Something wicked this way comes

If you take a moment to reminisce on your South African schooling, specifically your English lessons, you may recall sweating through some of the works of the great playwright, William Shakespeare. Those who were especially lucky might have covered one of his better known tragedies, Macbeth.

In the first scene of this play a trio of witches are interrupted as the story's tragic hero approaches. "By the twitching of my thumbs, something wicked this way comes," hisses one of the hags as they disappear into the night. The audience has to wait for quite some time before the irony of this phrase is revealed... Macbeth eventually succumbs to his vaulting ambition and pays the ultimate price for his treachery.

It is possible to draw comparisons between the tragic hero in Shakespearean plays of this genre and the masterminds behind modern day financial tragedies. Heading up every Fidentia is a tragic hero not unlike Macbeth, who will ultimately pay for his wrongdoings.

Sometimes you have to trust your gut

What always interests us about financial 'opportunities' that sound to good to be true is how people respond when you try to warn them of potential pitfalls. You are inevitably accused of being a cynic, a pessimist or overwhelmingly negative. Some will go so far as to suggest you are jealous of their financial insight. We experienced many of these reactions when chatting about the latest 'opportunity' being touted in the home loan market. The product we are referring to is a home loan switch, offered at 6% per annum, by Rudco Finance Company.

Considering the economic realities in South Africa at the moment you would be crazy to lend money at 6% per annum. The purpose of lending money is to make money and at 6% before commission and other expenses Rudco will be earning less on lent funds than if they simply invested the funds in any number of 'safe as houses' cash or bond accounts. This product begs one major question: "Where does Rudco hope to find money to back its 6% home loan offer?

The answer, according to Rudco's Pretoria branch is simple "Rudco has private funding." Satisfied? We venture this is a rather flippant answer. The South African Reserve Bank is supposed to be the 'cheapest' source of finance in the country, and their Repo rate is currently fixed at 9.5%! This means it costs South Africa's giant financial institutions 3.5% more to borrow money that it would cost a private investor through Rudco.

What we know thus far

Rudco Finance Company is the brainchild of a Mr Rudi Visagie and was started in 2006 to provide debt consolidation services. The company operates out of The Strand in Cape Town and appears to be aggressively recruiting agents to market this solution for residential bond holders in Cape Town, KwaZulu-Natal and Gauteng.

The company's branch (agency) in Pretoria operates a website which provides significantly more information about the product than the parent company. It appears for an initial fee of R5, 700 the company will begin the process of switching your home loan from your current provider to Rudco. Rudco will lend you money at an interest rate of 6% per annum on the amount financed, though you will pay a monthly management fee of R57 for this privilege.

Rudco has applied to the National Credit Regulator for a licence to supply credit products. Their website includes a lot of information on the National Credit Act and the protection all consumers enjoy under this Act. However, in the Rudco Pretoria's FAQ section they represent that they do not have to register with the Financial Services Board (FSB) because they don't give financial advice and only offer a product. We guess then that any financial intermediary selling this product had better do their homework thoroughly, because they will end up holding the can if anything goes wrong!

The kind of rumours we don't like to hear

We spoke to a number of bond agents who are worried about the bond switching product offered by Rudco. Word is that Rudco will pay R1, 000 in commission to an agent who switches their client's home loan to Rudco. There are even unconfirmed rumours that Rudco will pay a commission on the monthly bond repayment amount.

The agents we spoke to confirmed that Rudco expected bond payments to be made from the date of grant rather than the date of registration. Despite attempts by various other financial journalists, Moneyweb in particular, there is still no indication as to where Rudco will obtain their financing. The suggestion that it is securing offshore funding is worth investigating, though there would be significant foreign exchange risk and the process of bringing funds in and out of the country would probably flout foreign exchange regulations. This aside, interest rates have been rising in the UK and US and are now quite close to this magical 6% mark.

We can think of two other scenarios. The first is that the company hopes to settle the bonds of its clients on a first come first served basis, using the bond repayments made by other clients between date of grant and date of registration. This possibility should be avoided if Rudco places all such payments in trust account as promised. The second is that the company is using the 6% offer as a 'sign on' gimmick to get as many people as possible onto the books before adjusting the interest rate to a more sustainable level.

Early indications are that agents in Gauteng have already secured close to R200 million in applications for the home loan product. This is another sad indictment of the average South African investor who will disregard the uncertainty in a new financial product and simply hold out both hands for the reward that comes with a home loan interest rate of half of what banks offer.

In the absence of more information we echo the warnings made by various financial websites and in the press and recommend financial intermediaries be extremely careful when deciding what products to sell.

Editor's thoughts:
The 'wait and see' attitude that regulators and other financial watchdogs take when new products are brought to market is infuriating. How long do you think the regulator should take before investigating a company like Rudco? Should they act immediately to ensure the product is indeed viable or should they wait for the first complaint or charge to be laid? Send your comments to gareth@fanews.co.za