Saturday, 27 February 2016

Financial Advisors beware!

I’m not a big believer in regulation. My experience is that regulation often just leads to more and more bureaucracy, bother and hurdles for businesses to cross before they can sell things to their customers. The level of regulation in an economy seems to be inversely proportional to the productivity of that economy.

But occasionally regulation is a necessary evil.

There should obviously be some regulation of the food industry. Restaurants and supermarkets need to be inspected to ensure they are hygienic and pose no obvious threat to public safety. Food labelling, in particular things like expiry dates on risky products like meat and fish should also be controlled and monitored. These are things that help consumers make informed decisions about what and where they buy. That’s just basic.

The quality of certain key products such as water, milk, baby formula and electrical goods should also be regulated and controlled. These are things that pose a serious risk to our health and we have a right to know that these goods are safe and that any misbehavior by suppliers will be punished when it occurs.

I’m less convinced about things like regulation of things like internet access. We all know about extreme cases like North Korea and China who police what, when and how their citizens can surf the web and talk to friends, relatives and strangers online but you even see some countries blocking certain sites and facilities because of their over-sensitivity. Just last week Uganda blocked access to Facebook because of a fear that social media might influence their elections process although I suspect it was really a bit more sinister than that.

So some industries are best left alone, others need regulation. The financial services trade is one of them.

The main reason for this is because so many financial products are actually so difficult to understand. So few of us really understand things like trading forex and derivatives that there needs to be some enforcement of minimum standards of conduct among the people selling these things to us. We need to know that the people offering these things really do know what they’re talking about, have some credibility and will advise use as wisely and prudently as possible.

That’s where NBFIRA play a critical role. I’ve been saying good things about NBFIRA ever since they were first established. Like the Bureau of Standards they do a very good job, often very quietly, without great fanfare, making sure that we are protected from abuse. The work they did regulating the micro-lending industry has been remarkable. Our younger brothers and sisters won’t remember how things were 15 years ago. There were loan sharks everywhere. They were charging vicious rates of interest, taking clients’ ATM and Omang cards and behaving a lot like drug dealers. We heard of lenders who operated from car parks, from chicken restaurants and even a few who ran their lending businesses from their government offices.

But NBFIRA cleaned things up a lot and although there are still occasional abuses that industry is much safer than it used to be.

Their latest “target” has been financial advisors. These are the people offering you and me advice on how to manage our money and in particular where and how we should invest it. If you don’t have any personal experience of them ask your friends and relatives what they think and I think you’ll understand what this is an industry needing regulation.

I did another of our incredibly unscientific surveys on Facebook recently, asking people to say what they though of financial advisors using only one word. Barely a handful were prepared to say good things. The majority were scathing. Comments included: “Cunning”, “Tricky”, “Dodgy”, “Sly”, “Liars”, “Deceivers”, “Thieves”. You get the picture? This is not an industry that is well-respected.

At a workshop for financial advisors last week NBFIRA began the process of regulating them. From now on, anyone offering financial of investment advice must be registered with NBFIRA. Until formal regulations are published financial advisors need a formal, written exemption from NBFIRA in order to operate and a full list of those advisors who have registered and are therefore operating legally will be published on NBFIRA’s web site. Any company failing to comply will face a fine of P2,500. That doesn’t seem much but that’s per day. Every day they operate without being registered will be another P2,500. A few months of illegal operations is going to cost someone hundreds of thousands of Pula.

The good news is that as far as I could see every one of the advisors attending the NBFIRA workshop were keen to see these regulations in place, I assume so that their customers can tell the differences between legitimate advisors and the crooks damaging their reputations.

But here’s some even better news. At the workshop I asked NBFIRA whether these new rules could be used to stop people recruiting victims into pyramid and Ponzi schemes. The people representing schemes like Eurextrade and MMM Global talked about investments and profits so doesn’t that make them financial advisors?

The answer was actually quite simple. Yes, it probably does but that doesn’t matter. NBFIRA have the power to investigate anything along those lines, regardless of these new regulations. All we need to do is send NBFIRA an allegation and they’ll investigate it and take action if they feel it’s warranted.

As I said, I’m not a big believer in regulation but this is a very good example of what we need. A regulator that has been given some powers and that isn’t afraid to use them to protect the public.

All that’s left is for them to move on to furniture stores. As one MD told me years ago, they’re not really furniture stores, they’re moneylenders. Now if that isn’t a financial service within NBFIRA’s remit, what is?

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