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A dozen risks for brokers to navigate, part 1

15 March 2021 Gareth Stokes

The Institute of Risk Management South Africa (IRMSA) 2021 Risk Report flags a dozen risks that the country’s financial advisers and insurance brokers will have to navigate in the coming years. Over 114 pages, the report considers the impact that each of these scenarios will have on South Africa, and businesses operating here, against 10 metrics. These include leadership, institutional capacity, politics, social cohesion, national policy, service delivery, inequality, economy, global trends and climate. It would be impossible to produce a detailed newsletter on each of the 12 risks contained in the report. Instead, we will tackle the mammoth task in two parts, focussing on five of the risks in today’s newsletter and the remainder in a second instalment. We will consider how each of the overarching risks may be interpreted in the context of an advice-focused financial services provider (FSP).

Risk 1: Scarcity of unified, ethical and visionary leadership.

“A well-governed country, institutions and organisations are essential for the economy to thrive [and] to meet our fiscal needs, build resilience and secure the hopes of future generations,” writes IRMSA. The need for ethical and visionary leadership was also raised repeatedly during the association’s risk report launch, held 24 February 2021. Visionary leadership is moot if you cannot get the basics right. At this level, leaders need to instil a culture of ethics across the businesses or institutions they lead. 

The consequences of unethical leadership litter South Africa’s private and public sector landscapes. For example, a staggering 31% of respondents to a 2019 South African Business Ethics Survey indicated that they had observed ethical misconduct in their organisations. Only 55% of these individuals reported this misconduct; the rest remained silent for fear of victimisation or due to their personal conviction that nothing would be. “The absence of ethical and visionary leadership will almost certainly exacerbate other risks at country level,” writes Purple Capital CEO, Charles Savage, who encouraged leaders to exhibit humility and strength of character. A great way for leaders at advice practices to instil ethical leadership across their firms is to root out conflict of interest and always put customer outcomes first. 

Risk 2: Continuing private and public sector governance failures

“Our 2020 report demonstrates that risks are evolving [and that they have] multi-dimensional relationships with other risks; they seldom materialise in isolation,” said IRMSA President Thabile Nyaba, during her opening remarks to the launch. This interconnectedness of risks is apparent in the second risk discussed in the report because a lack of ethical and visionary leadership contributes to private and public sector governance failures. One need only page through the Auditor General’s 2019/20 Annual Report to witness the horror of governance failures at municipal level. Another example comes courtesy the widespread corruption in personal protective equipment (PPE) procurement that took place during lockdown. 

“Governance failures allowed corruption to prevail, stole life-sustaining aid from vulnerable people and prevented PPEs from reaching those who needed it most; this risk must be resolved if we are to prevent failing as a country,” observed IRMSA. FSPs that operate in a the financial advice segment have a higher duty than most to ensure effective corporate governance. They do, after all, handle millions of rand on behalf of clients each year, whether in the form of premium income or assets under management. Compliance with the Financial Advisory and Intermediary Services (FAIS) Act and its accompanying Codes should put most FSPs on the governance ‘front foot’; but consideration should also be given to the evolution of governance practices and the impact of crises on the governance function. 

The Harvard Law School Forum on Corporate Governance singles out a greater focus on environment and social aspects; the increasing importance of corporate purpose; and improved oversight of culture and human capital management as some of the big picture trends in the field. “The economic aftermath of Covid-19 will likely increase the risk of governance failure as organisations cut back on governance, which is often incorrectly seen as a dispensable nice-to-have,” warned Walter Ehrlich, a director at Retlaw Fox Associates. 

Risk 3: Shifts in consumer behaviour

“The lockdown forced a change in consumer behaviour and habits,” writes IRMSA. “The approach to work and how people interact with retail businesses has fundamentally changed [and] businesses have had to adapt to a significant change in consumption patterns whilst ensuring adequate realignment of working capital and workforce utilisation”. Advice practices have undoubtedly adjusted their operating procedures to accommodate the shift into the digital world; but this does not mean they were unaffected through 2020. The latest statistics from the Association for Savings and Investment (ASISA) suggest that fewer risk policies were sold through 2020 due to the inability of traditional distribution channels to function optimally without face-to-face interactions in the real world. 

