CONFUSION AT THE FSB

I received what I considered an astounding email from the Financial Services Board (FSB) this week that sums up its inconsistent approach to protecting consumers. In a guidance note on good governance (PF130) it admonishes retirement fund trustees to avoid conflicts of interest. The same is required in terms of regulations under the the Financial Advisory and Intermediary Services Act.

Where conflicts cannot be avoided they must be fully declared and managed. In simple terms, a conflict of interest is an arrangement or situation where an outside financial interest or obligation (real or perceived) has the potential to bias a decision or cause harm (in this case, to retirement fund members or their funds).

A conflict of interest can be avoided by a retirement fund by, among other things, not using a service provider for more than one service or one that provides a service to any other party which would allow it to profit.

Last year, Personal Finance raised this issue in the wake of the Rocklands property saga, which was riddled with conflicts of interest that allowed exorbitant gains at the expense of retirement fund members.

One of the issues that came out was the way in which financial services company Riscura provides asset management advice to retirement funds and also gets asset management companies, in turn, to pay it for doing risk assessments on their products.

This is a conflict of interest that can be avoided. The FSB decided to investigate.

Asked this week about the outcome of the investigation, the FSB said: “As far as the conflicts of interest question is concerned, Riscura and the management thereof was investigated and it was found that such conflicts were adequately managed and in instances where such conflicts could not be avoided, they were comprehensively disclosed.”

So why admonish retirement fund trustees to avoid conflicts of interest?

I raised the question with the FSB because Riscura’s name came up in connection with the default on R925 million of corporate debt owed by South Africa’s largest unlisted company, First Strut.

It is not that Riscura was involved in anything fraudulent, but it runs an investment product jointly with Investec Asset Management. Most of the money in the portfolio comes from retirement funds that Riscura advises on investment.

Riscura recommends to retirement fund trustees that their funds should invest in its product, for which it earns a fee – a clear conflict of interest. As the adviser to the funds, Riscura should be giving advice and policing the investments. The perception could be that Riscura will advise trustees to put retirement funds into its product because it earns extra money.

Another problem is that Riscura could tender at a lower price than its competitors to give advice to retirement funds because it can potentially earn extra from investments into its product.

It gets more interesting. Retirement fund money held in the product was invested in the Investec Credit Opportunites portfolios that held R435 million in First Strut bonds.

What this has cost the various retirement funds, and which ones are affected neither Riscura nor Investec are saying. And remember, Riscura holds itself out as an expert in assessing risk – but it could not detect a 20-year fraud!

And the FSB thinks that the Riscura conflicts of interest can be managed? I think not.

Although the losses for the retirement funds are fractional at member level, the questions are whether conflicts of interest in the First Strut debacle exposed retirement fund members to unacceptable risk and what responsibility the funds’ trustees could bear as a result.

These are questions that could be settled by the Pension Funds Adjudicator, Muvhango Lukhaimane. She set a precedent last month by ordering that the former trustees of four umbrella funds left in disarray by fund administrators Dynam-ique pay back the R20 million required to rebuild the funds’ records. It cost the 11 000 members of the fund 2.5 percent of their savings.

At least two big retirement funds, namely the Sentinel mining fund and the Telkom fund, are exposed to the First Strut losses. They did not respond to email inquiries this week.