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If the regulator had three wishes

31 August 2007 Gareth Stokes

On Wednesday, 29 August 2007, the Association of Collective Investments (ACI) hosted their annual convention in Johannesburg. A number of industry role players were invited to present or take part in panel discussions on the opportunities and challenges i

One such discussion centred on the importance of maintaining a robust regulatory environment without impacting negatively on innovation. Dube Tshidi, Deputy Executive Officer of Investment Institutions at the Financial Services Board shared some of his views.

The ongoing need for regulation

Tshidi started his presentation with a question: "Do we still need to regulate some of the industries, particularly the CIS industry which is so well managed?" In answering he made reference to his previous role with the retirement industry regulator. Tshidi said that the regulators role goes beyond simply accepting claims of good governance and extends to deeper investigations of each industry to ensure these claims are valid.

"The central role of the regulator is to ensure that within the financial universe there is viability, integrity and stability," said Tshidi. In addition the regulator has an essential role to play in facilitating consumer empowerment. To this end, regulators across the raft of different sectors in the financial services industry need to do two things. First, they must employ a consolidated approach across the industry, and second, they must ensure that the local trends and developments remain current with those of their international peers.

Tshidi said that "regulation is widely accepted worldwide and of course regulation is essential for many public policy objectives." South Africa has made significant progress in the regulation of the financial services industry, and in the area of general consumer protection.

The regulator's three wishes

Were it possible for the regulator to receive three wishes, he might request that all players in the financial services industry be blessed with the following characteristics.

The first wish would be for service providers, intermediaries and regulators to attain a level of self mastery. Tshidi explains: "We need to master ourselves, as individuals, as the industry and as the regulator." To do this, each role player needs to properly appreciate their duty and obligation in the financial services environment. They are there to serve the consumer and to act as custodians of investor money.

The second wish would be fore all players in the industry to act properly, with the requisite strength and in a timely fashion. Tshidi believes that financial professionals should ask: "Are you investing in this vehicle for your own benefit or for the benefit of the investor?" If you answer the latter, you are on the right track and the regulators job becomes much easier.

And finally, Tshidi would wish for all industry participants to develop good relationships. "You need to have a genuine relationship with your clients." He called for open, transparent relationships built on good advice over a significant period of time.

If all these qualities were in place, the regulator could relax in the knowledge that his job was close to done. Success for the registrar is in "protecting consumers and ensuring that there is fair competition."

Greed is at the root of all evil

One of the regulators most difficult tasks is to ensure "there is no confusion between confidentiality and secrecy." Tshidi distinguished between these concepts, noting that while confidentiality would not stand in the way of transparency, secrecy was aimed at subverting it. The transparency versus secrecy debate is easy to resolve. A confidential fact which would cause outrage in the investment environment is more likely to be a secret. As such it should probably lose its confidential status and find its way to the public domain.

Most secrecy issues stem from greed. Tshidi echoed the views of Ombud for Financial Services, Charles Pillai in saying There is too much greed in the financial service industry. He urged all financial service practitioners to conduct their businesses on the principle of "fair engagement".

Knowledge is the key to a level playing field

"The financial services industry is a knowledge and intermediary based sector where you have providers carrying more and superior information than consumers." The only way to level the playing field is to ruthlessly pursue transparency on costs and fees. In this regard the product supplier has a long way to go. In our view, it is unfortunate that financial intermediaries have to carry the can for miss selling financial products when full disclosure from product suppliers is seldom forthcoming.

This disparity is a massive challenge to regulators who must ensure that fairness prevails between the providers, the intermediaries and the consumers. "The right path demands proper conduct from both sides, the providers and the consumers. It dictates transparency, compassion and fairness," said Tshidi.

Apart from the challenge mentioned above, regulators in the collective investments arena are faced with two other issues in the next year or two. These include the regulation of hedge funds and the introduction of UCITS3. Many questions remain as to whether or how hedge funds will be brought into the collective investments arena. We look forward to answering some of these questions in future articles.

Editor's thoughts:
An interesting fact which emerged at the ACI conference was that many of the proposals in UCITS3 are already in force through local regulations and guidelines. The obvious benefit is that many of the industry players will have little to do to ensure compliance to this industry document, while a negative might result in some sensible standards being lowered. It was also suggested that collective investment funds would be able to gain access to hedge funds via the 'back door'. Today we ask whether hedge funds should be included in the collective investment regulatory environment. Send your comments to

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