FORMING A FEAST OUT OF CHAOS
We need far more collaboration if we’re to make better financial products
The question of who has the power to influence the savings industry in SA is a complex one. Much like our political landscape, this influence changes with the dynamics of the prevailing environment.
A useful statement to quote is Germany founder
Otto von Bismarck’s declaration: “Laws are like sausages, you should never watch them being made.” It illustrates the chaotic, messy and sometimes unappetising nature of bringing about changes for good.
Politicians direct the legislators (the National Treasury), which in turn ensure that the laws are enforced by the regulators (the Prudential Authority and the Financial Sector Conduct Authority). These govern the financial service providers (the manufacturers, for example) who service their clients, often through some intermediary (an adviser) or interest group (a union, employer forum or trustee board). When politics and profit collide there are loud and competing interests that are not always easy to resolve.
Let’s try to get to the nub of these competing interests. On one hand, we are making increasing demands on private long-term savings to address societal and political needs, whether those are climate change, social protection, transformation, targeted infrastructure development or good governance. On the other hand there is a need to have a robust financial services industry that can compete globally in delivering value for money to clients. For example, in the retirement fund space, forcing consolidation means only the largest players can provide the scale to deliver, which stifles the emergence of new black players.
It is often thought that financial services are purely profit seeking and will operate with this as their sole objective. But there are significant costs to setting up the infrastructure to run a financial services company in terms of systems, staff and capital. Long-term sustainable profit is required to fund this; it is not a “quick buck”. Financial services companies get rich when their clients do.
It means that all players need clear, long-term guidance about the operating environment. Most are slow to react to sudden disruption. While smaller players may be more nimble, additional costs to make changes could be prohibitive.
What about the customer?
Clients, who are often thought of as helpless, actually have far more sway than they probably realise. The advent of social media has provided platforms where disaffected clients can easily vent their dissatisfaction and find like-minded individuals ready to rally to their cause. This is no longer an insignificant influence. Recently a tweet from a widow complaining that her husband’s death claim had been repudiated was retweeted by celebrities, which led to the entire life insurance industry changing the way pre-existing conditions were treated in the event of accidental death.
The problem is that the inherent complexity of financial services leads inexorably to high levels of information asymmetry, which confuses the consumer. Low levels of financial literacy mean that many consumers don’t understand the products they are invested in; and many providers don’t work hard enough to foster greater understanding. This then leads to poor levels of coverage and product outcomes.
Consumers of financial services products are reputed to make lower advocacy efforts than other consumer groups, and complexity ensures that it stays this way. And while unions, for example, are there to represent members, sometimes their interests are subsumed into broader political agendas. The other issue is advisers are too often allied to the providers.
Studies such as the Edelman Trust Barometer survey suggest that employers are among the most trusted sources of advice for employees and should do more to safeguard their staff. But here again come the dynamics of unintended consequences. The shift to defined contribution and multi-employer umbrella funds have made many employers step away from this role, even as the atrocity of an event such as the one at Marikana should demonstrate to any employer the consequence of the financial exploitation of employees.
And then there’s fintech, which may leapfrog all these agendas if our industry and our policymakers’ best intentions do not deliver on client needs.
These are times that demand far more collaboration in the industry if we want to get it right. There should be more who contribute and invest their time on considering the longer-term direction.
The National Economic Development & Labour Council is a critical platform for this debate, but discussions can often be derailed by grandstanding. The workshopping of ideas needs to happen before the debate reaches this point.
To its significant credit, the National Treasury signposts intended changes well ahead of time. But often detailed discussions at the point of promulgating laws are rushed.
Much like in the case of sausages, there are many different ingredients that need to go into the mix. To achieve the best possible product, we need the perspectives and inputs (ingredients) from all the role players in appropriate proportions.
We must also recognise that SA has its own unique challenges and circumstances. We may be able to consider recipes applied in foreign places, but we have our own custom-made sausage — boerewors — that is a great blend of competing flavours with a myriad varieties that is much loved (though pretty much only here).
When politics and profit collide there are competing interests that are not always easy to resolve