What should the priority be: the sickness, or the symptom?

The Financial Services Board is currently looking at the second level of priorities in terms of the provision of financial advice and intermediary services to consumers of financial products. It called for “…contributions from industry associations on possible refinements to the definition of intermediary services in the current insurance laws and reforms to related remuneration structures.”

The first change that took place resulted in the commission structure of investment products being radically changed, with advisors only receiving 50% of the commission upfront, and the balance being payable over 5 years.

The so-called “Work Stream 2” issues will now be addressed, with the focus on “intermediary status and related remuneration”.

Where current practices or business models consistently fail to deliver fair outcomes for consumers in terms of ensuring products and services (including distribution models) are appropriate to the needs of the target market, advice is appropriate to client needs, and products deliver as per customers’ reasonable expectations, then the Financial Services Board (FSB) will consider structural interventions to mitigate the risk of unfair customer outcomes.

Yesterday, a front page article in Rapport carried yet another story about a property development scheme gone sour. Propspec promised a 30% annual return on investment, which dried up four years ago, according to the article.

The simple question I want to ask is this: where is the root of the problem?

Does it lie with those marketing the product, or those who put it on the table?

The article on the Propspec scheme quotes liberally from a substantial investor who is an auditor. One would expect someone with his knowledge and experience to be very wary about investing in dodgy schemes.

The same question can be asked about most of the other investments that went belly up. Should those who were duped by the propagators of the schemes, be they investors or advisors, be held accountable, or those who “spun a web of lies and deceit…” according to the late Charles Pillai, commenting on Leaderguard?

Methinks that the FSB is barking up the wrong tree in its focus on intermediary status and related remuneration. They are treating the symptoms, while the Aids in the industry is not receiving the required attention.

An advisor who recommends a product is obligated to conduct a due diligence exercise prior to such a recommendation. Why should this be necessary when the provider was issued with a licence to do business by the regulator?

Who is beter equipped, or empowered, than the FSB, to test both product and applicant?

Is this not an obligation which should rest with the official watchdog, who is responsible for looking after the interests of the consumer? What then is the value of a licence approval? Surely this is the acid test before consumers are exposed to the product by advisors?

Getting back to the request for input from the industry:
Whether the product is recommended by an in-house advisor being paid commission, or an independent advisor receiving a fee from the client, it is still the same product.

Shooting the messenger does not address the underlying problem. As Shakespeare put it so aptly: “…and therein lies the rub”.

While the root cause of the problem is not addressed, you can fire all the advisors in the industry, and the problem will remain.

In fact, it will worsen, without the eyes and ears of the honest advisor who often expose the fraudulent activities long before the authorities become aware of it.

There are other areas identified by the FSB that deserve far more urgent attention than definitions and remuneration models.

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