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Monday, November 1, 2010
Culture of non-compliance

The new FAIS Conflicts of Interest legislation will ultimately change the face of financial services and financial advice in South Africa, said Wendy Hattingh, Head of Department: FAIS Supervision of the Financial Services Board, at the 11th Annual Conference of the Compliance Institute of South Africa.

The legislation is an amendment to the FAIS General Code of Conduct for financial services providers and representatives. Implementation of the legislation has already commenced and will be fully in force by April 2011. It addresses concerns the FSB has about conflicts of interest between financial services providers, representatives and clients and will severely affect the practice of incentives that financial services providers use to reward both tied and independent financial advisers for achieving sales objectives. Incentives such as overseas trips, weekends away, hospitality at sports events etc. will now no longer be allowed.
Hattingh said that where a conflict between ethics and economics arises, economics typically wins, unless something forces people to choose differently. “The amendment is that ‘something’, as it compels industry to take a hard look at the issue of conflicts of interest and make the ethical choice.”
The legislation requires industry to avoid any practice that might make it impossible to render an unbiased and fair financial service to a client. “Conflicts of interest are difficult to measure and their impact on a client may only be revealed years later,” said Hattingh.
She said the amendment was a mixture of principles and rules-based legislation, which the industry should approach by observing both its spirit and letter. “South Africa has an over-riding culture of non-compliance, so it was important to include sufficient detail in the amendment, such as a lengthy list of definitions of conflicts of interest, while still making it broad enough to capture apparent exceptions. This means that industry will need to focus on the principle of avoiding conflicts of interest when applying the new legislation.”
Many companies are still trying to find loopholes in the detail, she said. For example, the amendment states that a financial services provider and its representative must avoid, and where this is not possible, mitigate any conflict of interest. Some companies have pounced on the phrase ‘where this is not possible’ as a way of ameliorating the impact of the legislation, hoping that they’ll get around it by a superficial attempt at mitigation. They’re also changing the disclosure requirements of their conflicts of interest policies, in the hope that disclosing a conflict amounts to mitigating it. “You can’t just disclose yourself out of a conflict,” Hattingh said.
The FSB is currently seeing companies investing resources on compliance and training while remaining committed to choosing economics over ethics. “We’re not saying don’t make money; we’re saying do so with due care and diligence in the best interest of your clients.”

Copyright © Insurance Times and Investments® Vol:23.11 1st November, 2010
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