Following a mistake?

01 August 2013 Robert W Vivian, University of the Witwatersrand

It is now acknowledged that the UK was wrong in combining prudential and market conduct regulation. The FSA has now disappeared as the UK introduced the Twin Peaks moving prudential regulation to the Bank of England, that Grand Old Lady Threadneedle Street. The FSA has morphed into the FCA.

Now SA is going to introduce the Twin Peaks, almost certainly another mistake. The UK introduced TCF now SA is going to introduce TCF. The UK carried out the RDR ending with the daft idea that commissions should be banned. Now SA is going to carryout a RDR and one can already predict the outcome.
The daft idea will be that commissions should be banned. South African regulators should at least try and have one original idea and stop following failed regulatory ideas of the UK.
Establishing dominance

It may be recalled that in South Africa some years back there was a proposal which was seriously considered of moving prudential regulation of banks to the FSB, when the FSA was being formed, but the South African Reserve Bank and the Bank Regulator told the FSB in no uncertain terms to get lost.
Moving bank regulation to the FSB would have been a massive mistake as the UK learnt with the near collapse of its banking industry. One would have thought that it is now manifestly clear that the UK is no longer a country to follow when it comes to regulation. It appears as if its grand days of being a leading financial centre is coming to an end, quickly, mainly due to its regulators and meddling lost and confused politicians.

Theoretical overview

In resolving the debate about banning commissions it is useful to understand something about the theory of law. The question should be: when should something be prohibited by law? We have old, well recognised laws which have existed since the dawn of time. These include prohibitions against murder, theft, rape, kidnapping and so on.
The nature of these laws tells us when laws should exist. One must start off with the understanding that everyone is born with what the American’s call unalienable rights: the right to life, liberty, property and the pursuit of happiness. No laws are necessary to give these rights to anyone. These are natural rights. What is necessary is negative laws preventing other human beings from killing, stealing, raping and so on.

The principle of law then becomes clear. People should be free to do as they please just as long at the do not harm others. It is now clear that the above laws exist because each of the prohibited unlawful outcomes are achieved by acts which injure someone else.
Laws should not prohibit normal every day to day conduct. Laws cannot prohibit day to day activities. Laws prohibit unlawful outcomes. This point was made centuries ago by John Stuart Mill who asked why it is it we do not have a law which prohibits stabbing, striking, pushing, poisoning and so on. We have one general law; "Thou Shalt do no murder”. It is the outcome which is prohibited.
If we had a law against stabbing for example no medical operation would be possible. The doctor would have to apply for permission to a regulator to perform an operation. If we had a law against striking a boxer and rugby player would have apply for permission to box or play rugby from a regulator. Applying for permission will end-up with the failed communist state of central planning and controlled economy.

Historical payment context

Two of the oldest forms of remuneration is that of commissions and fees for service. Both are perfectly acceptable. The older and most suitable is the payment by commission.
In concept, the two are completely different and that is part of the problem. Not only are commissions being outlawed that that form of business is being outlawed.

A commission is paid to a broker for the introduction of business. It is not paid for any other reason. All the broker needs to do to be entitled to the commission is introduce the business. The broker does not need to provide any advice at all. The broker may indeed do so in an attempt to secure recurring business.
It is for this reason that large brokers can operate on a fee basis. Eventually it is hard to tell the difference between a commission for introducing business and providing a fee for service. There can be no legal objection at all for a broker earning commission for introducing business.

Case in point

The argument which is put forward is that commissions should be outlawed for reasons of conflict of interest. My goodness, every known human activity creates a conflict of interest. In this regard South Africa takes the lead. We have had an undertaker murdering his friends to get business. We should outlaw undertakers because that activity creates a conflict of interest. Doctors can over-service so doctors create a conflict of interest. Doctors should be banned. Regulators themselves create a conflict of interest.

Prof Naill Ferguson argues the world banking crisis was caused by massive over regulation so complex these could not be read let alone implemented. It is in the interest of failed regulators to argue it was the private sector and absence of regulation which failed, which is of course what has happened. Regulators should be banned because of their conflict of interest.
The existence of the Short term Ombudsman exists as a conflict of interest. The Office of the Short term Ombudsman is funded from cases it deals with. It is in its interest to have as many cases as possible. So it should be clear one cannot ban everyday activities because it creates a conflict of interest. All commercial and government activities will have to be banned.
Incidentally the now defunct FSA did commission a study to assess the extent of conflict of interest in broking and the study concluded virtually no conflict of interest could be found in recurring business. A broker who has a regular client has a greater interest in looking after that client than making a one off profit from a conflict of interest situation.

Differing industry roles

There is another reason why commissions are much more suitable to fees. The nature of the responsibly of the professional adviser is vastly different to that of a broker. It is much simpler.
The broker earns a commission from the introduction of business. The broker need not provide any advice or service. The position is different for a professional adviser. The FSB is increasingly imposing increasing obligations, ill-defined obligations at that, on the intermediary and then holding intermediary professionally liable for the obligations the FSB has imposed.

If the FSB is not imposing these additional obligations the courts are. It may well be necessary one day for intermediaries to opt out of the advice system and stick strictly to placing business and earn a commission. Commissions should not be banned.

Quick Polls


How confident are you that insurers treat policyholders fairly, according to the Treating Customers Fairly (TCF) principles?


Very confident, insurers prioritise fair treatment
Somewhat confident, but improvements are needed
Not confident, there are significant issues with fair treatment
fanews magazine
FAnews June 2024 Get the latest issue of FAnews

This month's headlines

Understanding prescription in claims for professional negligence
Climate change… the single biggest risk facing insurers
Insuring the unpredictable: 2024 global election risks
Financial advice crucial as clients’ Life policy premiums rise sharply
Guiding clients through the Two-Pot Retirement System
There is diversification, and true diversification – choose wisely
Decoding the shift in investment patterns
Subscribe now