What you think about recent regulatory attentions
On 15 November 2011 I distributed a newsletter titled Welcome respite for intermediaries as regulators shift focus. I suggested that the pending Treating Customers Fairly (TCF) regulation, although not bypassing financial intermediaries, would demand more from product providers. The reader response to the newsletter was overwhelming so I’ve dedicated today’s column to sharing some of your views. An open dialogue remains the best way to raise issues and areas of concern within the financial services industry.
The overriding sentiment from FAnews readers is that they’re up to their proverbial necks in regulation and that any shift in regulatory focus is long overdue. Yet the majority of comments pick up on the burden placed on the intermediary by existing regulation rather than the promise of a softer stance in the future. One reader – incensed with the impact of regulatory exams on the financial services sales force opines: “They [the Financial Services Board] are systematically wiping out the very reason for their existence – the men and women who rely on the industry to support their families!” He warns that many among South Africa’s ageing intermediary workforce are approaching retirement age – with younger intermediaries seeking alternative employment as compliance functions escalate.
A dying breed
His view was supported by many of our readers. An intermediary with 27 years in the short-term industry observes: “I have become very disillusioned with my career as an independent broker as constant changes result in ever-increasing costs. I fear for the future of this industry and will take the first opportunity to get out.”
Another reader, who went by the nom de plume Old Broker (OB), reckons the FSB has always acted to the advantage of the insurance companies. He offered up the recent decisions around investment commission and conflict of interest as examples. He also questioned whether the regulator’s attention was directed in the right area. An issue that immediately springs to mind is that of churning, which is almost exclusively identified by the regulators as an intermediary-induced ill… The reality is that much of the “churn” in today’s marketplace is a direct result of large insurers and investment houses buying up independent books of business.
They say that absolute power corrupts absolutely – and we have plenty of examples of this truism. Think for example of the Gauteng freeway tolling proposal… The minister of transport tells us that a “user pays” system is the fairest solution before announcing that half of the users (those in taxis and buses) will be exempt from any charge. An example from the financial services space is the decision to cap the annual license fee paid by insurance companies. “These companies should pay a license fee for each adviser on their books,” reckons OB. “As things stand the independent adviser is subsidising the insurance companies!” OB was on a roll, asking why the sales forces of the direct insurers, among the biggest culprits where miss-selling of insurance product is concerned, were not fully “covered” by the FAIS Act.
Feeling the costs of compliance
Costs are another hot issue. In recent weeks I’ve received a number of complaints about the increased cost of conducting business as an independent financial intermediary. FSB license fees top the list. One reader opines: “A year or two before the FAIS Act was promulgated the FSB said that the cost of registering and complying with FAIS would be nominal.” This is clearly not the case today… Andre Otto chipped in with the question top of every IFA’s mind: “What does the FSB do for the small independent brokers to justify the nearly R5, 000 per annum they charge?”
Reader Allan writes: “Our fees do not stop at the annual levies. Every time we need to make a change, register, de-register, or change a name or even an address, there is another fee to pay. Some fees – such as adding a category to your licence – are excessive.” Over and above the license fees practices are spending thousands of rand to comply with various regulatory interventions – not least the cost of regulatory examinations. “No brokerage will be able to absorb all these extra costs,” reckons John. “For starters you will require extra office space, extra staff, new computer programmes, the increased burden of carrying accounts, increased phone and stationary accounts, staff benefits and salaries, bad debts and legal fees to name a few.” Another frequent complaint centres on the soaring cost of professional indemnity cover, which has gone through the roof due to the increasing complexities in the financial advice space.
What does the future hold for the financial intermediary? “Eventually the FSB will kill the goose that lays the golden egg,” reckons Allan, before asking whether the local regulators will learn from the various mistakes made by the Financial Services Authority in the UK. If you buy into conspiracy theories then you might wonder whether the demise of the IFA is perhaps on the FSB’s agenda. “The sooner the FSB can reduce the independents to a tiny minority the less their administrative burden, the bigger their profits and the more they can concentrate on big payouts and hiking their fees,” opines John.
The big fish always get away
He asks where the regulator was when Fidentia and Sharemax set about fleecing investors. In doing so he raises a point very close to my heart: “[After each product provider collapse] the liquidators – appointed by the FSB – and all the other [private sector] scavengers walk away with purses bulging while the investors and the brokers involved are left to fight for survival. The investors stand to lose their hard-earned cash and the brokers stand to lose their licences and future incomes while the corpulent predators scuttle away with their new found loot!”
The independent advisers need someone in their camp. “What gets to me is that the small independent broker is the only category of service provider that truly renders an unbiased service to the consumer out there – yet the FSB stands back while the Outsurances of this world publicly tell the consumer to avoid brokers,” notes Deon. He asks why the FSB cannot stand up to protect its licensed practitioners.
It is difficult to forecast the impact of today’s legislation on the IFA landscape a decade from now. Perhaps John sums it up best: “The FSB is effectively forcing brokers out of the industry or into the hands of the banks and insurance companies, thereby denying clients the freedom to experience unbiased advice from truly independent advisers.”
Editor’s thoughts: There is no doubt that regulation adds costs to doing business. While private companies continue to lobby for prohibitive red tape to be removed, the financial services industry is snowed under by new, proposed and pending legislative interventions. Are you concerned that the current regulatory load will result in small IFAs being closed out of South Africa’s financial advice space? Please add your comment below, or send it to gareth@fanews.co.za
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