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It is recommended that one regulatory authority be established in South Africa

Honoured guests, ladies and gentlemen. It is an important topic that we confront in this session of your convention and I am sure one in which you will keenly participate.

I am indeed privileged to share this session with fellow panelists of note in the shape and form of none other than Bruce Cameron, who needs no introduction and interestingly enough a representative of another important state organ ostensibly set up to combat financial crime, the FIC, represented here this afternoon by Christopher Malan.

I am particularly pleased to see that you have included Mr Malan in this session of the panel. A fair amount of what we see in the FAIS Ombud’s Office by way of complaints relate to investments in fraudulent investment schemes or schemes which do not comply with the law.

I am sure we will be able to learn about some of the challenges that are faced with regard to the effective prosecution of financial crime.

Back To Basics

Turning now to what I believe you would want to hear from me, as the Ombud for Financial Services Providers, with regard to whether FSP licences are too easily granted, the criteria applied in the granting of such licences and how can the consumer know their rights when it comes to dealing with financial planners who are rendering a financial service, particularly advice.

Let me start by positioning what I believe we should constantly bear in mind when we interpret and understand what the FAIS Act stands for. I know we say very easily and very quickly – FAIS stands for consumer protection and to uphold the integrity of the financial services industry.

That is all very well but what does it mean – do we simply chant the mantra of consumer protection and integrity without really understanding why we are saying it. In order to attempt an answer to this, we must not forget why FAIS came about in the first place. FAIS came about as a result of a scam.

We all know that scam was MASTERBOND where an estimated 22 000 investors, lost R600million. Most of these investors were pensioners who lost their life savings and many of them who saw nothing but the prospect of penury and living life on tins of cat food committed suicide.

Now, it is a fact that Masterbond was not the only one. There have been many others, both pre- FAIS & post –FAIS. What is even more frightening is that as we speak here this afternoon, we do not know what is being plotted and planned in some boardroom somewhere on how to hood wink consumers with another innovation in the financial services industry.

To quote a forensic auditor that I recently spoke to from the DTI – she said that consumers simply cannot keep pace. Those that are plotting a financial scam are always one step ahead. So, the challenge is how do we reduce the risk. We cannot eliminate it.

Nel Commission of Enquiry

Now so loud was the public outcry post the MASTERBOND collapse that the authorities saw it fit to put in place a commission of enquiry into the MBOND saga. This we all know was the Nel Commission of Enquiry into Masterbond chaired by one of South Africa’s eminent judges, Mr Justice Nel.

I would really recommend that those of us here who are interested read that report in its entirety. It is most revealing of the kind of practices that prevailed which led to a result like MBOND. Here is the web address http://www.doj.za/commissions/nel.htm).

I would like to, if I may set out some observations made in the Nel Report, which are material to-day as they were at the time the comments were made It is unfortunate that these comments by the Honourable Mr Justice HC Nel remain valid even today.

The first comment which I think is useful is that:

‘In South Africa, the rights granted by the Companies Act to minority shareholders, holders of debentures and other stake holders, are more illusory than real. This is evident from everyday experience of the luckless South African investor who more often than not is treated with contempt by controlling shareholders, directors, management and the external auditors,’

He then compares us with investors in other parts of the world and says:

‘In many respects the typical South African investor is also worse off than his counterparts in many other jurisdictions. He labours under the attentions of vast hordes of unregulated, unsupervised, unethical and unqualified intermediaries, whose sole purpose in life seems to be to part him from his money'

He lays part of the blame on ineffective supervision

'Ineffective supervision by entities such as the Registrar of  Companies and the JSE Securities Exchange SA, neither of whom seems to play any discernable role in the protection of investors;’

He casts a serious indictment on our regulatory & supervisory authorities

'The often illusory protection entrusted to other regulatory and supervisory authorities who lack the resources or the will to carry out the functions assigned to them by the legislature,’

And on our criminal and prosecutorial authorities

'Directors, managers, issuers of securities, intermediaries and auditors who operate with very little fear of personal repercussions in the event of fraud, negligence or incompetence;’...

These directors, managers etc. continue with their unlawful activities under different guises, because they have no fear of prosecution.

He makes some concluding remarks in his introduction by saying that:  

‘The typical investor is thus in an invidious position. Encouraged and even compelled by circumstances to save and invest, the investor has little control over the investment and is completely at the mercy of the regulating and supervising authorities, the issuers of securities, intermediaries, auditors, and the directors and officers of corporations and other entities. If one or more are incompetent or dishonest, financial security is at risk’.

He re-affirms the role of the regulators by saying that:

‘It is axiomatic that the primary functions of securities regulators and supervisors are the protection of investors and the promotion of stability and integrity of financial markets. This is recognized in virtually every country in the world and also the expressed objectives of many of these entities.’

What do we see post FAIS

Moving then to what we see post FAIS, I believe that we are on a slow and somewhat inexorable path to some sort of consumer protection. Without sounding like a doomsday soothsayer, I am afraid there will still be many more casualties along the way, before we can say that we have achieved some degree of consumer protection in South Africa.

We have pronounced on a few cases, where people who were licensed recommended investments in schemes that were fraudulent or pyramid schemes

Abrahams vs Christopher Pillay

Here the broker was disbarred, soon after we issued the determination

Leaderguard –where we pronounced on seven matters where brokers, although not licensed recommended investments in a fraudulent forex scam and we made our comments regarding how the South African marketing arm operated in terms of an exemption, which was portrayed as being an FSB approval.

