Surprise, surprise. A run on BoE Bank. Listening to and reading queries from Personal Finance readers about banks in general, and seeing as what has happened at Fedsure and Saambou Bank, I am not in the least surprised by the run on BoE.
The action or lack of proper action and clear statements by both the government and the regulators is one of the main problems. The joint statement by Finance Minister Trevor Manuel and Reserve Bank Governor Tito Mboweni, expressing their confidence in BoE and giving an assurance that the bank will be backed, is too little too late.
On the face of it, BoE did not deserve this loss of confidence. The problem is ordinary investors' lack of confidence in the South African system following the collapse of Saambou Bank and Fedsure.
What was and still is needed urgently is a proper inquiry into the financial services industry and its regulation in South Africa.
Trevor Manuel has already announced that he wants to see the auditing profession keep a tighter rein on corporate South Africa. He needs to do a lot more and to investigate what should be done to correct the systems, particularly in view of the seemingly lax attitude of the regulators in preventing disasters.
Fedsure and Saambou are good cases in point. The warning signs were there long before they collapsed.
Fedsure has a history of cowboy action going way back to the Fenton deals in the 1980s. At the time, Fedsure and an assurance company called LifeGro (which went to the wall) were flogging an investment product which was linked to equity markets, but carried extensive guarantees and no withdrawal penalties. When equity markets collapsed in 1987, investors demanded their money. Fedsure came close to folding.
The saga continued with other issues, such as the appalling state of its medical aid scheme; its issuing of black-hole policies, which were a blatant tax dodge; and commission-driven selling that involved high fees for advisers.
Fedsure's collapse and takeover by Investec came as a result of three main problems (although there may be others that haven't yet come to light):
- It used investors' money to buy in to other financial services companies, including Saambou, to build a mighty financial services company, only to see these investments go phut;
- To generate new business, it declared bonuses and provided guarantees on a range of investment products that were way out of line with the market and placed the company at risk of having to meet promises that were above investment returns; and
- It over-valued its assets, particularly property assets. In other words, Fedsure claimed to have more money in the kitty than was actually the case.
The Financial Services Board (FSB) should have paid a lot more attention to what was happening at Fedsure to bring it into line. But it failed to react. Even when I wrote about, and told the FSB, illegal unsecured and non-repayable loans were being given to financial advisers to steer business to Fedsure. Now it claims to have no record of what I told it. My accusations have since been proved correct.
The FSB is continuing to make an absolute clot of itself, not only because of its lack of visible action on Fedsure, but also because of its absurd stand on commissions paid by life assurance companies.
The FSB has sent out for comment a draft document saying, in effect, that it is giving in to pressures from the life assurance industry to allow the deregulation of commissions on lump-sum investments, but not on recurring premium investments. The problem is that commissions paid to financial advisers by life assurance companies are regulated, and they are facing competition from other parts of the industry that are not regulated.
Driven by higher commissions and luxury trips around the world for advisers, the biggest scams in recent years have been with lump-sum investments, particularly with the move from defined-benefit to defined-contribution retirement funds.
Many people, who are now members of defined-contribution funds, are having to handle massive amounts of money for the first time, without the skills to do so. Due to commission structures, many thousands have been robbed of a secure retirement by companies selling inappropriate products and encouraging poor advice. The main products that have been mis-sold are preservation funds and living annuities.
Instead of reacting to the complaints of the life assurance industry and extending commission regulation, the FSB chose to turn a blind eye when the life assurance industry blatantly contravened the commission regulation by paying "fees" instead of commissions.
The FSB should have rather extended regulations to limit commissions on all financial products sold by financial advisers.
In light of this, I am pleased to see the Actuarial Society is investigating the Fedsure debacle, and that the concerns that I have been expressing for the past few weeks are also reflected by Judge Jan Steyn, the ombudsman for the life assurance industry. His report, extracts of which we publish extensively this week, is fairly damning of the life assurance industry and shows that it needs to jack itself up.
Judge Steyn's remarks and the fact that the Actuarial Society is carrying out its own investigation into Fedsure will hopefully spark more serious consideration of what happened, and of what is happening, from the FSB and/or government, which has been extremely reticent in investigating the issue.
A thorough investigation is in the interests of the wider life assurance industry and investors.
Personal Finance cannot express an opinion about the financial soundness of any financial institution. We do not have the resources to make such assessments. However, a unit trust investment gives you the most security in the event of a corporate collapse, because your money is held in trust. If the company goes bankrupt, your investment does not go with it. Only a fund's underlying investments in companies that go bust are at risk. Unit trust funds are also generally limited to investing no more than five percent of investors' money in one company, or may not own more than five percent of a company. Unit trust companies also offer investors more protection on money market funds against bankruptcy than that offered by banks. However, some unit trust fund's costs are excessive.
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