Don’t miss the Ready Set Retire conference 2014
Avoidable conflicts of interest in the financial services industry remain a major threat to your financial security.
The problem is even greater when there are conflicts of interest within the Financial Services Board (FSB), which should be a citadel in guarding your interests.
But it appears not to be the case. Rinate Goosen, the manager of the FSB’s Financial Advisory and Intermediary Services (FAIS) enforcement division, is a case in point.
Until last year, Goosen served as compliance officer for Unlisted Securities of South Africa (USSA), which allowed financial services providers with limited qualifications to use its licence to sell property syndication shares and debentures (see box, right).
Being a compliance officer at a company means ensuring the company adheres strictly to legal requirements.
Over the past year, Personal Finance has reported on serious cases of the mismanagement of savings, particularly of retirement savings, where the root problem has been avoidable conflicts of interest.
The fundamental problem with a conflict of interest is: which master is being served? For example, is a financial adviser who is paid sign-on bonuses to work for a different company, particularly when there are sales targets, going to act in your interests or those of the new employer?
This unacceptable practice was started by Discovery, but because the FSB failed to stop it, the practice rapidly spread through the industry. This has resulted in a substantial but unknown number of policyholders, particularly of risk assurance products, being switched around between companies, often to their detriment.
Many of these policyholders, who believe that they now have cheaper life assurance, will find that the products have been structured in such a way that as they get older the premiums will become increasingly unaffordable.
A major problem is that, all too often, the conflicted parties simply do not do their jobs properly – for example, by undertaking proper due diligence on product suppliers and their products.
In determination after determination, the FAIS Ombud, Noluntu Bam, has highlighted how product floggers – particularly when conflicted by things such as excessive commissions – have failed to carry out even the simplest of company and product checks, leaving investors exposed to major losses.
This is particularly the case with property syndications, where commissions can range from anywhere between six and 15 percent of your initial investment.
What far too many individuals and companies in the financial services industry fail to accept is that they are in the position of ultimate trust – they are looking after the possessions of others.
This is not their money. They never worked for the money. Their duty, a fiduciary one, is to handle the money with all due care and diligence.
The problem is that if the FSB cannot see and avoid a conflict of interest within its own ranks, how will it manage those of the institutions it must regulate?
The FSB knows that conflicts of interest are a problem. Financial service providers are obliged to avoid them, while retirement fund trustees should refer to a FSB guidance note advising them to avoid conflicts of interest.
National Treasury is considering making the trustee guidance note obligatory.
Yet too many retirement fund trustees treat the guidelines with absolute contempt by allowing their service providers to be totally conflicted.
The potential dangers of conflicts of interest should be avoided at all costs; and where they cannot, there must be full public disclosure so that everyone can see any potential pitfalls.
Personal Finance has been pointing out to the FSB for many years the problems that can be caused by fronting, an example of which is the USSA structure.
This problem was endemic with most property syndication companies. There is currently an FSB review of FAIS licensing of financial advisers. Hopefully this structure, which allows an adviser to operate under two licences simultaneously, will be banned to stop the clear abuse.
FRONT COMPANY RENTED LICENCE TO UNQUALIFIED FINANCE ADVISER
“This was nothing short of hiring out a licence for a small monthly fee,” financial advice ombud Noluntu Bam found in a determination in which she ordered Pretoria broker Marthinus Ras to repay R800 000 to a recently bereaved widow.
One of the reasons for Bam’s determination against Ras was that he and his company, Prefecsure Lewens, were unqualified and unlicensed to recommend and sell the debentures and unlisted shares of The Villa – a now-failed property syndication offered by Sharemax.
In October, Personal Finance reported that Bam provided evidence that Sharemax’s compliance director, Gert Goosen, had set up a company, FSP Network (trading as Unlisted Securities of South Africa, or USSA), that, for a fee of R150 a month, allowed unlicensed advisers to register as its representatives, enabling them to sell Sharemax shares and debentures.
The Financial Advisory and Intermediary Services (FAIS) Act requires a defined level of qualification for licensing people selling the shares and debentures that underlie property syndication schemes.
Ras was among 622 financial advisers who took advantage of the USSA structure.
This was all reported by Personal Finance in October, but what was not known at the time was that Goosen’s wife, Rinate, was the the compliance officer of USSA.
Rinate Goosen worked at the FSB as an analyst and a manager in 1991 and 1992. She rejoined the FSB in July last year after the collapse of both Sharemax and USSA.
As compliance directors at both Sharemax and USSA, the Goosens had a duty to ensure the requirements of the FAIS Act were being met – not side-stepped.
They allowed Ras to be registered as a representative of USSA without the required qualifications; Gert Goosen also allowed an R800 000 transaction to be effected a few days after his registration.
But there was an additional problem in that Sharemax allowed the transaction to take place in the name of Ras’s company, Prefecsure Lewens, and not USSA.
Nonku Tsombe, head of the FSB legal department, says Goosen has explained her role at USSA to the FSB.
He says Goosen told the FSB that USSA did not rent its licence out to unqualified financial advisers.
The USSA assessed a potential representative’s qualifications and experience in accordance with the prescribed requirements, and “USSA engaged regularly with the FSB to obtain clarity in respect of specific qualifications as and when required”.
“She further advised that USSA did not even consider mandating brokers or applicants who had no prospect of qualifying for a licence in terms of the legislative requirements,” Tsombe says.
Rinate Goosen’s direct boss at the FSB, Gerry Anderson, the deputy executive in charge of market conduct, does not believe she was or is conflicted.
Anderson is the same person who recently argued to the Parliamentary finance committee that the responsibility for controlling property syndications lay with the Reserve Bank and the Department of Trade and Industry.
This despite the fact that people selling property syndication investments are subject to the FSB and his department, and that most of the property syndication companies were also registered as financial service providers in terms of the FAIS Act.
PRONOUNCEMENT ON SYNDICATIONS
When Rinate Goosen was compliance director of USSA, she wrote an article published on the internet, of which the following is an extract:
“In South Africa [property syndication] is still a relatively young industry, having been in existence for more or less the past 10 years. It is an up-and-coming industry and it is inevitable that it will incur more regulation as it evolves. The important point is, however, to consider the regulation that applies in other parts of the world, but to ensure that if and when it is applied in South Africa, that it is cost-effective, efficient and suits the South African circumstances.”