracts, the Act plays nicely into their hands. The new ‘law’ even allows them to sell you a phone on a three-year contract! Good luck – we certainly can’t remember a cell phone that worked faultlessly beyond two years.

Can the same happen in the financial services space?

Have financial services product providers tailored regulation to suit? We don’t have to answer this question – because the evidence is there for all to see!

Editor’s thoughts: According to the laws of physics – for every action there is an equal and opposite reaction… If you push in one area – something has to give in another. Thus any concession to the financial consumer requires an equal concession from either product provider or financial services intermediary. Do you think acts such as the FAIS Act, NCA and CPA have been structured to benefit large private corporations rather than aide the consumer? Please add your comment below, or send it to gareth@fanews.co.za