The problem with FSB 'approval'

Thousands of financial services websites proudly proclaim their companys status as "FSB approved" or "Registered Financial Services Provider." At face value we can accept that these companies have been issued licences to carry out certain activities in th

We can also accept that they are aware of the requirements contained in the legislation applicable to their areas of activity, and that they understand the role of the Financial Service Board (FSB) in policing the regulatory environment. But what does this 'stamp of approval' mean to the man in the street?

We have spoken to a number of individuals who believe that companies who have received FSB licences will be above board, and that the financial products and services they supply will require no further investigation. While this view is a credit to the FSB in that private individuals believe the regulator has teeth and is protecting their interests, it could not be further from the truth.

Dishonest companies use FSB approval to lure investors

Applying for and being granted an FSB licence has little bearing on the tactics employed by the company concerned. Some individuals and companies are using the FSB licenses to give credibility to their products to the detriment of the investment community.

Leaderguard Securities went to great pains to obtain an FSB license in order to bolster its standing in the eyes of the financial advisers and clients it was courting. The company used the so-called FSB stamp of approval to support its risky and illegal investment activities. Much has been written about the process the company used to obtain its license- but the influence attached to the license once obtained cannot be disputed.

More recently, Fidentia Holdings and two of its subsidiaries were placed under the control of curators after evidence of gross financial mismanagement. Management at the company had little hesitation in lining their own pockets at the expense of investors. While the FSB was responsible for investigating and shutting down the company, it should be noted that Fidentia had previously been awarded an FSB license. This license would certainly have influence investors' decisions in contracting with the company.

Who regulates what?

One of the biggest issues at the moment is to determine which regulatory body should get involved with an errant financial services company. These companies often offer complex financial solutions which stretch into more than one regulatory environment.

The recent investigation into the operations of property investment company, Money Skills is a case in point. The company was issuing debentures to investors, offering interest of 24% per annum over a five year period. It was left to the Registrar of Banks to finally apply for the company's liquidation based on the fact it did not have a banking licence and should not have been issuing debentures.

Given this case, FAnews Online would appeal to all of South Africa's regulatory bodies to conduct a quick investigation into the numerous property investment 'opportunities' being touted to unsuspecting South African investors. Almost every one of these companies is offering some form of share-linked debenture scheme coupled with guaranteed interest returns well in excess of industry norms. In our view, these companies have operated under the radar due to the huge capital growth in property values over the last five years. Now that the capital growth is drying up, thousands of investors are at risk if nothing is done.

Continue to exercise caution when investing

Approval by a regulatory body will not ensure compliance by the company or its management. Individuals who commit financial fraud and misrepresentation operate in the belief they will not be caught- and that in the even they are, they will be able to escape prosecution. Regulators should be more pro-active in policing and tackling companies and individuals who blatantly flout the law.

In the interim it would be wise to carefully consider your financial investments even if the company operates with an FSB license.

Editor's thoughts:
Regulation is supposed to prevent the kind of financial catastrophes which have been widely reported on in the last few months. The Financial Services Board and other regulatory bodies appear oblivious to the fact that unscrupulous companies are using the awarding of FSB licences as a rubber stamp for their activities. Do you think the FSB needs to install a division to investigate and visit all licences issued to date to make sure that the business activities are in line with the licences granted. Partcipate in our poll or send your comments to gareth@fanews.co.za