Evolving consumer behaviour combined with society’s shift into the fourth industrial revolution (4IR) will drive change in your advice practice. You will have to keep a close eye on consumer behaviour and ensure that your operating model, supported by platforms and systems, is up to the task. “It is important for businesses to build capabilities to ensure quicker and more confident reactions when faced with change; businesses must find new ways to engage with customers,” noted Berenice Francis, group executive at Motus Holdings. The widespread adoption by intermediaries of digital technologies was central to a recent presentation by Santam’s head of intermediated distribution, Andrew Coutts. We summarise the insurer’s vision for the future of risk advice in Five ways to differentiate your brokerage

Risk 4: Failure to move forward in reforming the national health system

The National Health Insurance (NHI) Bill emerged as a central component of South Africa’s future risk landscape. This writer’s belief is that the risk in NHI derives from uncertainty. We are, for example, concerned about how optimal outcomes will be achieved when the details of the proposal in terms of cost and coverage are still up in the air. IRMSA reflected on the risk from a social perspective. They argued that healthcare reform is an imperative and that the risk lies in failing to achieve this. “As much as Covid-19 created an impetus to invest in healthcare, the risk is that we may fail to take advantage of this opportunity to reform the national health system,” writes IRMSA. There are thousands of advice professionals earning a living in the healthcare insurance and medical schemes sector who will be watching NHI developments closely. They would do well to elevate NHI implementation in their risk frameworks. 

Risk 5: Deepening structural inequality

“South Africa is facing the immediate triple socio-economic challenges of poverty, unemployment and inequality, aggravated by an ailing economy,” writes IRMSA, as it introduces the fifth risk highlighted in its annual report. It is easy to establish a link between a country-specific risk and the risks it poses to businesses. We all know, for example, that structural inequality introduces social instability which negatively impacts on the economy. It also true that a growing population of disenfranchised poor will reduce your potential client base. What is less clear is what individual advice practices can do to address the structural inequality exhibited in 21st Century South Africa? 

You might argue that by being in business you are already doing your part. Your practice creates jobs and dedicates a range of resources to improving the financial outcomes of clients in multiple income groups, raising the overall level of financial wellbeing in society. But there is so much more that could be. Nicola Comninos, group chief risk officer at the JSE, suggested a renewed focus on sustainability. “You need to bring sustainability into your product lines and into your business approach; we must encourage leaders in society to think about more than maximising shareholder wealth to also maximise impact to stakeholders,” she said, during her address to the 2021 IRMSA Risk Report launch. We leave it to Nyaba to conclude: “Risk management was elevated into the spotlight through 2021; we must accept the challenge to partner with the private and public sectors in order to transform the future of our beloved South Africa”. 

Writer’s thoughts:
An issue not addressed in 2021 IRMSA Risk Report is the risk that technology could widen inequality by further marginalising the poor. It will take visionary leadership to address our country’s structural inequalities and ensure that technology is leveraged in such a way as to ensure good outcomes for all. What is your financial advice practice doing to address structural inequality in South Africa? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

 

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QUESTION

Covid-19 may accelerate certain industry trends. What are we likely to see?

ANSWER

Adoption of contactless technologies and digital experiences will likely be accelerating emerging technologies further
The consumer will expect safety and precautionary measures, driving the need for enhanced surveillance policies and technologies, which may pose potential privacy concerns
Rising activism among consumers and employees could drive an increased focus on corporate purpose
Value chain disruption is likely to lead to an increase in creative partnerships, which may in turn cause organisations to further invest in developing the mindset and agility to collaborate across sectors in the ecosystem
Cost management will be a critical priority to ensure business continuity based on cash flow requirements, to manage lower margins and revenues during a downturn
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