BRIAN BENFIELD: Fais Act has failed and belongs on the ash heap of history

An excellent place to start unravelling SA’s “excessive regulatory burden”, recently highlighted by the World Bank, is the 2002 Financial Advisory & Intermediary Services (Fais) Act.

The Fais Act is an unmitigated and costly failure that does considerable harm to the growth, development and transformation of the SA financial services sector. 

It places an unsustainable burden on both the industry and its regulators. A growing list of non-performances and failures demands that it be drastically redrafted from scratch or, preferably, abandoned in its entirety. It has failed on every applicable metric. 

Enacted without any official prior research or “problem analysis”, the act was not accompanied by any statement of purpose or how success would be measured. In addition, it completely ignored the vast body of long-existing common and statute law that was perfectly adequate to deal with the “mischief” with which the Fais Act purported to deal. 

According to the Financial Services Board (FSB) spokesperson at the time, Gerry Anderson, Fais aimed to “regulate and professionalise” insurance intermediaries, collectively to be registered as financial service providers (FSPs) with their representatives. Interviewed on SABC television in 2002, Anderson stated that Fais would “prevent another Masterbond”. 

Senior counsel opinion obtained after the promulgation of the act found no fewer than 15 major blemishes that offend the SA constitution. These include the violation of the doctrine of separation of powers, with parliament abdicating its powers by assigning plenary legislative powers to bureaucrats without proper limits and criteria, and intolerably vague definitions.

The opinion, passed on to the authorities at the time, concluded with the statement: “This act cannot be regarded as a rational piece of legislation. It is so unlikely to pass constitutional muster that drafting de novo will prove highly desirable.” 

It should perhaps be noted that a similar experiment was conducted in the UK in 1977 in the form of the subsequently abandoned Insurance Brokers (Registration) Act of 1977.

Before the introduction of Fais and after sustained cajoling by the Free Market Foundation, an independent cost-benefit analysis was commissioned by Gill Marcus, then deputy governor of the SA Reserve Bank. The resultant Genesis Analytics report warned that Fais could become a serious additional barrier to entry for black insurance brokers.

However, it showed that the act could be financially justified if it materially improved insurance premium-payment persistency rates. That premise then became one of the primary justifications for the enactment of Fais. But this has now been completely forgotten and buried in the mists of time. 

Its role in the professionalisation of FSPs has also been called into question. Its mandate for financial advisers to act in their clients’ best interests merely reiterates long-existing common and statute law. 

Moreover, Fais has been applied not only to individual FSPs but also to insurers and other financial institutions that provide financial advisory or intermediary services. Many of these entities were surprised to discover after its introduction that they were also expected to register as FSPs. 

It has thus never been clear whether Fais was intended as a consumer protection measure, an FSP registration and monitoring system, or merely another market conduct regulatory instrument. 

Many critical factors have thus contributed to its failure:

• Despite Fais’ regulatory framework (including mandates for transparency, suitability assessments, record keeping, reporting and ongoing monitoring) an improvement in persistency rates has not materialised. Actuarial data on the life assurance industry indicates that average overall annual lapses may have doubled since Fais became effective.
• The complexity of Fais regulations has imposed substantial burdens on FSPs, diverting focus from product knowledge learning and client engagement and retention. Those who have failed to meet the demands and expenses of Fais have been driven out of business. Unsurprisingly, these have largely been small, independent and emergent black advisers and intermediaries. Indeed Fais, along with archaic product distribution price controls, has been so egregiously detrimental to market development and transformation that black brokers still represent well under 20% of SA’s independent brokers, this mostly reflecting a lack of resources rather than a lack of competence. 
• Key technical market developmental elements such as product innovation, innovation of distribution systems and payment systems development have taken a back seat to Fais’ emphasis on administrative compliance and procedural requirements. Advice given and record keeping can readily be mandated for FSPs without the necessity of Fais in its present form. A complaints-driven system, as in many other jurisdictions, would prove far cheaper and equally effective. 
• While Fais may have had an effect on the professional conduct of some advisers, significant improvements in professional conduct are primarily due to the efforts of the financial institutions themselves and to the established professional associations, such as the long-standing Insurance Institute and the Financial Intermediaries Association. Moreover, any random survey will show that few, if any, policyholders have ever heard of the vaunted six pillars of Treating Customers Fairly (TCF) that are now interwoven with Fais. In addition, almost every week the Financial Services Conduct Authority (FSCA, previously the FSB) puts out lists of rogue FSPs, representatives and others, despite the claims that Fais would all but eliminate these. 
• Serious concerns arise regarding the exorbitant escalation in costs associated with administering a now bewilderingly complex system. For example, the act requires the perpetual updating by FSCA staff of an exhaustive directory meticulously recording every FSP and representative’s evolving personal details, qualifications and roles. 
• Fais has not only failed to prevent another Masterbond, it has failed to prevent a slew of subsequently scandals, including Fidentia, Sharemax, VBS Mutual Bank, Mirror Trading and BHI Trust, to name but a few. Indeed, it was never capable of preventing any such scandal.

Addressing such multifaceted challenges requires a comprehensive approach by a team of industry-wide participants. It includes slashing and simplifying regulatory requirements, eliminating the reported unconstitutional elements and fostering greater technical innovation in product design, payment and distribution systems.

Alternative systems used elsewhere should simultaneously be investigated. This should be done well before any attempt is made at the proposed premature wrapping of Fais into the mooted Conduct of Financial Institutions Act. 

In the absence of meaningful research and redrafting, there appears to be little merit in the continuance of Fais. Indeed, SA would do well to follow the UK’s example and repeal the entire act, relegating this unfortunate experiment to the ash heap of history. 

• Dr Benfield, a retired professor with the Wits University department of economics, is a senior associate and board member of the Free Market Foundation.