South Africa’s financial services sector may be flourishing, but it’s doing a poor job in meeting the country’s needs, closing the inequality gap, and providing value for consumers.
This was the message from independent actuary and consultant Rob Rusconi, who spoke at the Alexander Forbes Hot Topics Summit in Cape Town this week.
Rusconi, who in 2004 blew the whistle on the high costs of investment products, says the industry has the potential to play an enormous role in contributing to the well-being of South Africans. It needs to collaborate with private-sector employers and the government to find solutions to South Africa’s socio-economic problems and uplift society, the lower echelons of which are reaping few benefits from the services the industry provides.
There are two things it needs to do better, he says:
Identify and meet people’s needs; and
Provide transparent, demonstrable value.
Rusconi says many poor people, “through assets that we can’t see, like personal initiative, determination or market insights”, have the potential to improve themselves and contribute to the economy.
On the other hand, those who have risen out of poverty have the potential of falling back into it – most middle-class households are "only one incident away from financial disaster".
Therefore, the challenges for financial services providers are enablement – providing the means for upward social mobility – and protection.
Insurance provides protection in the form of a safety net. But insurance does more than protect; it lets you take more risks with the assets you have, Rusconi says.
The enabler is savings – they give a person the possibility to rise socially and the power to negotiate.
“But savings is also a safety net, because if something goes wrong, there is something to fall back on,” Rusconi says.
It is through savings and insurance that the financial services industry can both enable and protect, thus contributing hugely to the country’s well-being.
There are things only the government can do, such as the provision of social grants. But there are things other parties need to do, Rusconi says. Financial services providers need to meet needs, as do employers, who understand the needs of their employees probably better than anyone else. And by doing this responsibly, they will reap the rewards of a more productive workforce.
Individuals also have a part to play in contributing to the fabric of social protection, he says. They should be saving. “It’s not just good for them, their families, and their communities; it’s good for the country.”
The financial services industry does a very bad job of providing value for money, transparently, Rusconi says. Any market works when the price of the product is lower than its value to the customer. But how does a customer gauge the value of financial products? These products are complex, he says, so customers cannot assess their value, and in some cases nobody actually wants the product.
To get these products to the customer, the industry has to spend a fortune on distribution and intermediary networks, which pushes the cost above its fair value.
Moreover, product providers don’t meet needs, he says. Yet demonstrably meeting consumers’ needs is required by law – it is one of the prescribed outcomes under the Treating Customers Fairly regulatory framework.
He says most of the industry has an ivory-tower approach to the design of financial products, imposing them on consumers, with very little idea of what most people want. “How can product providers presume what their customers want when they haven’t walked the streets of Gugulethu or Soweto?” he asks.
Rusconi says there a lack of trust in the financial services industry, and this has resulted in broken markets. If insurance, for example, is “sold rather than bought”, as the mantra goes, this is a sign of a broken market.
He says he often hears talk of how banks are entering the stokvel space. “But they don’t deserve to be in the stokvel industry,” he says. “People prefer to use stokvels because they have more trust in that environment. The banks will have to demonstrate their unique value to these groups in order to build trust.”
This failure of the industry to provide value or to meet basic needs has contributed to the poor savings culture in South Africa, Rusconi says.