It is high noon for the Financial Advisory and Intermediary Services Act. By late next month, the financial sector faces its first watershed in the implementation of the Act.
At the end of the implementation process, the Act’s requirements will result in better qualified financial advisers, to the benefit of consumers. But practising advisers who do not have a matric face losing their livelihood or doing a lengthy stint in a mentoring programme.
By mid-year, advisers who pass muster in the February/March assessments must apply for a licence that will allow them to give financial advice to consumers. This applies to all advisers, from one-person micro-businesses to the giants of the financial sector.
The Act’s objective is to protect consumers from under-qualified and incompetent consultants. When it is finally up and running, consumers who lose money as a result of suspect advice will be able to reclaim losses from the licensee — the financial adviser or his/her employer.
Licences will be awarded only to individuals deemed competent to give advice. This will happen after they have been assessed through what could be seen as an “entrance exam”. Those who do not measure up may not practise.
Gerry Anderson, the Financial Services Board’s (FSB) deputy executive officer of market conduct and consumer education, was adamant that the planned assessments are not an entrance exam and that very few will be forced to stop working. He said: “The assessments due in late February and early March simply assess where the person stands with regard to his or her experience-based competence.
“If you examine the process of becoming a “fit and proper” financial adviser, you’ll see that those who do not achieve the required standard will not necessarily be forced to stop working. Until they become competent, they will just have to be mentored by a qualified adviser.
“In two years or so they will have another opportunity to try for a licence.” Anderson rationalised the inevitable job losses, saying that only “bad apples” would be forced to “exit the industry”.
But Peter Dempsey, Old Mutual executive general manager for products and services delivery, took a different view. While believing that the Act is the only way to go, he saw people losing their livelihood as a result of the Act’s requirements, especially at the lower end of the market.
However, Dempsey said that the overall number of insurance brokers and agents had declined since 1997/98 and that the “fit and proper” requirements will maintain this trend. He saw the job fallout continuing until after the second phase of implementation.
Anderson said that inaccurate perceptions of the impact of similar legislation in the United Kingdom and Australia had exaggerated fears about disqualification under the Act. Neither country had yet implemented its legislation, he said.
He added that sub-standard advisers have voluntarily left the industry ahead of implementation.
Rod Pearson, general manager of technical services with broker Glenvaal MIB, took issue with the appropriateness of the knowledge required by the assessments. “The knowledge required for the assessments should relate to everyday dealings with the public,” he said. “After all, the objective is to test existing expertise. In some respects, this is arguably not the case.”
He conceded that the Act would result in better advice for consumers.
Anderson saw no contradiction between the Act and the Financial Services Charter, which kicks in this month and compels banks to enhance their black economic empowerment credentials. He believed that the charter’s requirements regarding financial institutions’ spending on consumer education would further the aims of the Act.
The long-term and short-term insurance industries are not alone in dealing with the fallout. Also affected are banks, stockbrokers, accountants, tax consultants, investment advisers, asset managers, employee benefits consultants, medical insurance advisers, financial planners and those providing estate planning. Customer relations is the one area where the banking industry falls under FSB jurisdiction.
Banking Council general manager Nicky Lala Mohan noted that although the banks initially argued against their inclusion under the Act, they were included for deposits of under 12 months.
Where banks sell insurance products in their banking halls, they are usually acting purely as agents, albeit for a subsidiary. Mohan confirmed that in response to the Act, banks have embarked on a massive programme to train counter staff.
Dempsey seemed unperturbed about the intrusion of government regulations into the assurer’s turf. He admitted, however, that he was grateful that the FSB had made it plain that the regulation would be largely self-imposed.
Anderson conceded that the FSB will monitor advisers by relying mostly on feedback from customers and spot checks of records by its officers. But he pointed to the armoury of penalties available to the regulator to keep financial advisers in line. “There will be plenty of fines,” he said.
He explained that if a consumer was given bad financial advice that resulted in an avoidable loss to a client, the licensee would have to pay a punitive fine as well as make reparation to the client.