With just two months to go before financial advisers are required to register their practices under the Financial Advisory & Intermediary Services (Fais) Act and license themselves in terms of Fais's "fit and proper" requirements, the financial advisory sector faces its biggest challenge in decades.
The purpose of Fais is to raise standards of professionalism in the industry and root out unethical practices that allowed advisers to get away with giving bad advice.
Similar legislation in the UK had a devastating effect on the broking community, reducing the number of practitioners by two-thirds over a period of several years. The impact was less dramatic in Australia, where financial advisory legislation has been in place for more than two years. In SA, Fais is expected to result in some instances of broker consolidation, though not nearly as dramatic as in the UK.
The insurance sector has been hit with a blizzard of regulation in recent years, starting with the Policyholder Protection Rules (PPR) in July 2001, closely followed by Fais and the Financial Intelligence Centre Act (Fica).
This followed an avalanche of complaints about the hit-and-run sales tactics of brokers and financial advisers. Many clients ended up with policies that were unsuited to their needs, but earned large fees for the broker. The sector was unregulated, so almost anyone could sell an insurance product or offer financial advice without the risk of legal recourse for bad advice. There were no standardised academic qualifications and many "financial advisers" were salesmen tied to the products of a particular insurance house. Insurance companies also engaged in questionable marketing tactics. Many investment products were sold on the basis of "indicative" returns that often proved fictitious.
The Financial Services Board (FSB) and regulators decided to get tough with advisers. PPRs require advisers to be transparent in their dealings with clients, disclosing all costs, benefits, exemptions and expected investment returns, while providing recourse for clients in the event of bad or inaccurate advice.
Fais imposes a code of conduct on intermediaries and sets minimum professional standards for those involved in advising or marketing financial products. It also defines what constitutes advice.
Fica compels advisers to report on and even probe suspicious transactions and is aimed at preventing money laundering.
The task of raising professional standards among financial advisers fell largely to the Insurance Sector Education & Training Authority (Inseta). In September 2003, government gazetted fit and proper requirements (as subordinate legislation to Fais), which introduced licensing and qualification requirements for all financial advisers and financial service providers.
Initially, financial advisers had until April 2004 to be licensed in terms of the fit and proper requirements, but the deadline was extended to September 30 2004.
"The fit and proper requirements were gazetted last year, but we still get calls from brokers asking: What is Fais?' Many still have no idea that they are required to obtain a licence to continue in practice," says Inseta Fais project co-ordinator Glen Edwards.
To be deemed fit and proper, financial advisers must satisfy three broad requirements. They must demonstrate:
- Competency (in terms of product and market knowledge); and
- Financial solvency and administrative capacity.
In June 2003 Inseta, in consultation with the FSB, established a Fais Project Office with a budget of R6m from its discretionary funds and embarked on a series of countrywide roadshows to enlighten financial advisers on the new requirements. These roadshows drew capacity crowds wherever they went, and reached more than 10 000 people, says Inseta CEO Nelius Volschenk.
This was supported with radio, print and public relations efforts aimed at raising awareness of the new requirements. The Inseta website recorded more than 90 000 hits in January, up from 31 000 in December. This is proof, says Volschenk, that Inseta's public-awareness campaign had started to bite.
The Fais Project Office commissioned a learning equivalence matrix of existing insurance and other qualifications, which established academic thresholds for fit-and-proper determination.
"This was a huge undertaking in which 132 qualifications that relate to the insurance industry were mapped on a matrix and valued in terms of the unit standards that have been generated for the insurance sector," says Volschenk.
Inseta represents several subsectors within the insurance industry: short-term insurance; long-term (life) insurance; pensions; risk management; health-care benefits and administration; unit trusts; funeral insurance; reinsurance; and activities related to financial intermediation.
The initial academic thresholds are not particularly demanding and anyone with prior learning such as a university degree or other recognised qualification can continue practising without having to sit the fit-and-proper exams. Volschenk says thousands of practitioners satisfy the initial requirements, but many still chose to sit the exams to ensure their industry knowledge is up to date.
Inseta, in conjunction with Unisa, recently held countrywide exams for more than 15 000 insurance advisers. About 9 600 advisers sat the first exam in March, with a pass rate of 82%. A further 5 000 sat again in May, with a pass rate of 81%.
This 15 000 represents about 21% of the 70 000-strong insurance-broking community, though many more are deemed fit and proper by virtue of previous qualifications.
The exam questions focused on the knowledge, skills, ethics, application and analytical abilities of candidates.
The issue now facing the insurance sector is how to bring the nearly 70 000 advisers involved in selling funeral policies under the Fais banner. This is the most unregulated and ill-prepared segment of the advisory sector.
Though there have been plenty of concerns raised about the effect of Fais on the broking community, most see it as a move in the right direction. Volschenk says: "Fais merely forces the industry to do what reputable brokers are already doing."
Edwards says: "We don't expect SA to see the same level of attrition that accompanied the introduction of similar legislation in the UK, but we do expect some consolidation. This legislation is designed to weed out the bad apples. Some of the smaller, independent brokers may decide to amalgamate with larger brokers that have the administrative and back-office capacity that they lack. But overall, this will be good for the industry, and it will be good for clients."
