The recently published insurance fraud statistics by the Association of Savings and Investment South Africa (Asisa), showing that most fraud cases in 2022 were perpetrated by dishonest financial advisers, raises serious questions about ethics in the advisory industry and underlines the importance of finding the right person to advise you on money matters.
“Financial advice”, as defined in our legislation, refers to advice you receive from a registered financial services provider, or representative thereof, that has the sale of a financial product as its objective. To quote the Financial Advisory and Intermediary Services (Fais) Act, it is “any recommendation, guidance or proposal of a financial nature furnished, by any means or medium, to a client or group of clients in respect of the purchase or investment in any financial product”.
The Fais Act has been part of our financial legislation since 2002. It requires any person or company who offers financial products or services to be registered as a Financial Services Provider.
FSPs are bound by the General Code of Conduct under the act which, among other things, requires that: advice is factually correct, not misleading, and appropriate to your circumstances and needs; the terms and conditions of products are fully explained; the commission and remuneration the adviser receives is disclosed; and conflicts of interest between adviser and client should be minimised.
Fit and proper
Advisers must also fulfil the act’s “fit and proper” requirements. According to a blog by Donald Dinnie in Norton Rose Fulbright’s “Financial Institutions Legal Snapshot” newsletter, in the context of the act, a fit and proper person is someone who is considered to have the necessary integrity, competence and financial soundness to operate as an FSP.
“The sct does not provide a specific definition but sets out a number of factors to be taken into account when assessing a person’s fitness and propriety. These include the person’s honesty, integrity, reputation, their financial soundness and solvency, their competence and qualifications, and whether they have been convicted of any criminal offences or have been found guilty of any misconduct in relation to their business activities,” Dinnie says.
If a company or individual offering you a financial product does not comply with the requirements, you can report that company or individual to the Financial Sector Conduct Authority, and if you have a complaint against a registered FSP, you can submit it to the Ombud for Financial Services Providers, also known as the Fais Ombud.
Questionable business model
Although the Fais Act was a major step towards consumer protection, the business model of the largest providers of financial products predated the act by many years, and this has not changed fundamentally. Under the model, advisers in the providers’ distribution networks are highly incentivised to sell you their products, resulting in serious conflicts of interest.
The conflicts are at the heart of the advice fraud revealed in the Asisa statistics. Despite regulators’ efforts to improve outcomes for consumers, the commission system of remuneration continues to drive unethical behaviour by the advisory industry.
The Retail Distribution Review, an initiative by National Treasury to address the problems and force providers to reform their business models, dating from around 2016, appears to have stalled.
What to look for in an adviser?
A new breed of adviser, the financial planner, has taken financial advice to the level of a profession. Financial planners have a postgraduate qualification, offer a level of service similar to what you would expect from a family doctor or lawyer, and are bound by a professional code. The top echelon of planners in South Africa have the internationally recognised Certified Financial Planner designation and are members of the Financial Planning Institute of Southern Africa.
In a 2022 interview with Personal Finance, David Kop, the former director of the FPI and co-founder of FI Consult, said a major tell-tale sign that an adviser was not working in your best interests was that the adviser’s focus was on the product, not you.
“Financial planning is not about the product. The product is a tool a planner will use to help you to meet your goals. If the adviser’s conversation with you is all about the product, and not about you, that is probably the first tell-tale sign that somebody is just there to sell you a product.
“Financial products are vitally important and are needed in our ecosystem, but from an advice and planning viewpoint, the first step is to understand more about you – what you want to achieve, what your goals and dreams are. Then, the planner will apply his or her skills in order to achieve your goals. If that is the approach your planner is taking, you know you’re on a financial planning journey. But if the approach is to get you to buy a product and worry about the advice second, then you’re in a product-sell environment,” Kop said.