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Too many eggs in one basket?

“Catch-22 is any paradoxical, circular reasoning that catches its victim in its illogic and serves those who have made the law.”

One of the options in the Merriam-Webster dictionary reads: “A situation presenting two equally undesirable alternatives.”

At times, these hectic days of constant legislative change reminds me of Joseph Heller’s zany novel in which the (anti) hero tries to claim that he is insane. His superiors then determine that only one who is sane will claim that he is insane, therefore he must be sane.

Two apparently contradictory news reports recently got me thinking again about where the financial services industry, and our sector, specifically, currently finds itself, and where it is heading.

Amicus re Incerta

The long-term insurance industry statistics for the 12 months to 30 June 2017 reflects payment of R458 billion in benefit payments from life insurers to policyholders and beneficiaries.

This included an increase of 21% in claims against individual disability policies.

“An unusually high increase in disability claims is usually indicative of consumers under severe strain. Financial stress leads to both mental and physical illness, which invariably results in higher disability claims.”

The life industry, as custodian of the nation’s wealth, currently holds assets worth R2.7 trillion on behalf of policyholders.

There can be no better example of the important role the industry plays in the lives of ordinary citizens, than the support and payments received by policyholders after the devastating floods and fires in the Western Cape recently, despite some disgruntled policyholders complaining after being under insured.

In the middle ages, when I was employed by Old Mutual, its motto was: Amicus certus in re incerta. A certain friend in uncertain times, or, more plainly put, a friend in need is a friend indeed. The Dutch have an even more apt translation: Een echte vriend wordt in onzekere tijden opgemerkt of, in nood leert men z’n vrienden kennen.

The other side of the coin

Investors in the ill-fated Relative Value Arbitrage Fund are now faced with a possible 5c for every one rand invested, despite a return of 422% for those who were fully invested from April 2004 to July 2012. According to the auditors of the fund, a total of nearly R2.5 billion was invested, while over R1.8 billion was paid out to investors.

Big losses were also incurred from failed property syndication schemes, although, as in the RVAF case, many also made significant gains before the implosion.

Did this warrant the full scale legislative onslaught we have been experiencing for the past ten or more years? Or did it perhaps take the focus off the good work done by the industry as consumerism started distorting the focus?

Twin Peaks to the rescue?

The object of the Financial Sector Regulation Act is to establish a financial system that works in the interests of financial customers and supports balanced and sustainable economic growth in the Republic.

Critics of the Act were particularly vocal on the huge bureaucracy being created, with little indication of a thorough cost or impact study.

Just a glance at the various structures to be implemented to ensure synergy between all the various agencies involved appears to confirm these concerns, and possibly reminds one about what is said about the road to hell.

But wait, that’s not all…

The 2008 financial meltdown, despite not really impacting on South Africa to the same extent that it did elsewhere, led to what many view as over reaction from government. Most of the current bigger maladies are as a direct result of political interference and the appointment of incompetent people and worse: the replacement of competent civil servants with lapdogs eager to bark at the command of his master’s voice.

Other legislation, and notably FICA and POPI, will add a huge administrative burden to an already overloaded ass. Future legislative interventions, and notably the Conduct of Financial Institutions Act, may just be the straw that breaks the proverbial smaller camel’s back.

Independent advice, in particular, will be under severe threat, given the demands all this will place on time, funds and productivity.

Did FAIS Fail?

If it did, it was not because the legislation was at fault. Any new law will have shortcomings which need to be addressed over time.

The single biggest mistake was possibly trying to remedy problems relating to the investment arena by casting a net to include all other disciplines. Failure to understand, for instance, that different rules should apply for marketing funeral policies compared to complex financial investments, led to regulation by exemption, which increased as time progressed, and is already included in the new legislation.

Switching the regulatory focus from rules to client outcomes will have a significant impact on compliance by the industry, and entail a vast investment in systems development to enable it to monitor and prove fair treatment of clients. An inherent danger is that those who will rule on whether fair client outcomes are achieved will necessarily be making a subjective assessment. How long is a piece of string?

Perhaps Lewis Carroll provided the best summary of the current rat race:

“Now, here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that.“

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