Legislation in the financial services industry is, in my opinion, a little bit like much of the traffic legislation in this country – there’s lots of it but it is poorly enforced and where it is, it is aimed mainly at the soft targets. The recent introduction of the “Conflicts of interest” legislation is a case in point. The legislation is aimed at eradicating the outrageous incentives that many of the financial services companies were offering to advisors selling their products. These incentives often included things like lavish overseas incentive trips (in the guise of a “conference”), entertainment at local sports and arts events as well as generous lunches/dinners. And while commission has always been regulated, some of the companies even found ways to pay for things like secretaries and office space.
The legislation has now put a complete stop to all of this (for independent advisors at least) with companies now only being allowed to spend a maximum of R1000 per advisor per calendar year on things like entertainment. While I am in favour of the legislation (in principle) I think that there are far easier ways to go about regulating what companies spend on advisors than the rather excessive record keeping requirements that are currently required. It would have been far easier for companies to be required to keep and publish (online) a record of all that they spend on each advisor. When a client consults with an advisor and suspects that the advice might be “tainted” because of incentives that have been offered or paid, all that he or she would need to do would be to visit the online register of that company to establish exactly what the company has spent on that advisor and thereby establishing just how independent his or her advice actually is. But no, we have once again followed international so-called “best practice” and now we sit with these ridiculous registers and have also destroyed a big section of the hospitality/team-building industry in the process (it is illegal for a company to pay for conferences or similar events). Why cant we lead for a change?
The act requires me to declare something along the following lines to my clients:
I have no conflict of interest with regard to:
- any financial interest;
- any ownership interests, or
- any relationship with a third party
That might, in rendering a financial service to a client:
- influence the objective performance of my obligations to my clients; or
- prevent me from providing an unbiased and fair financial service in the interest of my clients.
On the surface this seems pretty simple and obvious but there is also another side to the conflicts of interest nonsense which pretty much makes it impossible for anyone to honestly declare the above.
There are many examples where there are blatant conflicts of interest that are not covered or envisaged by the legislation. For example – there are some companies that still offer both unit trust RA’s as well as the older (traditional) life insurance RA’s. It is widely accepted that these are inferior products and yet they are still the most frequently sold. Why? Because the commission structure is much higher on them than on the unit trust RA’s. Don’t blame advisors for this, they did not create these products – the FSB set the commission limits and it is the companies that developed and still offer the (inferior) RA’s. Surely that is a blatant conflict of interest? And yet it is not addressed by legislation. Why not?
Or consider the following example. Many of the companies require minimum volumes of business before they will grant contracts to advisors. In some cases they even cancel advisors’ contracts for not producing sufficient new business for them. They force advisors to commit to writing Rx worth of business each year else they face the threat of their contract being cancelled by the company. For many advisors, the loss of the contract will materially affect their cash-flow as well as their ability to service existing clients and so they are “forced” to keep writing new business. Or worse still – our company has more than R130million worth of investments with one of the LISP companies and they refuse to give us a consultant to service our business. Despite the fact that they earn around R700000 in admin fees each year from our clients, they are not prepared to service this – they are only interested in new business. Because we wont guarantee them a specified amount of new business each year we are not serviced by them – we are consigned to the totally inefficient and impersonal call centre. How can I possibly make the declaration above under these conditions?
If we never write new business again we will be fine – we are in the service business and actively look after our existing clients and yet the financial service companies all constantly need new business to survive – now that’s the biggest conflict of interest of all! And the legislation is mum on this!
