Secondary

The Cost of Compliance: Survey

This research, conducted in February this year, was prompted by growing concerns that the legislative framework as represented by the Financial Advisory and Intermediary Services Act of 2004 (FAIS) is placing a heavy burden on financial advisory practices in terms of the time and effort they need to invest to make their businesses compliant.

Five hundred and sixty two FSPs answered 27 questions via an on-line questionnaire. These FSPs were:

  • Business owners, representatives and key individuals in the South African financial services industry
  • Any person with a Category 1, II, IIA, or IV licence

For the purposes of the research, “compliance cost” is defined as the direct cost to financial advisory businesses to comply with Government legislation.

Some of the key findings of the study are:

  • Financial advisers have a wealth of industry experience but do not have all the financial planning qualifications
  • Financial advisers are not clear on the quantum of their value
  • Financial advisers are not ready for charging fees for advice
  • Regulatory compliance costs are ‘silent killers’ to independent financial advisers
  • The cost of advice is increasing and puts pressure on the affordability of advice
  • FSB policies have unintended consequences that may not be beneficial to the consumer
  • It is increasingly difficult for the independent financial advisers to put clients’ interests first when profit-margins are shrinking
  • Costs will force independent advisers to become employees and move back into the corporate environment
  • Losing the “independent” label will impact on “independence of advice” and will not be in the interest of clients

A concern for us, ever since compliance became obligatory, is the impact on one’s productivity. Question 14 in the survey asks: By how much has your time on compliance related activities increased in the last three years? The results are documented as follows:

It is apparent from the answers to this question that compliance costs are increasing by more than 10% per annum. Yet there are 50% of respondents who believe that this increase is more than 20% per annum. This is closer to the USA average which has been increasing at a rate closer to 25% per annum over the last four years.

The bad news for South African Advisers is that this increase will continue into the future and need to be factored into budgets and business plans. Bad news for clients is that financial advisers will need to commence recouping their compliance expenses from the client. After all, FAIS is there to protect clients and they will need to pay for the financial services rendered to them in this regard.

The survey also provided some insight into compliance options exercised by respondents.

It was pleasing to see that 60% of the respondents used an external compliance officer, whilst 38% used an internal compliance officer or acted as their own compliance officer. With regulatory compliance becoming increasingly complex and time-consuming, advisers must consider outsourcing the compliance function to a specialist compliance officer. We believe that taking into account the risks and costs to an adviser, it is far better to make use of an external compliance specialist that to go it alone in the hope of cutting costs!

Johann Maree of the Institute of Practice Management, concludes his introduction thus:

When conducting research like this, one must bear in mind the cost of non-compliance versus compliance. A Financial Services Board investigation, prosecution and conviction can have direct costs, collateral costs, costs to on-going business and reputational costs. The direct costs may include a fine or a criminal fine, and defence costs as well as possible collateral costs when parties hurt by these violations enter into lawsuits against the advisory business. The costs to the on-going or future business can include ineligibility for FSP licenses, debarment or suspension from business activities and prison sentences for business-owners or key individuals.

Cutting compliance costs in this environment is not a good idea and will certainly not lead to an overall reduction in costs. We hope that our findings will contribute to the development of a more efficient and FAIS compliant financial advisory business.

The survey concludes with a number of comments by FAnews. I selected the following, based on the practical realities you face every day:

  • The Financial Services Board (FSB) must get tough on product providers and corporate FSP’s
  • The FSB must look at product due diligence before marketing is allowed by product providers. Each product should be registered with the FSB and advertised as such. Consumers will be better protected this way
  • The FSB should develop a comprehensive compliance kit for independent financial advisers that are implemented through compliance officers. This will improve standards across the industry and ensure that implementation in advisory businesses occurs
  • Are the compliance standards sought by the FSB applied the same way in every FSP? (FSB audits can range from a 3-hour visit to a two day visit – when processes and procedures are analysed there appears to be differences and inconsistencies in the way these audits are handled)
  • Financial advisory business software or CRM packages should also be registered with the FSB. (Many make broad statements about what they do and on closer analysis this does not appear to be so. These necessary business tools cost advisers a lot of money – they need to be protected too.)

The survey contains a lot of detailed information, including calculations on the cost of the regulatory exams, compliance and levies. I would like to urge readers to take time to study it in detail. It provides valuable information about current perceptions in the industry.

Please click here to download the Survey Feedback.

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