Hurdles that SA-based advice practices must clear, ASAP
Broad-based black economic empowerment (B-BBEE) and the potential for South Africa to find itself on the global Financial Action Task Force (FATF) grey list are two prominent issues that local financial and risk advisers will have to navigate in the coming 12-18 months. And although the 2022 Morningstar Investment Conference was mainly aimed at investment-focussed independent financial advisers (IFAs), wealth advisers and holistic financial planning practices, the matters discussed will impact on all advice-focused financial services providers (FSPs), product providers and their mutual clients, South Africa’s financial services consumers.
There is a slight chance SA sidesteps this ‘bullet’
Victoria Reuvers, Managing Director of Morningstar Investment Management, wasted little time on introductions during a fast-paced industry panel discussion titled ‘From grey listing to B-BBEE: The changing landscape of financial advice’, held during the 2022 Morningstar Investment Conference. She steered spokespersons from Allan Gray, Coronation Fund Managers and Ninety One through these often-controversial topics, with the first question focusing on the impact of grey listing on a financial advice practice. At the time the conversation was held, the experts were suggesting an 85% or higher chance that South Africa would be grey listed, with some holding out hope that government might just do enough to buy a stay of execution.
Assuming the country is grey listed you can expect more of your offshore clients, whether they invest via platforms domiciled in SA or directly offshore, to be screened as high-risk clients and to be screened more frequently, explained Tamryn Lamb, Head of Retail at Allan Gray. The main impact will therefore be that your clients are subject to enhanced due diligence measures. Lamb encouraged the IFAs in the audience to start preparing for grey listing by engaging with their foreign service providers to determine how risk rating requirements might change. “Make sure that you look at your own risk monitoring and compliance procedures and start preparing for the additional documentation that might be required,” she said.
Could this be a Y2K scenario?
Pieter Koekemoer, Head of Personal Investments at Coronation Fund Managers, compared the macro- and micro-economic uncertainties around the country’s pending grey listing to events in the global financial services sector leading up to the Y2K problem, in the late 1990s. He pointed out that the potential impact of grey listing would be softened by the amount of attention focused on the problem over the past few months. “The short-term impact on financial advisers is that you will have to get those Know Your Customer (KYC) packs ready, so that you can submit them more regularly to product providers; aside from the increased administrative workload, you are not going to notice the issue,” Koekemoer said.
The panellists agreed that the impact of grey listing on domestic financial markets would be more significant the longer South Africa remained on the list, and that the overall economic impact would be nowhere near as bad as the fallout following recent ratings agency downgrades. Sangeeth Sewnath, Deputy Managing Director at Ninety One, noted that being grey listed was the equivalent of a regulatory ‘own goal’ and warned that certain macroeconomic consequences were inevitable. “There is potentially going to be less money coming into the country and we could see higher transaction costs,” he said, before addressing the question most frequently asked by IFAs, being how the event might impact the rand? “Other than a knee-jerk [temporary] reaction on the day that the grey listing is announced, [we would not expect to see] a massive impact on the currency,” said Sewnath.
His advice to IFAs: “On a micro-level, you need to make your processes as efficient as possible in dealing with client requirements when they go offshore, because the enhanced due diligence process means that you have got to be a lot more prepared,” he said. “You also need to be more selective in who you decide to partner with going forward; an SA nominee company works pretty well, but you must make sure that they are able to execute in a fairly digital way, and as seamlessly as possible, to reduce the frictional costs that come with enhanced oversight”.
Is selling out to a larger practice your only solution?
Reuvers then steered the conversation to South Africa’ B-BBEE regulations and the potential impact on smaller advice practices of the Employment Equity Amendment Bill (EEAB). “There are a lot of questions around proposed regulatory amendments, particularly around ownership, and [we have interacted with] many sole proprietors or smaller advice practices that feel the easiest response would be to sell out to larger players,” she said, before asking the panellists whether the impact of regulation on truly independent financial advice had been adequately considered. After all, asset managers are heavily dependant on the survival of independent advice practices for their own success.
Koekemoer was the first asset manager in the proverbial hot seat. “The most important advice that I can offer is not to make hasty decisions,” he said. He encouraged advisers, through their associations, to engage with government and the financial sector regulators to ensure that the rules, standards and terms of compliance are appropriate for their operating models. The suggestion was that the policymakers would be remiss in ramming through a one-size-fits-all regulations for all product providers and advice practices, regardless of turnovers and staff headcounts. Sewnath advocated for a common-sense approach based on diversity being non-negotiable to build an enduring business in the South African context.
Licensing requirements make diversification / transformation non-negotiable
That said, FSPs cannot ignore the need to prepare their businesses for the looming EEAB and, perhaps more critically, the transformation requirements that are likely to be part and parcel of the licensing requirements under the Conduct of Financial Institutions (COFI) Act. “The Employment Equity Act is actually in flux at the moment, because the draft amendments will impact the broader financial services sector, including those businesses who are compliant on the existing scorecards,” concluded Lamb. “What those scorecards look like [and the] metrics that will be set across the industry will be changing”.
Koekemoer’s closing remarks focused on the role of the Financial Intermediaries Association of Southern Africa (FIA) and the Financial Planning Institute of South Africa (FPI) in advocating on behalf of advisers, intermediaries and the broader financial advice profession. He commended the FIA for being active and present in a broad range of regulatory matters but suggested the FPI, which is more focused on practice professionalism, as “arguably” being a better fit to represent wealth managers at the advocacy level.
Writer’s thoughts:
It was refreshing to find employment equity legislation and grey listing trotted out as key issues facing advice practices ahead of the often discussed, and rather worn out, digitalisation and technology themes… Two key question emerge from today’s newsletter. First, are you concerned about the impact of fast-tracked, legislated transformation on your business? And second, which association do you believe is best positioned to lobby regulators on your behalf? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.
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