We are yet to see what becomes of the brokers involved and the perpetrators of the scam, who I am often told are seen driving around in luxury cars in and around the Pretoria area.

Now these cases can be viewed on our web-site.

We have started looking at another scam involving unlisted shares known simply as GAREK shares.

Of course against this backdrop, we must view what we have seen recently with the unfolding of the Fidentia saga. It becomes clear that when we view this, that legitimate questions start to be asked about whether there is effective supervision and whether there are regulatory gaps.

A key issue that we have already identified and indeed addressed in a comprehensive judgment is that of potential regulatory problems at point of entry. It is not necessary to repeat all of that here.

What is critical is to ask what needs to be done

On the issue of licensing, it is obvious that whilst we can pronounce on complaints after the licence has been granted. We are not the licensing authority. That function lies elsewhere in the system. But, we need to recognize also that whilst we cannot prevent every eventuality, we can, at entry level at least reduce the risk that exists of letting in a potential crook into the system.

There is a need to urgently address some very important issues

Obviously all of these cases post FAIS highlight the need to urgently address some very important issues.

Are the current ‘fit & proper’ standards adequate throughout the financial services industry?

Is it the law that is the problem or is it a question of human judgment?

In this regard there is a need – on an urgent basis – to collate all information applied across the sector to create some kind of risk based approach to the ‘fit and proper’ requirements.

Part of this process would be to identify the gaps that exist in the various parts of the industry and across financial regulators.

There is a need to urgently address some very important issues

Once the gaps have been identified, there is a need, obviously taking a risk based approach to tighten the ‘fit and proper’ requirements, whilst at the same time ensuring that there is access to competition and a free market. These are important considerations and the one cannot be compromised at the expense of the other.

Coupled with the tightening the licensing requirements there is the obvious need for more effective supervision. In this regard it is good to note that you have representatives in your convention across the regulatory spectrum.

It is important that there is effective exchange of information and the streamlining of reporting and information systems.

Key recommendation of the Nel Commission of Enquiry

One of the key recommendations to come out of the Nel Commission is

‘The necessity for more holistic regulation is increasingly recognized because a fragmented system cannot deliver the standards of investor protection and supervision which both the industry and the public is entitled to.'

It is recommended that one regulatory authority be established in South Africa.

In the light of what we have seen and will continue to see, it is my view that urgent attention should be given to taking seriously the observations and some of these recommendations of the Commission.

On the important question of consumer awareness and education

Consumer Education & Awareness

Section 32 of the FAIS Act

The function of disseminating information to members of the public relating to the nature and availability of the Ombud and other enforcement mechanisms rests with the registrar.

However the Act also makes clear that industry has a significant role to play in this regard.

Now, not only the FAIS Act, but other pieces of legislation, such as FSOS, the National Credit Act all make consumer education a prerogative.

Are we doing enough about consumer education and awareness?

It is my sense that not enough is being done in this regard. In order to effectively disseminate information to the consumer, it is important that the following be given priority.

1. There should be proper funding to the relevant authorities and effective use of those resources must be made.
2. Programmes must be conducted in the rural areas especially;
3. The regulators must ensure that financial services providers, in particular the financial institutions, carry out their public awareness responsibilities. In this regard monitoring of performance in terms of the financial sector charter obligations must be carried out;
4. The national broadcaster and the print media must be mobilized to use their enormous resources to promote public awareness within users of financial services and products;
5. Non-governmental organisations, provincial and local government structures must all be marshaled to promote awareness;
6. Programmes can be introduced in schools under life skills programs.

Constitutional Arguments

In the context of financial crime, there appears to be too much of emphasis on the constitutional rights of would be offenders and opposed to the need to safeguard the public interest through the effective sharing of information. It is critical that in order for there to be effective protection there must be the effective sharing of information among all parties concerned.

The constitutional imperative to ensure that the rights enshrined in the Bill of Rights be upheld is counterbalanced with the corollary that no rights are absolute. This is something that always needs to be factored in whenever it is sought to limit rights, such as the right to engage in free economic activity.

Indeed Section 22 of the Constitution which provides that every citizen has the right to choose their trade, occupation or profession freely is subject to its own internal modifier, which provides that ‘The practice of a trade, occupation or profession may be regulated by law’.

Such law as regulates such trade, occupation or profession limit that the rights that many are so afraid to interfere with. This is contained in Section 36 of the Constitution which provides that any right may be limited in terms of a law of general application to the extent that the limitation is reasonable and justifiable in an open and democratic society.

In this context it is obvious that the public interest and the need to ensure consumer protection would trounce any argument that a right is being unreasonably limited.

Whilst on the subject of constitutional arguments, Section 38 of our constitution which provides for the introduction of a class action when a right protected by the Bill of Rights is being infringed or threatened – needs to be expanded to include the protection of the consumer.

In this regard the South African Law Commission has already done considerable work. A Bill has been drafted by the Commission and it is important that it be accepted by the lawmakers. It is only in this way that consumer protection and the empowerment of investors can become a reality.

Conclusion

In conclusion, I think it is important to repeat what our Minister of Finance said recently at a conference on corporate governance. He said:

“The law is not enough... we surely would not want to live in a world in which we relied only on the law for protection of human worth and the protection of social partnerships. If the law is not enough, then compliance with the law is not enough, and we have to put the spotlight on what we understand by fiduciary responsibility and corporate identity” 

I want to leave you with that thought. That we should focus our attention – not so much on the law – because it is not enough, but rather on our fiduciary responsibility as corporate citizens.