Savings industry needs a change of course
It has not been an easy few weeks for the financial services industry, with five significant events that will require the industry to think very carefully about how it does business with you and your retirement fund in the future.
The events were:
* The placing of asset manager Interneuron under provisional curatorship last week after losses, which could exceed R100 million, caused by a rogue derivatives trader, Gerhardus Bekker, were uncovered by the Financial Services Board (FSB). Bekker got away with it for seven years because of sloppy checking systems.
* The referral to the FSB by the deputy Pension Funds Adjudicator, Muvhango Lukhaimane, of cases where life assurance companies have “double-dipped” with the confiscatory penalties they apply on the non-payment or reduction in payment of retirement annuity (RA) contributions.
* The announcement recently by the PPS RA Fund board of trustees that it will be closing its life assurance RA option to new business. This is the first time the industry has publicly admitted that life assurance RA products are inferior despite the wealth of evidence that they have seldom been in the best interests of consumers.
When the proposed Treating Customers Fairly regulatory regime becomes law it will be very difficult, in the light of the overwhelming evidence militating against these products, to see how the life assurance industry will be able to continue foisting its traditional investment products (both endowments and RAs) on consumers.
* The Deeb Risk judgment in the Pretoria High Court, dismissing an application to, in effect, force the office of the financial advice ombud to refer complaints against financial service providers to the High Court. This a significant victory for consumers and an even more significant blow for errant financial advisers, particularly those who continue to sell high-risk and even fraudulent products to consumers.
If the application by the financial adviser, with the support of Santam, which financed and provided the high-powered legal team to argue the case, had been successful, it would have negated the very purpose of the legislation establishing the office of the ombud.
The intention of the ombud’s office is to give consumers quick and effectively free access to justice and compensation when they have been inappropriately advised. Most consumers, particularly elderly pensioners who may have lost all or most of their savings because of inappropriate advice, would never be able to afford the expensive and often drawn-out court process to recover their money.
This judgment will hopefully now put a stop to the repeated challenges by the industry to the authority of the statutory adjudicators, particularly the financial advice ombud and the Pension Funds Adjudicator.
Every time there is a challenge such as this one to the authority of one of these ombud schemes, it proves again that financial services companies have little regard for the interests of consumers.
* The provisional curatorship of the Rockland Targeted Development Investment (TDI) Fund, in which retirement funds had invested R518 million, exposing problems apart from the actual investments in the Rockland fund.
The major problem exposed was the role of asset management consultants – when a company such as Riscura and its associated company, Riscura Analytics, play the role of all things to all men.
Riscura is the asset management consultant to the Telkom Retirement Fund and the two mining funds, the Sentinel Retirement Fund and the Mine Employees Pension Fund, that invested in the Rockland TDI Fund. Riscura provides these funds with various other services, at an additional fee, of course, including recommending and effecting asset allocation, the appointment of asset managers, and transitioning (switching) assets between asset managers.
And, to cap it off, Riscura Analytics earns fees, often as a percentage of assets, from many of the asset managers it recommends, including Investec Asset Management and numerous hedge funds, particularly from funds of hedge funds operator Edge.
The conflicts of interest of Riscura are unacceptable. They simply cannot be in the best interests of retirement fund members, particularly when many of the trustees do not seem to have a proper understanding of what it means to avoid a conflict of interest.
Riscura’s chief executive, Jarred Glansbeek, was one of the main industry players who pushed for more leniency in the use of alternative investments, including hedge funds, in the new regulation 28 of the Pension Funds Act, which governs prudential investing by retirement funds.
Little wonder, when Riscura has found so many ways of making money, both directly and indirectly, out of retirement funds. Glansbeek says National Treasury and the FSB are aware of Riscura’s services to alternative investment managers, including hedge funds. He also says Riscura gave the FSB and Treasury “a lot of pointers for how to make it a lot safer for potential investors and we see that many of these suggestions have been taken on by National Treasury in the proposed framework for the regulation of hedge funds”.
I doubt, however, that these pointers included any approval by the regulators of the conflicts of interest.
All five events should focus the collective mind of the industry on treating consumers fairly. All service and product providers, whether they are advising or providing services or products to retirement funds or individuals, need to remember that the money they manage belongs to individuals, including retirement fund members. The savings of hard-working consumers need to be respected – they are not a honey pot to be dipped into at will.
URGENT NEED FOR CHANGES IN THE LAW
Urgent action is required by the financial services authorities to bolster legislation aimed at protecting consumers by plugging the regulatory holes exposed by the three cases mentioned above. Arising out of all three is the need for urgent changes in a number of areas to protect consumers and pension fund members.
The areas include:
* The compulsory registration of retirement fund asset management consultants in terms of the Pension Funds Act and their inclusion in the Financial Advisory and Intermediary Services Act, with a separate, strict code of conduct. This should be prioritised by National Treasury in the wake of what has been revealed in the provisional curatorship of the Rockland Targeted Development Investment (TDI) fund.
It is absolutely unacceptable that an asset management consultant such as Riscura should be both a consultant and a service provider to a retirement fund, while also raking in millions of rands by providing services through an associated company to asset managers it has recommended to retirement funds.
An asset management consultant to a retirement fund should not be allowed, directly or indirectly, to provide any services apart from playing a watchdog role to a retirement fund. It is there to help trustees to check on service providers.
This watchdog role should include advising retirement trustees about conflicts of interest, which should be avoided whenever possible. And in most cases it is possible to avoid conflicts of interest.
* Treasury and the Financial Services Board (FSB) should immediately convert PF 130 – currently a FSB guidance note to retirement fund trustees on how they should behave – to enforceable regulation. Such regulation will probably require even stronger definition of conflicts of interest.
* Treasury should redefine professional indemnity (PI) insurance required by financial service providers.
Currently there is a requirement for financial service providers to hold PI insurance. But there is little definition of what the PI insurance should cover, although the intention of the requirement was clearly to ensure that consumers are, in fact, compensated.
Currently, most PI insurance sold to financial service providers seems to cover mainly legal expenses, enabling advisers to legally beat up the very people PI insurance should be aimed at compensating.
There must be thousands of very worried financial advisers who put consumers into imploding property syndication schemes who, following the Deeb Risk High Court judgment, now deservedly face determinations from the financial advice ombud, Noluntu Bam.
The question that arises is whether consumers will actually receive compensation. Will the PI insurance companies pay up when there is a compensation order issued by the ombud? If not, will the advisers pay up?
Santam, through its agency Stalker Hutchinson Admiral, which seems to be the major provider of PI insurance to financial service providers, needs urgently to say whether it will be paying up in all cases where compensation orders are issued by the ombud.
Santam has various exclusion clauses under which it will not cover compensation ordered by Bam. It needs to detail these exclusions so that consumers can assess whether or not they are dealing with people of straw.
It is important that greater definition should be added to current PI requirement regulations, stating that PI insurance must be there to provide immediate payment of compensation when it is ordered by the ombud. It should then be the problem of the PI provider to recover any losses from the financial services provider if they have behaved improperly.
As such, the PI insurers will be a lot more careful about the people to whom they sell the insurance. Financial service providers must have PI cover. If they cannot get it, this will help get rid of the undesirable elements in the industry whom the FSB seems unable to effectively weed out.
In the meantime, as a consumer, you should ask your financial adviser for the terms of the PI insurance he or she holds. You should insist on a copy of the policy document and check whether it covers you or simply the adviser for legal costs.