South African planners herded into licensing

Over the past 12 months, the financial planning industry in South Africa has experienced similar legislative change to Australia.

In South Africa, the Financial Advisers and Intermediary Services Bill (FAIS) was enacted on November 15, 2002, placing a plethora of binding obligations on the industry regarding the provision of financial advice.

Under the Act, which comes into effect on July 1, all financial advisers must hold a valid licence as issued by the Financial Services Board (FSB).

However, executive director of South Africa’s Financial Planning Institute (FPI) Sakkie van der Merwe says the finer points to the legislation are still being hammered out. Legislators are in the process of writing sub-regulations to the bill to “spell out the full extent of the rules and regulations that the industry and advisers will have to abide by”.

FAIS will compel those selling financial products to disclose their commissions and to keep written records of the advice they provide along with reasons for their recommendations — with records to be kept for five years. FSB deputy executive officer Gerry Anderson says under FAIS, licences will have to be prominently displayed so that consumers will know whether an adviser has the required stamp of approval.

There is also a set criteria for licensing. Anderson says the criteria is to ensure that advisers are of “good character and integrity and competency”, with competency assessed in terms of both experience and qualifications.

Experience, according to van der Merwe, is defined as at least one year’s relevant experience with an education level to National Qualification Framework (NQF) 4 (year 12), while the assessment of “character and integrity” focuses on ethical dealings and whether the adviser has a clean record.

The good news for FPI members, according to van der Merwe, is that the internal standards that the association already demands of signatories are similar to those they will be forced to adhere to under the new legislation.

The South African FPI is the only exclusive planning association in a country of 44 million people, van der Merwe says. It has 7,500 members, of which 2,750 are Certified Financial Planners and the rest a mix of associated planners and registered planners.

The FPI was originally formed in 1982 as the Institute of Life and Pension Advisers but in 1998 it became affiliated with the Certified Financial Planner Board of Standards in the United States, and in April 2000, adopted its new name to more accurately reflect its role as the national custodian of competency and ethical standards.

Van der Merwe says 80 per cent of the planners in the association are independent, and he estimates the total size of the planning industry in the country to be in the region of 20,000 to 30,000 planners.

Van der Merwe adds that when FAIS legislation comes into full effect this number will decline as “shoddy planners” are pushed out of the industry, either by the regulators or by market forces as those unable to get a licence are likely to suffer a decline in business.

“Over the next couple of years the new regulation of the industry will provide customers with more satisfaction and protection and help us in attaining a better working relationship between ourselves and our members,” van der Merwe says.

At a more ‘big picture’ level van der Merwe notes that the success of the South African planning industry in future will be determined by the strength of the nation at an economic level.

“The industry’s success is dependent on our economic strength nationally and the extent to which we can project ourselves overseas so as to attract investment into South Africa,” he says.

He remains confident that the industry will continue to prosper.

“It’s a stable, yet growing, market and customers can look forward to receiving better advice and protection going forward,” van der Merwe says.

According to the FSB’s Anderson there are a number of additional benefits likely to flow to consumers as a result of FAIS legislation.

“[The legislation] allows consumers to pull out of transactions within a 30-day cooling off period — even if they have already signed on the dotted line.”

FAIS also requires companies to designate a compliance officer to whom consumer complaints can be directed, with the compliance officer having to report to the Registrar of Financial Services.

Licensing should see planner numbers dwindle

The impact on the South African financial planning industry of the Financial Advisers and Intermediary Services (FAIS) Act when it is introduced on July 1, will see the eradication, or at least a reduction, in what Investec Bank global head of private banking Sam Hackner deems ‘entrepreneurial flair’ in the nation’s advisory market.

With advisers now required to be licensed under the new legislative regime Hackner believes there will be a 30 per cent reduction in the size of the planning community - equating to 9000 of the estimated 30,000 planners in the industry ceasing to offer advice.

Hackner believes this is a positive development for the industry as greater scrutiny is now afforded to planners and the advice they provide.

While Hackner says there are, as there is in Australia, a lot of excellent financial advisers, some advisers suffer from a lack of industry understanding and FAIS will weed these out.

“I think for some it’s a misunderstanding of what they’re selling. For instance, you don’t sell a 10 year annuity to an 85-year-old grandmother.

“It’s all about developing long term relationships. I mean, ultimately you make your money by building an annuity book and not from putting clients into products that just happen to pay the largest upfront fee,” he says.