Closing the Loop

In view of an article I wrote some time ago, a radio station approached me this week to take part in a discussion concerning investments that offer exceptional returns. I politely declined as I do not have sufficient insight to express an opinion on air.

Trying to obtain clarity from some provider websites is like trying to take the milk out of your coffee.

One sometimes gets the impression that they took their cue from the Joan Baez song, Diamonds and Rust:

You were so good with words, and at keeping things vague…

It did however make me wonder how the revised regulatory regime under Twin Peaks will affect those providers currently operating under the radar.

A particular group that we have been interested in is the so-called “aggregators”. This is typically a firm which invites prospective clients to provide details which would enable them to source the best product for the clients’ needs.

In response to an enquiry to the Regulator as to whether this does not construe an intermediary service, we received the following reply:

The response to your question about aggregators is not exactly “clear-cut”. You get aggregators and aggregators. Some are genuinely independent (and my view is that the definition of intermediary services does not cover them) and some are not independent. One will therefore, in each case, have to look at the facts.

However, I understand that my colleagues in the Insurance Division of the FSB are looking at the whole aggregator issue and how they fit or should fit into the regulatory framework and as such, we will have clarification on this matter as soon as is practicable.

In view of a number of legislative amendments earlier this year, we again took up the matter with the FSB, who responded as follows:

Please note that although certain amendments to the definition of independent intermediary under the Insurance Acts have been enacted (through the Financial Services Laws General Amendment Act), the commencement date of these amendments will be informed by the retail distribution review the FSB is undertaking. Further, although amendments have been proposed to the definition of intermediary services under the FAIS Act (through the Insurance Laws Amendment Bill) it is unlikely that these amendments will be enacted soon. The position in respect of the FAIS Act as communicated therefore remains valid. As to the Insurance Acts, our view is the same as that expressed earlier in respect of the FAIS Act – whether or not the activities constitute intermediary services will depend on facts prevailing in each case. Matters such as the exact nature of the activities of the “aggregator” and the manner in which it is remunerated are factors that must be considered in making this determination.

We are aware of one instance where action was taken against an aggregator which resulted in a R1.5 million fine. Amongst other transgressions, it merely provided the client with the cheapest quote, rather than all relevant quotes to enable clients to determine what product best suited their needs.

This obviously also transgressed the General Code of Conduct requirement which reads:

“A provider may not, in dealing with a client, compare different financial products, product suppliers, providers or representatives, unless the differing characteristics of each are made clear, and may not make inaccurate, unfair or unsubstantiated criticisms of any financial product, product supplier, provider or representative.”

Regrettably, these problems often only come to light when there is a complaint.

At a recent SAIFM seminar, the National Treasury indicated that one of the changes to be introduced under Twin Peaks is a change in the way the industry will be regulated and supervised, including a review of “Non-advice” distribution models.

The Market Conduct Authority will be outcomes-focused, with the emphasis on monitoring and, specifically mitigating risks, and responding pre-emptively to avoid a “conduct crisis” as in the case of African Bank. It also envisages swift and severe enforcement consequences where either the letter or spirit of the law is contravened.

Perhaps we can all join Joan Baez in the chorus when she sings:

And if you’re offering me diamonds and rust, I’ve already paid.

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