Many years ago, I was playing golf at Voortrekkerhoogte. At one stage, we walked past 1 Military Hospital, or 1 Mil, as it is better known. One of the players in our four ball remarked:
“If a 9 mil does not get you, 1 Mil will”.
Cynical as it may sound, this has become the perception of many financial advisors as far as the FAIS Act is concerned.
Most of the findings of the FAIS Ombud conclude with: “The advisor failed to act with due care and diligence…” This is often just another way of saying that the forms and processes were in place, yet the client suffered loss, and the advisor has to make good.
The introduction to the FAIS Act stipulates its purpose: “To regulate the rendering of certain financial advisory and intermediary services to clients…”
In our view, the most important words in this phrase are the last two.
Since the FAIS Act came into being on 30 September 2004, we have seen a lot of regulating, and massive changes in how advice and servicing is rendered to clients. The compliant advisory practice has certainly changed dramatically.
The question we need to ask, nearly eight years on, is this: Has the quality of advice increased in line with the steps taken to conform to legal requirements? Or, more importantly, to what extent has the consumer benefited?
We now have systems and procedures in place like never before. We cover our backs against each and every possible eventuality which can lead to a complaint to the FAIS Ombud. In the unlikely event that it does happen, we have all the prescribed documentation in place to prove that we worked strictly according to the prescribed methodology.
Our entire focus is on complying with the requirements regarding the first part of the introductory sentence above, while the intended beneficiary, the client, is not as prominent on the radar screen as in the past, when his or her needs formed the prime focus of our delivery.
The fact that the financial services industry is exempt from the Consumer Protection Act places an even bigger onus on us to protect the client. If FAIS does not protect him or her, there is no second safety net.
Very often, it is only when the client calls on the FAIS Ombud to intervene that we see justice done in terms of the “due care and diligence” provision in the Act.
This phrase is so broad that it can be interpreted in almost any way. In this day and age of consumerism, the benefit of the doubt is more heavily weighted towards the complainant than the advisor. The latter can provide as much evidence as is needed in terms of procedural correctness, and yet draw the short straw.
If we go back in time, it is important to remember that, before FAIS, the industry was largely self-regulated. What led to state intervention was a number of collapsed investment schemes, and the resultant hardship for investors, many of whom were pensioners.
Did the introduction of the FAIS Act put an end to such schemes?
The answer is a resounding NO.
What makes matters worse, though, is that many of the failed schemes and scams were perpetrated by entities licenced with the FSB.
From the regulator’s perspective, one understands that their purpose is to ensure that the provider is of good standing, and has the required infrastructure to conform to all the requirements of the Act. When such a provider then abuses this trust, the regulator investigates and takes the required action.
Experience has shown that this is often a very lengthy process, and by the time steps are taken to stop the scheme, the damage done is beyond repair. Most of the steps, taken after the event, just add to the bill, and further reduces the final reparation to investors.
There are no prizes for guessing who the biggest loser is in all of these failed schemes.
Those clients who approach the FAIS Ombud may get some relief. Most determinations against the FSP rule that the advisor who placed the business must reimburse the client. This despite the fact that, in some cases, the quantum of the loss has yet to be determined as the scheme has not yet been sequestrated.
The single biggest need of investors is proactive prevention of such schemes – not reactive steps which do little to repair the damage. One is almost reminded of drug peddlers who get caught dealing, while the suppliers mostly get off scot free.
Until such time as the saying “prevention is better than cure” is adopted, we will continue to see the advisor penalised and the dubious product “pusher” riding off into the sunset, his saddle bags filled with ill-gotten gains.
To paraphrase my cynical army friend: If FAIS does not get you, the Ombud will.