Amongst others, the objective of the FAIS Act and subordinate legislation may undoubtedly be summarised as the professionalisation of the financial services industry as well as the protection of financial services consumers.
As with many other compliance practitioners, I have been involved with FAIS compliance since that very first fateful day in October 2004. It is now seven and a half years on, and I believe it appropriate to reflect on what, if anything, has been achieved by the regulation of the financial services industry.
Much has changed in our industry since 2004. I can vividly remember consulting with wide-eyed financial advisors, informing them that henceforth they would be required to provide their clients with disclosure documents and to perform financial needs analyses prior to furnishing advice. Probably the most horrific aspect for advisors at that stage was the requirement that commission would need to be disclosed to their clients as a separate monetary figure.
Interestingly enough, today we find that all these erstwhile terrifying and cumbersome requirements are by and large complied with as a matter of course. We also find that financial advisors are more professional and more suited to their profession as a result of the minimum qualification and experience requirements. Business operational aspects have also seen to improve as a result of the Fit & Proper requirements. One may be forgiven for saying that many advisors have moved away from simply running a financial services business towards running a business in financial services. An honest review of the financial services landscape, or rather that part of the industry that I’m involved with, has consequently led me to believe that regulation has indeed been successful in transforming it to a professional industry.
However, my concern is with the second objective of the FAIS Act, that of consumer protection.
It is common cause that since we entered this new period of regulation, far too many investment schemes have collapsed amounting to billions in losses. As is normally the case, those who can least afford to lose their hard-earned savings are usually hit the hardest by these collapses. Inevitably, fingers are mostly pointed at the intermediary, and whilst there is no denying intermediary involvement, I have to question whether some culpability is not warranted elsewhere?
At the core of most Ombud determinations is the advisor’s failure to adhere to Section 2 of the General Code of Conduct, in that it is found that the advisor failed to act honestly, fairly, with due care, skill and diligence in the interest of the client. Generally speaking it is not usually a lack of honesty that is at issue, but rather a lack of due care and diligence.
This particular requirement is somewhat of an anomaly in the greater FAIS framework in that it seems to be more principle-based then rule-based. Ironically an advisor can follow all the rules, but fail to adhere to the principle. From my experience, many of the advisors who face liability as a result of a collapsed investment scheme often had a vested interest in the scheme with their own funds and that of family and friends also heavily invested. One would therefore assume that these advisors honestly believed, not only in the product itself, but also that they were providing the best advice to their clients.
The role of investor greed and the lack of regulation at product level are two important factors that also need to be highlighted.
After all this time, one Code of Conduct still regulates the actions of both a single advisor business as well as that of an international insurance company or investment house, responsible for billions of investor funds. Simply amending the Code by putting more rules in place only serves to increase the compliance burden whilst doing little to protect investors from rogue products.
One can only hope that the envisaged “Treat the Customer Fairly” initiative and the Consumer Protection Act will supplement and succeed where regulation under FAIS was unsuccessful. I strongly advocate that the time for the next era of regulation has arrived and that this era must focus where it is so sorely needed, on institutional and product level.
The average financial advisor is a person of finite resources who, similar to consumers. deserves some regulatory protection.
This article by Billy Seyffert, head of Legal and Compliance Services at Moonstone Compliance, was first published in MoneyMarketing.