Selling financial services in a join the dots world
How often have you heard South Africa referred to as a “Banana Republic”? It’s a phrase that gets bandied about every time the ruling power veers from the path to democracy… But there’s a more appropriate phrase for 21st Century South Africa, especially if you’re a stakeholder in the financial services industry. As the regulations, Acts and amendments pile up we’re in danger of becoming a bona fide “nanny state”. What? The veritable font of Internet knowledge, wikipedia.org, defines the phrase as “the perception of a situation characterised by governmental policies of over-protectionism, economic interventionism, or heavy regulation of the economy and society…”
And with FAIS, Treating Customers Fairly, Conflict of Interest, Regulation 28, the Insurance Laws Amendment Act, the National Credit Act, FICA and Consumer Protection Act – and now National Treasury’s so-called “Twin Peaks” model – you’ll soon have to let the regulators know when you’re taking a break to blow your nose… The sarcasm probably isn’t necessary – but you get where I’m going with this… Aside form government and regulatory intervention, professionals in our industry are subject to a fair amount of self regulation too. Each industry has its own set of codes and guidelines – whether you are a professional accountant or short-term insurer, you’ll find something relevant. And now there’s another code for financial institutions...
Enter CRISA, for the institutional crowd
In July this year, 19 July to be exact, South Africa’s institutional investors got a dose of this self-regulation when the Code for Responsible Investing in South Africa (CRISA) was launched in Johannesburg. Companies will begin reporting on the application of the code from 1 February 2012. John Oliphant, chairman of the stakeholder committee that drafted the code, said that CRISA would provide the investor community with the guidance needed to give effect to the King Report on Corporate Governance (King III) as well as the United Nations-backed Principles for Responsible Investment (PRI) initiative. By adopting this code, South Africa becomes the second country in the world, after the UK, to formally encourage institutional investors to integrate into their investment decisions environmental, social and governance (ESG) sustainability issues. “The Code is the next step in ensuring that institutional investors actually implement policies that guide their day to day actions when it comes to responsible investing,” says Oliphant.
Who does CRISA apply to? We can find out by considering the various bodies that have endorsed and adopted it. These include the Institute of Directors in Southern Africa (IoDSA), the Principal Officers Association (POA), and the Association for Savings and Investment South Africa (ASISA). In addition the code has the backing of the Financial Services Board, Johannesburg Stock Exchange and the PRI. “We strongly support the CRISA Code. It is important that pension funds and investment managers operating in South Africa understand clearly their responsibilities and invest for the long-term. The successful adoption of this code sends a clear signal to other regulatory agencies around the world that they can – and should – play an important role in encouraging responsible ownership practices,” said Dr Wolfgang Engshuber, chairman of the PRI.
The financial intermediary conducting business with asset managers, pension funds, insurance companies and a range of other financial services providers should benefit from this industry code because it encourages companies to adopt its principles and practice recommendations on an “apply or explain” basis. What does CRISA entail? The following is reproduced from the ASISA press release covering the CRISA launch. (You can download a full copy of the code – which only runs to 16 pages – from http://www.iodsa.co.za/, http://www.asisa.org.za/ or http://www.unpri.org/).
The five principles of CRISA
Principle 1: An institutional investor should incorporate sustainability considerations, including ESG, into its investment analysis and investment activities as part of the delivery of superior risk-adjusted returns to the ultimate beneficiaries.
Principle 2: An institutional investor should demonstrate its acceptance of ownership responsibilities in its investment arrangements and investment activities.
The institution should implement a policy detailing mechanisms of intervention and engagement with companies where concerns around “shareholdings” have been identified, as well as the means of escalation if such concerns cannot be resolved. This section of the Code should also detail the approach to voting at shareholder meetings, including the criteria to be used in reaching voting decisions and public disclosure of full voting records! CRISA also requires that controls be introduced by the institutional investor to prevent insider trading as defined by the Security Services Act.
Principle 3: Where appropriate, institutional investors should consider a collaborative approach to promote acceptance and implementation of the principles of CRISA and other codes and standards applicable to institutional investors.
Principle 4: An institutional investor should recognise the circumstances and relationships that hold a potential for conflicts of interest and should pro-actively manage these when they occur.
That’s good news – and we’d certainly welcome greater recognition of conflicts at product provider level… And we wonder how this requirement would filter down to the relationships that develop from the tied agent distribution force.
Principle 5: Institutional investors should be transparent about the content of their policies, how the policies are implemented and how CRISA is applied to enable stakeholders to make informed assessments.
The Code requires institutional investors to fully and publicly disclose to stakeholders at least once a year to what extent the Code has been applied. If an institutional investor has not fully applied one of the Principles of the Code, the reasons should be disclosed. Disclosure as well as policies should be made public. Institutional investor and their service providers should also, before agreeing to a proxy or other instruction to keep voting records confidential, carefully consider the reasons put forward to justify confidentiality.
Responsible investing and corporate governance guidelines in South Africa are largely voluntary. Oliphant concludes: “The Code aims to put in place the checks and balances needed to make this voluntary framework successful. Together with the King Report, the new Code seeks to encourage best practice conduct by shareholders and companies.”
Editor’s thoughts: The industry should be commended for taking steps to self-regulate. What I’d like to know is whether self-regulation with “voluntary” adherence is a sensible way to go? Please add your comment below, or send it to [email protected]
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