Can independent advisers underwrite the entire financial services universe
We received a number of comprehensive reader responses to our newsletter titled “Does treating the adviser fairly extend to the FAIS Ombud?” Apart from the dozen-plus comments posted directly on our website we have a handful of email replies to the question: Would the financial services industry be safer if the Financial Services Board (FSB) investigated and approved new financial products before they came to market? In today’s newsletter we’ll take a look at some of the points raised by our varied readership.
I may be guilty of driving an agenda, but I believe by answering this question in the affirmative we create the foundation for a lasting and consumer-friendly financial services environment. Many of our readers agree with this view. “The FSB is the controlling body of the financial industry and they should focus on the soundness of all new financial products. The product should be distributed via the adviser with a stamp of approval from the FSB,” notes one reader. At issue here is the recent FAIS Ombud ruling in the matter of Elise Barnes (the complainant), D Risk Insurance CC (first respondent) and Deeb Raymond Risk (second respondent). The Ombud ruled in favour of the complainant and ordered the respondent to repay capital in the amount of R800, 000. Independent financial advisers need to know to what lengths they must go to ratify (or conduct due diligence into) a particular product provider / product combination.
A bizarre and onerous requirement
Let’s use the Sharemax property syndication as an example. One of our readers – who explains the various steps he took to familiarise himself with the group’s offering – observes: “I approached a forensic auditor to ask how much it would cost to conduct an independent audit, which at R20, 000 per syndication was too much for my practice to bear.” He reminds us that the first Sharemax syndications went off without a hitch and that early investors were paid in line with the various prospectuses. Aside from the excessive commission argument (something we can debate in a separate forum) the average broker could easily – even after conducting a thorough investigation – have come up with an “all clear” on the Sharemax syndications.
This brings us to a critical point. Another of our readers is unsure whether the FAIS Ombud’s interpretation of the due diligence requirement holds water. “I believe that the ‘due diligence’ requirement put on the financial services provider (FSP) is an incorrect interpretation of the FAIS Code of Conduct,” he says. The part of the code that is repeatedly referred to reads: A provider must at all times render financial services honestly, fairly, with due skill, care and diligence, and in the interests of clients and the integrity of the financial services industry. He concludes: “Nowhere in the FAIS Act or Code of Conduct is any reference made to a due diligence process that must be conducted by the FSP, other than the normal precautionary measures such as checking licences…”
The difficulty in conducting comprehensive due diligence investigations is set out by a legal adviser at a large FSP. “An asset manager may have agreements in place with 100 or more product providers, each with more than one product,” she says. “In terms of the Code of Conduct we have to provide the client with options, which implies the products of more than one provider and, consequently, more than one due diligence.” If the providers play ball you can get through the bulk of these investigations given enough time – except that products change constantly – forcing the FSP to start all over again. Another angry reader wondered whether the independent broker should “contact Ernst & Young to do independent due diligence studies on Old Mutual, Sanlam, Discovery, Absa, Medihelp and National Treasury (for giving advice on SA Retail Bonds) etc!”
Product providers unwilling to assist
A number of our readers pointed out that conducting due diligence with larger providers was practically impossible. One practice in the investment space sent out a 71-question “due diligence” survey to the financial institutions it dealt with – with varied results. Some product providers provided comprehensive responses while others refused to get involved. The legal adviser agrees: “There is often an issue that providers are reluctant to provide you with detailed information on their products, which, in any event, only their actuaries fully understand!”
Is there a simpler solution? A reader sums it up very eloquently: “The FSB is in a position to obtain all the relevant information from the providers, to ask the right questions, and to save independent financial advisers an enormous amount of time by conducting these investigations and subsequent product approvals, and allowing all advisers to rely on such approvals.”
The adviser underwrites the entire financial services industry
The FAIS Ombud decision to award damages in the Barnes versus Deeb complaint has huge implications. A reader – who posted under the acronym Miffed – notes: “The burning issue here is that Cameron (and the FSB) views the independent adviser as the final underwriter for virtually any investment.” The Code places tremendous administrative demands on the adviser and any non-compliance – regardless of its import – can be used as grounds for a FAIS Ombud ruling against the adviser.
Another reader concurs: “The regulators should be wary of the emerging principle that the adviser should bear the physical losses where a client’s investment goes South, notwithstanding the fact the adviser has no control over the investment, derives no benefit from the capital (save for the usual fee or commission-based compensation), did not embezzle or otherwise steal the money, neither influenced nor controlled the actions of management in the failed product provider, nor been privy to the inner workings of the day to day business.” The question that must be asked is what happens when a really big provider goes to the wall? If the court challenge to the latest FAIS Ombud ruling fails, we could find out sooner than expected.
We’ll conclude today’s comment with a call for commonsense to prevail: “May the appeal succeed and may the High Court pass judgement on the Ombud’s modus operandi – she needs to be slapped down.”
Editor’s thoughts: It makes perfect sense that an aggrieved financial services client would take on the adviser. The FAIS Act and Code of Conduct create so many compliance functions that some form of contravention on the part of the adviser (FSP) is inevitable... It is easy enough for the Ombud to find reasons to rule for the complainant in most cases. Are you concerned that the independent financial adviser is carrying the can for financial product meltdown, while the product provider and regulators walk away unchallenged? Please add your comment below, or send it to gareth@fanews.co.za
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