The David Gleason Column
Most South African financial advisers cannot distinguish between a prospectus and marketing information, are unaware of the legal requirements relating to a prospectus, cannot read or understand financial statements, are unable to assess institutional risk and are unlikely to make intelligent inquiries about the nature of the security underlying secured debentures.
Citing the famous high court case between the Durr family and Absa/ Stuart Myles, Judge Hendrik Nel says this in an assessment of the draft Financial Advisers Bill.
His latest missive provocatively implies that, since there’s only going to be one chance to get this right and there are so many holes in the proposed legislation, the Financial Services Board (FSB) should send it back to its policy review committee.
The Nel commission (set up originally to inquire into the failure of investor protection after the Masterbond collapse) takes as its point of departure that people are encouraged to save in various ways so as to build assets to support them in old age. So no modern society can allow to be let loose on itself so-called financial advisers who are unequipped and untrained.
Intermediaries, says Nel, are invariably the common denominator when frauds are perpetrated on the public. They are rarely prosecuted, often motivated by greed (especially when targeting the elderly) and able to practise without being required to demonstrate qualifications, skills and adherence to ethics. Nel believes somewhere between 20 000 and 30 000 individuals, loosely described as “brokers”, are active in South Africa.
In August 1996 the FSB’s policy board issued its first consultative paper on the regulation of retail investment services in this country. Now a first draft Bill has surfaced.
Nel says the aim of the legislation ought to be to provide protection to investors from unfair or fraudulent practice, and to foster fair and efficient capital markets. But the way the current Bill is presented will have the effect, he believes, of entrenching a fragmented supervisory system, one which permits large-scale exemptions to apply and which will even allow registered practitioners to let loose unregulated employees on the public.
Nel has rightly acquired a reputation as someone who shoots from the hip. “Unfortunately,” he says, “the proposed provisions of the Bill run counter to [its] aims and also run counter to the provisions of securities legislation in every other jurisdiction researched.” Since Nel has drawn on legislation in Canada, the United Kingdom, Germany, Australia, Malaysia and Singapore and seven states in the United States, it’s fair to conclude he has accessed the best thinking currently around on investor protection.
He also touches on a vital issue which runs through just about every piece of South African company and financial legislation – that, by and large, we have a perfectly competent body of law, but we conspicuously lack the means to regulate and police these laws. The danger in this proposed Financial Advisers Bill is that, if passed in its current form, it will simply create yet another grossly unwieldy and generally toothless bureaucracy.
And there is another danger in this, which Nel doesn’t address – that of over- regulation, the attempt to be too protective of investors. This may sound callous, but most people will agree that the squeals about inadequate investor protection are always loudest immediately after some extraordinary hoax has been uncovered.
Those hurt or damaged demand retribution, and preferably want their money back too. The fact that they are adult and (presumably) capable of managing their lives is often ignored. Nel quite rightly points to greed on the part of many unscrupulous financial advisers, but he is silent on the cupidity (and stupidity) of many investors.
So fine balances need to be drawn between protecting investors from the deliberate frauds and negligence so often visited upon them, and their own incapacity or greed in reaching investment decisions. The need for society to protect people from their own actions is a matter which hasn’t been debated enough in South Africa.
This is a good opportunity for the government to develop an outsourcing programme which might produce very substantial benefits. For an Act of this kind to be successful, it will rely on proper licensing and adequate supervision. Licensing implies qualifications. Since so many specialist avenues may be developed by financial advisers, it follows that leaving licensing to the government could become a R100- million-a-year nightmare.
So perhaps the best way may be to empower approved tertiary educational institutions to set examinations and issue licenses. If South Africa does indeed have as many as 30 000 “brokers”, this could become a source of income for cash-strapped institutions.
For the rest, Nel has delivered a timely slap across the FSB’s wrist. A redraft of the Financial Advisers Bill must be produced, and swiftly please. At this rate we will be well into the next millennium before South Africa begins to catch up with its competitors.