Net tightens on poor quality financial advice

The net is quickly tightening on poor quality advice and products in SA's financial industry after Barry Tannenbaum conned some of SA's wealthiest businessmen in potentially the biggest financial fraud in the country's history in 2009.

The Financial Advisory and Intermediary Services Act (FAIS) was amended late last year to include broad conflict of interest provisions‚ while Paul Roelofse is the newly appointed consumer advocate for the Financial Planning Institute.

There is a serious concern about the ability of many financial advisers in SA to give quality advice‚ on top of selling products‚ as about 40‚000 of 100‚000 advisers haven't gotten through level 1 of the new FSB compliance tests.

The idea behind the new financial watchdog role is not to position the Financial Planning Institute (FPI) against the Financial Services Board (FSB)‚ which is the mandated regulator for the industry.

Roelofse said the aim was to "raise the bar" above minimum standards and to get around the problem that the FAIS Act is very product focused and compliance driven.

Leading the way

According to Roelofse‚ SA and the US were leading the way with the concept - which was not surprising after the US suffered one of the biggest frauds in history via Bernie Madoff's Ponzi scheme around the same time as South Africans were suffering at the hands of Tannenbaum.

He said the consumer advocacy role includes helping improve awareness among consumers about what financial planning was‚ as opposed to what the product offered.

"If you tick the right blocks‚ then you're doing okay [according to FAIS]. However, financial planning is much more complex‚ as advice may not end up in a product. For example‚ many people may land up in a process of reducing debt‚" said Roelofse.

"We are not positioned against the FSB. We work very well with them. The key is to take the FAIS Act as the foundation."

While he admitted general advice had improved with the regulatory and minimum requirements‚ "you always find the bad eggs and inappropriate choices". However, the consumer had to have the recourse to take a stand against that bad advice.

Alison Ferraris‚ head of professional wealth in the risk division for Alexander Forbes Life‚ said improving ethical and regulatory standards were moves in the right direction as some selling practices in SA still left a lot to be desired.

Unsavoury practice

An unsavoury practice becoming more popular was encouraging clients to sell policies and buy better sounding ones. She said there is also a problem with the multi-layering of costs as some of the new policies may not actually be cheaper.

Another issue to be resolved is the disparity between the Long-Term Insurance Act and FAIS.

"The aim is to standardise offerings on different platforms and how they interact so the consumer is told about all the multi-layers of cost‚" she said.

The industry is currently making submissions on ways to improve the situation‚ for example‚ ensuring that the definition of intermediary services are similar to the definition in the FAIS Act.

"We are going to have to have to look at more alignment‚" said Ferraris.

Out of 100 000 advisers in SA only 4200 are Certified Financial Planners - the honours degree equivalent designation of those who belong to Roelofse's institution - or only 5% of advisers in SA. "There is opportunity for growth for us as well‚" said Roelofse.

"Tannenbaum and pyramid schemes continue to find their way through‚" he cautioned.