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Can regulation benefit a broker?

01 February 2010 Jason Hartman, Compli-Serve SA

Financial advisors are faced with significant challenges due to current regulation and regulatory developments, resulting in a general belief that they do not benefit from the regulatory requirements imposed on their businesses.

Regulatory requirements have a significant impact on the size, structure and business operations of many brokerages. Some of the more consistent arguments against regulation have been the following:
• regulation results in structures being imposed on brokerages which does not consider or involve the specific needs of brokers;
• the cost of compliance is very high and consumers are thereby negatively affected as the cost of compliance is often added to the end-product;
• high costs result in a brokerage losing profitability or even having to retrench employees.

On face value these specific arguments definitely hold merit. However, when considering the bigger picture, brokers and financial advisors will find that regulation can indeed benefit their businesses.

The bigger picture

The ultimate objective of regulation is to achieve a high degree of economic efficiency and consumer protection and to mitigate the costs of non-compliance.

The constructive and mutually beneficial relationships between consumers of financial products and financial institutions and regulators are important to ensure the financial well-being of consumers and the success and long-term viability and profitability of financial institutions.

This relationship between consumers and financial institutions can only be formalised by an effective regulatory system and compliance with its regulatory requirements.

Stable and efficient economy

Market forces do not regulate themselves and for this reason the importance of maintaining an efficient and effective regulatory system for Financial Services Providers (FSPs) lies at the very core of South Africa’s economic well being.

All FSPs have a critical role to play in the maintenance of an efficient and effective regulatory system for the South African financial services industry. Brokers can fulfill this role by simply complying with the regulatory requirements and by actively participating, consulting and cooperating with the regulators.

Protecting consumers

Taking into consideration the severe imbalances of power between financial institutions and consumers, consumers prefer proper regulation. Regulation ensures integrity, transparency and disclosure in the supply of financial services to consumers. It further ensures that brokerages appoint competent staff, with the necessary experience and qualifications, to render these financial services to consumers.

Weighing up the costs

Brokers must see compliance as an opportunity to really understand and document their business processes. As you gain more visibility into processes you can actually streamline them, process them and make them more efficient.

Once you start to make business processes more efficient from a compliance controls perspective, you eliminate errors and fraud, so your business runs better. In other words, organisations that integrate compliance with business processes stand to realise significant efficiency gains, which can translate into better customer service, higher profits and competitiveness.

The Compliance Institute of South Africa’s Generally Accepted Compliance Framework defines compliance risk as the current and prospective risk of damage to the organisation’s business model or objectives, reputation and financial soundness, arising from non-compliance with regulatory requirements and expectations of key stakeholders such as customers, employees and society as a whole.

Compliance risk therefore not only exposes the organisation to fines, civil claims, loss of authorisation to operate and an inability to enforce contract, but it also exposes an organisation to reputational damage. In light of this, most brokers and financial advisors will agree that the cost of compliance is mostly lower than the cost of non-compliance.

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