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Unintended Consequences

Twenty one years on, and our fledgling democracy is still in the process of adapting to the real, modern world.

Quite often, legislation is enacted with the best of intentions, only to achieve the opposite of what it set out to do. Current labour legislation is widely blamed as one of the major reasons for the poor state of the economy.

Possibly the best (or worst) example is contained in a report in Legalbrief Today which comments on a Business Day article on government intervention in labour broking:
New research shows half of the workers employed through labour brokers lost their jobs, while a far smaller portion got permanent jobs in the 12 months following amendments to the Labour Relations Act that placed restrictions on the employment of temporary workers, says a Business Day report. While Cosatu campaigned for the amendment in an effort to protect workers and prevent employers from subverting labour law, statistics gathered from a labour broker industry association and analysed by UCT’s Economics Professor Haroon Bhorat shows a classic trade-off occurred. The survey shows that while a small number of employees were taken on by the end client – 20% – and got permanent jobs, 50% had their employment terminated. The remainder were unaffected or given new contracts of some sort. ‘Just over half of all temporary employment service employees had their employment relationship either terminated (45.4%) or underwent retrenchment (5.5%). ‘Job destruction was the key response in the wake of the regulatory changes,’ writes Bhorat.

The debacle concerning visa applications, and the resultant negative impact on tourism, is yet another example of how bungled legislation can achieve the opposite of what it intended to do. Or, as Christo Wiese put it: ”The one industry where SA consistently outperformed the world since 1994 was tourism. Then we impose new visa regulations that no one can explain, and the effect is immediate. We shoot ourselves through both feet and then claim unintended consequences.”

It appears that this term has become the new euphemism for “we failed to achieve what we set out to do.”

The Draft market conduct framework, published on 12 December 2014, contains an appendix titled Conduct of business requirements issued in recent years. This list is by no means exhaustive, yet it provides a chilling picture of just how much has changed over the past eleven years. Not included in this document are proposed interventions such as the Financial Sector Regulation Bill which promises sweeping changes in the whole industry.

A recent article in BDLive on a report to Parliament on the proposed banning of commission payments, elicited a response from Jaco van Tonder, sales director at Investec Asset Management, who is quoted in the same paper as saying:

…the proposals could affect the availability of advice to middle-market customers. The main concern of life insurance retirement funds was that banning commissions would lead to customers finding it harder to obtain financial advice. Less advice would be available as a result. He pointed to experiences in the UK, the first country to enforce a formal ban on commissions through a distribution review. Surveys have found that British advisers are moving towards customers who earn between R1m and R2.1m as the ban on commission rendered clients who have low levels of investable wealth unprofitable for brokers.

Another study found the availability of advice declined after the distribution review kicked in during 2013, especially for customers with a maximum of R417,000 in assets.

Mr van Tonder said there was a risk that a reduction in advice could lead to a reduction in savings. “This is the main risk that both industry and the regulator would like to avoid.”

One of the main concerns we have is the threat to the sustainability of independent financial advisers. It is encouraging to see that this forms part of the RDR proposals, but more needs to be done to ensure clients have access to objective financial advice.

An independent study to test the impact of past and future legislation on financial advisers may be the best way to ensure their survival. Before reducing adviser income through commission cuts, consideration should be given to additional costs occasioned by compliance to complex legislative requirements.

The financial impact of compliance on productivity needs serious consideration, especially on smaller players who simply do not have the infrastructure to produce business and comply with constantly changing regulatory requirements. This often leads to a head-in-the-sand approach and a fervent hope not to be caught out while trying to earn a living.

No objective thinker disputes the need for change in the financial services sector on a wider scale to protect the public. The Regulator needs to be commended for its efforts to engage with the industry to ensure it considers all views.

What we should all guard against is unintended consequences.

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