Celebrating a decade of FAIS

Illustration: Colin Daniel

Illustration: Colin Daniel

Published Oct 4, 2014


This week marked the 10th anniversary of the implementation of the Financial Advisory and Intermediary Services (FAIS) Act.

The Act came into effect on September 30, 2004, ushering in regulation of financial advice for the first time. This regulation brought with it a host of good measures:

* Licences for financial services providers (product providers and advisers), who must be fit and proper when it comes to competency, honesty and integrity and financial soundness;

* A slow raising of the levels of competency through regulatory exams for financial services providers, or their key individuals;

* A general code of conduct that obliges advisers to deal with you honestly, fairly, with due skill and care and to act in your best interests;

* An obligation on financial services providers to disclose certain information to you, to avoid conflicts of interest and to give you suitable advice; and

* An obligation on advisers to keep a record of advice given to you, which you should be given to read and sign.

It is easy to see why 12 leading independent financial planners say the effect of the Act on financial planners and the level of advice given has been “profound”.

The 12 – Barry O’Mahony, Natasja Hart, Debbie Netto, Ian Beere, John Campbell, Lionel Karp, Craig Kiggen, Alec Riddle, Gerrit Viljoen, Jan-Carel Botha, Bouwer Nel and Dilip Garach – are all former winners of the Financial Planner of the Year award sponsored by Personal Finance and the Financial Planning Institute. They were commenting in response to National Treasury’s retirement reform discussion documents.

The FAIS Act and the Financial Services Board (FSB) have improved financial services and advice beyond all recognition, they say.

And Ian Middleton, the managing director of Masthead which offers compliance and practice management services to financial services companies, says the Act has driven more financial planners to have a longer-term focus on the advice process rather than the sale of products to earn commission.

With the FAIS Act came the FAIS Ombud, properly known as the Ombud for Financial Services Providers, who can deal with your complaints about bad advice or service.

Middleton says the number of determinations made against advisers – typically below 35 a year – is a small fraction of the number of financial transactions that take place each year. In 2012, there were also some 1 350 settlements of cases.

Even the total of all complaints about financial products to ombuds and adjudicators, at less than 40 000 a year, is a small portion of the millions of transactions annually.

These statistics appear to paint a good picture, although we do not know how many victims haven’t come forward.

Middleton says that, in his view, most regulated investments are sold via sound advice processes, while there is still some “product flogging” when it comes to life and disability policies.

Determinations from the office of the first FAIS ombud, Charles Pillai, and his successor, Noluntu Bam, have highlighted exactly how not to give advice, and all too often the rulings highlight how the adviser acted in his or her best interests to benefit from the commission rather than in your best interests.

The fear of being the subject of one of these cases must be a big deterrent of bad practices, and their publication in Personal Finance, among others, educates us all about what constitutes good advice.

Bam recently told me that few complainants who have been awarded compensation come back to her office, and she believes they are therefore succeeding in claiming that compensation.

Her orders have the status of a High Court order, and failing to comply with them will have negative consequences for the offending adviser’s credit record, she says.

Kudos must go to the FAIS Act, but the biggest black mark against the post-FAIS era must be the way in which ombud rulings have been taken on review. Some financial services providers have tried to go to court rather than use the appeal process through the FSB Appeal Board. And any appeal against an award to you that you feel the need to fight on an equal footing with legal representation seems to defeat the aim of providing a cost-effective and quick complaints resolution process.

Notably, these cases have concerned property syndication schemes such as Sharemax, so often sold to elderly people of limited means with disastrous consequences when these schemes have failed to deliver as promised.

There is also nothing in the legislation to provide in the appeal process for an appointed lawyer to assist the complainant.

Recently, the Council for Medical Schemes noted a similar problem with scheme members facing the legal might of schemes and their administrators in complaints taken on appeal. It has engaged an organisation of pro bono attorneys to assist scheme members.

The Sharemax-related appeals have resulted in some 3 000 complaints about property syndications piling up in Bam’s office, because she has decided to await the appeal decision before making more rulings.

She was recently questioned by members of parliament’s finance committee about her ability to deal with these complaints. They should have been asking her how to amend the FAIS Act while still ensuring that there is a fair appeal mechanism, to ensure she could continue to do what she has proved so good at doing – delivering swift and equitable resolutions to complaints often concerning outrageous practices.

MPs and policymakers could also have done something long ago about the R800 000 limit on compensation the ombud can order. It has been at this level for 10 years.

Property syndications are just one of a number of financial products that sit in what Middleton terms a regulatory gap. Billions have been lost in these schemes, as well as the likes of the Relative Value Arbitrage Fund (RVAF) – see “More rulings against Calitz up his bill to more to R6.8m” (link below).

When the dangers of property syndications were first raised, the job of dealing with them was passed on to the Department of Trade and Industry, which acted only to issue directives on the selling of these schemes.

When the activities of the RVAF, attracted attention, the FSB said it questioned Herman Pretorius but was satisfied he was managing private equity and not soliciting investments from individuals.

Ideally, we need a regulatory system that does not allow schemes and toxic products to fall through the cracks and clearly sets out which regulator should stand up and say “it is my job to deal with this”, Middleton says.

The FAIS Act also makes provision for the debarment of advisers and representatives who give poor advice or in any other way contravene the Act. Since 2010, more than 4 500 advisers have been debarred.

The 12 former winners of the Financial Planner of the Year, however, give the post-FAIS era bad marks for giving criminals too much scope and freedom to act, with insufficient negative consequences.

There have certainly been a lack of headlines about prison terms for those who have defrauded consumers of financial products.

The advisers also point out that while they are obliged to act in your interests, the product providers still act in their own interests.

We may be 10 years down the line from the introduction of FAIS, but, as Middleton says, FAIS is part of a regulatory journey – the next big game-changers will the Treating Customers Fairly (TCF) principles and the Retail Distribution Review (RDR), a review of how you pay for financial products.

TCF is likely to focus financial services companies’ attention on the products they create, and already there are noises in the product factories as new, apparently fairer products prepare to be rolled out.

Hopefully, TCF and RDR will see an end to products that cause financial misery for their users, such as contractual investments with penalties. Hopefully too, the proposed new regulatory regime will bring all conduct related to financial services under a single regulator, and will bring about a greater commitment to punishing anyone who isn’t acting in your best interests. And in 10 years time, we will again be able to say the financial services industry has changed profoundly.

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