The government and the R3.2-trillion savings and investment industry have committed to work together in a spring clean of the financial services industry so that your savings are better protected.
At this week’s annual convention of the Association for Savings & Investment SA (Asisa), the industry, the government and the regulators outlined how they are, and should be, working together to ensure that you are treated fairly and sold appropriate and properly risk-managed products.
The aims are to build your confidence in the savings and investment industry and to ensure that your reasonable expectations are met.
However, the convention was not all cosy. Both sides, particularly the government and the regulators, detailed their concerns and suspicions.
Leon Campher, the chief executive of Asisa, says that no matter what product you invest in and no matter where your money flows, the important thing that both the private sector and the government have to remember is that the money belongs to individuals, who have entrusted their money to the industry.
There is a fine balance between the fiduciary duty of providing a return on your investments and channelling your money into building the economy, on the one hand, and, on the other, bridging the gap between the private and public sectors, Campher says. The two sectors have come a long way considering their justifiable history of distrust, he says.
Industry speakers gave general support for the government’s proposed reform of the financial services industry based on its policy document “A safer financial sector to serve South Africa better”, which was released with the Budget in February.
Among other things, the proposed reforms call for a higher standard of consumer protection in the financial services sector than in other industries, and that regulation must be “intensive, intrusive and effective”.
The proposals should not be seen as a government plan but rather as a national plan embraced by all parties, Campher says. “No one party can achieve what is required. The private sector cannot be a passive bystander. We need a partnership based on understanding and trust.”
The challenges that face the industry and the broader economy must be resolved by a partnership, Campher says. He warns that the problems will not be resolved by layer after layer of regulation.
“We need standards, we need whistle- blowers to report what is wrong, we need sound supervision and regulation, and we need ruthless reaction when something goes wrong,” he says.
Olano Makhubela, the National Treasury’s chief director of financial investments and savings, told the delegates that the reform process “is not a witch hunt. We are by no means trying to go after the financial sector. We do not want to destabilise the sector.”
But, Makhubela says, there are areas, such as those that relate to the costs of products, that need attention to ensure that consumers obtain a fair deal.
“If costs are taking a huge chunk out of savings, does it become worthwhile to save?” he asks.
Government speakers expressed their concerns about the cost of products, the lack of proper transparency and disclosure, and the need for the industry to commit to changing its culture, from top management down, to ensure the fair treatment of consumers.
The industry expressed its concerns about the lack of certainty in government policy, the entry of the government into what should be the preserve of the private sector and the potential for too much regulation, which would result in consumers paying higher costs or limit valid choices.
REFORMS PAST, PRESENT AND FUTURE
Reforms to the financial services sector that have been proposed, are under way or have been completed recently include:
* The separation of prudential regulation and market conduct regulation.
Prudential regulation aims to ensure that a financial institution has the cash to pay you when a payment or benefit is due to you. Market conduct regulation aims to ensure that you receive appropriate advice and products.
To manage the two risks better, the prudential supervision of life assurance companies, which falls under the Financial Services Board (FSB), will be moved to the South African Reserve Bank. The Reserve Bank already supervises the banks. The supervision of the market conduct of the banks will be moved to the FSB.
* The change of market conduct regulation from a rules-based structure, where acceptable and unacceptable behaviour is detailed, to a principles-based structure, where financial services companies have to meet certain standards of behaviour. However, the principles-based structure will be reinforced with rules. The principles-based structure is called Treating Customers Fairly. A road map that details the roll-out of the new system is expected to be published shortly.
* Ongoing changes to the country’s retirement-funding system. A third policy document on retirement reform is expected to be published by June.
Legislation is expected to be promulgated later this year or early next year to fast-track some of the reforms, which include the demise of provident funds.
In place from next month will be the new prudential investment guidelines, in terms of regulation 28 of the Pension Funds Act, for retirement funds. The new guidelines limit how much may be invested in any asset class to ensure a spread of investment risk.
* Changes to the Collective Investment Schemes Control Act (Cisca) to bring its provisions more into line with those of legislation in other countries.
* The increased regulation of hedge funds. Bert Chanetsa, the FSB’s deputy executive in charge of securities markets, told the Association for Savings & Investment SA conference that the new regulations will probably be based on the Cisca requirements that apply to collective investment schemes. These requirements include that your investment must be held by custodians rather than by the fund manager.
Chanetsa says that the big difference with regulating hedge funds that has to be resolved is that hedge funds are allowed to use the likes of derivatives and gearing (borrowing to invest), whereas collective investment schemes may not.
* The move towards new solvency standards for life assurance companies. Jonathan Dixon, the FSB’s deputy executive in charge of insurance, says that numerous industry/regulator task groups are involved in fine-tuning the standards, which ensure that life assurance companies pay the benefits due to you when they fall due.
Insurance products are a promise, and this means that they have different risks to those of other products, such as unit trusts, where you own the assets. Life assurance companies are required to hold reserves in line with their promises to you, but the problem is that these reserve requirements do not match the risks of the products. Some products have higher risks and others have lower risks, and this means that different levels of reserves should be required.
CONSUMERS BAMBOOZLED BY COMPLEX PRODUCTS
The financial services industry needs to ask itself why more regulation is necessary, Judge Brian Galgut, the Ombudsman for Long-term Insurance, told the Association for Savings & Investment SA’s annual convention this week.
The reason is that consumers have no bargaining power, Galgut says. Financial services companies simply lay down what consumers must do, whereas consumers are captive and powerless.
Galgut says that the problems relating to risk life assurance and investment products that his office have seen include:
* Financial products too often contain conditions such as time limits on benefit payouts and exclusions on benefit claims. Consumers find the conditions impossible to understand, because the policy wording is obscure and the documents use jargon.
* Products are complex and difficult for consumers to understand. Often, consumers’ level of understanding will differ depending on their age, gender and even where they live. The result is that some people are more successful than others when they complain to companies.
Insurers should do more research into their target markets so that they avoid selling complex products to people who will not understand them, Galgut says.
* Products are designed for one sector of the market but are sold to another, and the advertising is misleading.
* Bad behaviour, such as the churning of life assurance products (where investors are encouraged by intermediaries to cancel one product and to take out another, often at significant cost). “The assurance companies can and should do something about this,” Galgut says.
* Company complaint-handling centres do not have the power to treat consumers fairly. Galgut says that often the problem is that the staff who work at the complaints centres are not keen to make decisions that will go against the company, out of concern for their prospects for promotion.
Even where chief executives are committed to treating customers fairly, this attitude often does not percolate down to the company’s employees, Galgut says.
Senior executives need to make sure that they support their staff who deal with customers’ complaints. Senior executives should make it clear to these members of staff that it is vital that they treat consumers with fairness, the ombudsman says.
However, Galgut says, there is a growing tendency for companies to buckle under the threat of bad publicity and to settle even where the policyholder is in the wrong and the company is within its rights to reject the complaint. The reason for companies giving in is that, with the spread of social media and websites, they fear that their reputation will be put at risk.