Failure of Financial Services Providers in South Africa

Abstract

During the 1990s, South Africa experienced the failure of the Masterbond group of companies which attracted approximately a billion rand by promising investors secured investment in the form of debentures. A public outcry led to the appointment of a commission of inquiry led by Justice Nel. Part of the findings of the Nel report pointed to the need to update the security laws existing at the time and to regulate intermediaries who are usually seen as a vital link between the public and investment companies offering securities, including instances where fraud is being perpetrated on the public. Following the Nel inquiry, a number of steps were taken. A major step was the enactment of the Financial Advisory and Intermediary Services Act (Act No. 37 of 2002, known as the FAIS Act). The FAIS Act brought with it the relief that for the first time in South Africa, financial intermediaries would be regulated. Its main objective is to protect consumers and strengthen the integrity of the financial services industry. In furtherance of the above mentioned objectives, the FAIS Act provides for strict requirements for those who apply for licences to render financial services to the public; as well as codes of conduct for intermediaries. The FAIS Act only came into full operation on 30 September 2004. South Africa has come a long way since the days of Masterbond; however, a number of financial services providers continue to fail. In the process consumers have been left with nothing but empty promises. The question is whether there are any regulatory factors that could possibly be influencing the failure of financial services providers. Elsewhere in the world, regulatory fragmentation, capture1 and lack of capacity and information sharing amongst regulators have been 1 Regulatory capture refers to a situation where regulators take on the objectives of management in the firms they regulate, thereby possibly losing sight of the ultimate objectives of regulation (Benink, H. A. and Schmidt, R. H. (2004) Europe's single market for financial services: views by the European Shadow Financial Regulatory Committee, Journal of Financial Stability, 1, pp. 157-198. iii singled out as factors that undermine regulatory effectiveness. Could these factors be relevantly raised about the South African financial regulatory system?