Fast little loans
Well done, Greg Smith; you have told us what many of us suspected. Sadly, what Smith has said about investment bank Goldman Sachs holds true for many financial services companies around the world.
For those readers who missed the report, Smith this week resigned as a Goldman Sachs executive director and head of the bank’s equity derivative business in Europe, the Middle East and Africa.
In his letter of resignation, Smith accused his fellow executives of placing profits before the interests of the bank’s clients, to the extent that senior managers even referred to their clients as “muppets” (read: dumbos).
The problem is that it is not only Goldman Sachs executives who consider their clients to be muppets.
In today’s edition, we publish numerous reports on draft financial services legislation that was published last week. The reason for much of this legislation is that too many executives in the local financial services industry consider us, their clients, to be exploitable muppets.
If the industry behaved properly, there would not be a need for endless legislative intervention in the industry.
This week, I had an interesting conversation with the chief executive of a subsidiary of a major financial services company. The conversation was off the record, so I will not mention names.
His company brings cost-effective pro-ducts to market that no referee would red-card. He says the problem in the broader financial services industry is that many executives have come to see themselves as the main players.
They have forgotten that they are simply intermediaries who take the savings of thousands of people and invest them in companies that produce goods and services and make profits in the process.
It is the people who work and save, and the entrepreneurs who use these savings to create jobs, who are the productive people. The financial services industry is simply the aggregator of the funds of savers and the go-between channel.
The more the industry removes by way of costs, the less money there is for real entrepreneurs to create jobs and more savers. The question is increasingly rightly asked internationally why financial ser-vices executives, who in the main are not entrepreneurs but employees, are entitled to outlandish pay cheques and bonuses. The money they are skimming off is the hard-earned savings of us “muppets”.
Many of the companies that behave badly spend millions of rands employing people to convince you that they are acting in your best interests, while employing many other people to treat you like a muppet. Then, when you try to complain, out come their armies of often unprincipled lawyers, who will do anything to beat you or anyone else into the ground.
Let us look at some examples from the local financial services industry:
Over the past two years, there has been an explosion in unsecured lending – which makes one wonder about the effectiveness of the National Credit Act.
By the end of last year, unsecured lending accounted for 32 percent of all debt, whereas mortgage bonds accounted for six percent. In 2008, mortgage bonds accounted for 30 percent of total debt and unsecured debt accounted for 15 percent. Yes, these figures are correct.
Unsecured debt is money you borrow, for example, on a credit card or a store card, or by way of a personal loan from a bank.
On unsecured debt, you will be charged interest of between 20 percent and 30 percent. On a mortgage bond, you will pay between 10 percent and 15 percent.
Personal Finance is receiving an increasing number of complaints from readers who are being forced by banks into unsecured personal loans when they have the security to take out secured loans, or even to extend their home loans.
And it does not end there. When granting unsecured personal loans, the banks insist that you have consumer credit assurance to cover the loan in case you are unable to pay the loan because of death, being unable to work due to disability, or retrenchment. There is nothing wrong with that per se, because you don’t want to have your resources stretched if the unexpected happens.
But there are two problems:
* Consumer credit assurance is about the most expensive assurance you can get, and what makes it worse is that policyholders make very few claims because of the short duration of the policies. The bankers who sell the policies are literally printing money for themselves and to pay their excessive bonuses.
* You have the right to buy assurance from any company or to use an existing policy to cover the debt. But the banks make it impossible for most people to cede an existing life assurance policy, because they insist on retrenchment cover for six months’ income. Very few life assurance policies are sold with retrenchment cover, and the banks will not sell stand-alone retrenchment cover. So, hey ho, you are forced to take out one of the banks’ rip-off policies, on top of the scurrilous rates of interest.
The banks are engaging in a confusing price war over charges and services. Why not a price war on the interest rates charged for loans? Now that would be meaningful!
LIFE ASSURANCE COMPANIES
The life assurance companies, in particular, are very good at claiming they put you first, yet most of them continue to treat you like a muppet, selling overpriced investment products with very nasty contractual terms.
And an increasing number side-step the commission regulations to get product floggers to sell the mainly poor products. The instigator of the commission side-stepping is Discovery Life, which started such things as:
* Sign-on bonuses and share incentive schemes for their sales-agency forces. These bonuses can total millions. In the end, you pay for them, but, as a muppet, you are not told about the additional incentives when you are talked into cancelling a policy with one assurance company and replacing it with another – more often than not to your disadvantage.
* Netcos. These are structures that are set up between independent financial services providers, such as bank brokerages or even small operations. Ostensibly, the netco provides services to a life assurance company, but in reality it is simply being paid extra commissions based on the sales of the product of that assurance company. This is simply a system of kickbacks.
Let’s go back to the products. Most of the life assurance companies continue to sell high-cost savings products with the condition that if you do not maintain your premiums, they will penalise you with a confiscatory penalty, even when, through no fault of your own, you have run into financial difficulties.
Fortunately, as a result of government intervention, these penalties – which previously could be 100 percent of your savings – were first limited to 40 percent and now to 20 percent, although that is still a horrendous amount (R20 000 of R100 000).
As recently as this week, Sanlam, in reply to a question about the penalties and treating customers fairly, replied: “Having an early termination charge is not in conflict with [the principles of] Treating Customers Fairly, as the interests of all customers need to be balanced – those that terminate early, as well as those that stay until maturity.”
I leave it to you to decide whether it is fair to confiscate your savings when you are unable to maintain the premiums through absolutely no fault of your own – for example, when you were retrenched or you are unable to work because of illness or injury.
The life companies will not switch to selling only less profitable unit trust investments, which do not have confiscatory penalties.
These problematic practices are compounded by some of the main players in the financial services industry, such as Sanlam and Old Mutual, repeatedly challenging the right of various dispute resolution offices to consider your complaints.
This week, we report on how Old Mutual tried to block a complaint to the Pension Funds Adjudicator from a non-member former spouse of a Nedbank retirement fund member who was married and divorced under Islamic law. Old Mutual argued that the complaint was not a complaint in terms of the law.
Sanlam has the reputation of challenging the authority of the adjudicator more than any other company. And its Santam subsidiary is paying the costs and providing the legal punch to challenge the right of the financial advice ombud to make determinations in cases where advisers, on the basis of excessive commissions, advised elderly people to invest in very dubious, high-risk and now imploding property syndications.
It is one thing to argue the merits of a case; it is altogether another to beat up consumers by trying to prevent them from using structures designed to resolve their complaints quickly and cheaply.
It is time for financial services executives to stop treating all of us like muppets.