Calls for Stricter Enforcement

The news about yet another investment scheme which appears to have gone belly up, raised calls from the industry and the media for preventative measures to be implemented.

Personal Finance reported over the weekend on the purported Ponzi scheme posing as a hedge fund run by Herman Pretorius which ended in a fatal shooting of two people.

…the Association for Savings & Investment SA (Asisa), this week called for “ruthless and speedy” action by the FSB against those transgressing legislation.

Leon Campher, chief executive of Asisa, at an information meeting for financial advisers, said market conduct legislation means nothing without ruthless enforcement – it simply adds another layer of costs with no discernible benefit.”

“Campher says that:

* Far stricter rules should be applied when FSPs seek to register with the FSB, such as applicants and reference providers submitting information by way of an affidavit so that people can be criminally charged if they provide false information; and

* The FSB should appoint someone, at the cost to the applicant, to conduct a forensic and due diligence investigation into an FSP before granting it a licence.”

We have long propagated the view that there is little sense in expecting a financial advisor to perform a due diligence on a product which required at least five actuaries to develop. The fitness of the applicant should be assessed at the time of applying for a licence to operate, and paid for by the applicant, as Campher points out above.

The product that leads to the problem is not designed by the advisor. Prevent untoward products from reaching the market, and advisors will be unable to sell it.

Having said that, we must again ask whether advisors, when offered commission of between 7.5% and 12%, really apply their minds to what is best for the client. Failure to establish something as simple as whether the provider is registered with the FSB, cannot be ascribed to anything but gross negligence, or greed, or a combination of the two.

We recently reported advertising, which offers high returns, and claims the support of a prominent rugby player, to the FSB. I have not seen the adverts since, and presume that they have been told to stop advertising. The question is: have they been told to stop marketing until the regulator investigates their product to ensure that their claims of 20% returns are valid?

Reports that Pretorius was also pointed out to the authorities as far back as 2004, were published in Monday’s newspapers.

The Personal Finance article quotes Peter Stephan, senior policy adviser at Asisa as saying: …although one can never regulate fully against dishonesty and fraudulent activity, if the FSB, as the regulator of market conduct, is not seen to take swifter and firmer action against suspect operators, “investment” schemes and adverts offering unrealistic returns, there is an argument that a portion of the levies the FSB receives from the financial services industry should rather be used for a statutory investor compensation fund.

Levy income amounted to R311 217 358, according to the FSB annual report for 2011. Creating a compensation fund is nothing new; the legal profession, as well as several other professional bodies have such funds. In most of the claims lodged against these funds, it was mostly a few individuals who suffered, not anything like the purported 3 000 investors in the Pretorius scheme.

There is mounting pressure on the regulator to identify possible scams earlier, and nip them in the bud.

The calls by the Insurance Department for payments to advisors to be done within the letter and spirit of the Act, as well as the intention of the Enforcement Department to apply “gravity” fines are steps in the right direction.

We would also like to see pre-emptive measures employed to prevent scams at source and failing that, how quickly tricksters can be detected to minimise the damage.

At the moment, the biggest beneficiaries appear to be the “mopper-uppers” after the collapse. If consumer protection is to be achieved, pre-emptive action is required.

To paraphrase an old saying: If it is to be, it is up to the FSB.

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