protecting your own Bruce Cameron Editor: Personal Finance

Transcription

1 protecting your own Bruce Cameron Editor: Personal Finance

2 main laws that protect your money The Banks Act (deposits and loans) The Companies Act The Consumer Protection Act The Unfair Business Practices Act The National Credit Act The Pension Funds Act The Financial Institutions (Protection of Funds) Act The Security Services Act (previously the Stock Exchanges Control Act) The Insider Trading Act The Collective Investment Schemes Control Act (unit trusts, exchange traded funds and mortgage participation bonds) The Long Term Insurance Act (with the Policyholder Protection Rules) The Short term Insurance Act The Friendly Societies Act The Financial Advisory and Intermediary Services (FAIS) Act The Financial Services Ombud Schemes Act The Wills Act The Matrimonial Property Act The Trust Property Control Act The Medical Schemes Act

3 who regulates what Financial Services Board (Department of Finance) security exchanges (JSE) collective investments (unit trusts, exchange traded funds, mortgage participation schemes) life assurance companies short term insurers friendly societies financial advice and product sales SA Reserve Bank banks Department of Trade and Industries companies and close corporations consumer protection issuing of credit Department of Justice (Master of the High Court) trusts (inter vivos) umbrella trusts (Living Hands) Department of Health medical schemes

4 but with all this Masterbond FundsTrust Supreme Holdings Fedsure Saambou Bank Fedbond Leaderguard Pyramids (Rainbow, Kobus Milk) Publiserv medical scheme Insider trading Alexander Forbes (Secret profits) Life assurance confiscatory penalties Common Cents Fidentia

5 the crooks don t look like this if they did it would be all very easy

6 the trusting vulnerable scam artist joins church congregation presents investment scheme that will also benefit the church collects a few million Rand disappears pulled it off three times: KwaZulu South Coast, Cape Town, Gauteng

7 a two-pronged assault the scam artists do not care about the law are criminals will lie, will threaten, will promise the earth the financial services industry interprets the law to suit itself too often has poor ethical values too often driven by profits and self-greed too often forgets it is a custodian of public money too often uses perversely incentivised, poorly trained financial advisers (product floggers)

8 it is time to fight back the solution is not to: stop saving spend all you have put money under the mattress the solution is to: educate yourself trust nothing and nobody use the tools available start and keep saving (investing)

9 spotting a scam artist normally cold calls nice young man syndrome promises inordinately high returns talks glibly about guarantees provides little of substance in writing few contact details (operate from cellphones) has glossy brochures (the Candyfloss syndrome) will try to identify with known companies (ASBA Brokers) (Marriot = Marion)

10 spotting a scam artist (2) will use comfy names (Holland Moorehouse) will get irritated if you ask too many questions you will not be allowed to take away documents you will be pressured with urgency (never to be made available again, only one left) will use religious fervour-type meetings you will be sworn to secrecy you will be told everything is legal and properly registered will often use legal structures (particularly registered companies) will not hold assets in your name or through a nominee will not provide details of underlying assets

11 a case study: InvestiGro the facts investment promoted in newspaper advertisements guaranteed return of 5% a month or 60% a year money invested in registered company, Investigro capital guaranteed by way of a group assurance policy issued by a friendly society money invested in InvestiLoan, a loan shark operation.

12 a case study: InvestiGro the real facts contravention of the Banks Act taking deposits and lending money income guarantee: based on interest being received from an illegal loan guarantee worthless capital guarantee: based on a policy that was never issued by an unregistered Friendly Society contraventions of the Banks Act, the Friendly Societies Act, the Long Term Insurance Act, the Usury Act and the Companies Act

13 don t get involved if no proper documentation (e.g. prospectus for a registered company) you cannot take away documents show documents to other parties company not registered with the Financial Services Board but registration is no guarantee of honesty or a good product. does not fall under a regulated industry (e.g. collective investment, life assurance) makes extraordinary promises no details are provided of underlying assets has part or all of its operations offshore is not a known brand (Fidentia) you are pressurised all your questions are not fully answered (preferably in writing) you cannot understand how it works (normally complex structures) it is not tangible (does it have proper offices?) you are asked to sign blank documents

14 close to the wind property syndications come in various guises seldom hold direct ownership complex structure of companies, debentures and shares high commissions success dependant on buoyant prices need to cover high costs currency trading high risk many scam operators no proper accounting to investors worst example Leaderguard

15 close to the wind multi-level marketing basic structure of a pyramid - each person must introduce between 5 & 10 people, who in turn introduce another 5 or 10 people. - each person in the pyramid receives fee/commission from people recruited below - pyramids normally capped at five levels; or have diminishing percentages. legality - illegal if simply based on a part of a membership fee being divided up. - legal if includes a product. Can often be a financial product with extraordinary high costs or risky investments (Balltron used Fidentia).

16 and the regulated are no so good life assurance industry high costs lack of transparency have unfair contracts (confiscatory penalties) provide perverse incentives Linked Investment Services Product companies (Lisps) perverse incentives (foreign trips) kickbacks retirement fund service providers high costs lack of transparency (particularly life assurance funds) secret profits poor administration perverse incentives (particularly one-stop shops) unmanaged conflicts of interest poor corporate governance structures (e.g. trustees)

17 the Jack Milne factor Remember Milne took advantage of failures in the formal investment sector and poor market conditions to attract R200 million. Anyone who did their homework would have seen: the prospectus was flimsy no detail was given of underlying investments the claims were unjustified the guarantees were provided by a company already under suspicion

18 so what do you do when you can t trust anyone? you educate yourself you ask questions you understand what you are told you trust yourself and your instincts you go about it in an ordered way

19 20 steps to protect yourself 1. it s for the long term: the rest is gambling 2. get good advice (a financial planner not a product flogger. FAIS is not enough) 3. structure a plan with a financial needs analysis know your goals 4. get rid of debt 5. decide whether you want capital growth or income or both 6. select the right asset classes

20 20 steps to protect yourself 7. understand investments risk: systemic risk prudential risk advice risk market risk market sector risk volatility risk (timing risk) dishonesty risk currency risk cost risk risk of fear and greed the risk of not investing (inflation)

21 20 steps to protect yourself 8. decide on your risk profile (what you can afford to lose...not what you want to win) 9. diversify your investments (but into recognised asset classes and products) 10. understand market sectors 11. understand investment styles (growth and/or value stocks, macro economic and/or stock picking) 12. consider liquidity (cash liquid: property and private equity illiquid)

22 20 steps to protect yourself 13. consider guarantees (capital and growth but watch the costs and whether you really need them) 14. take account of costs: (remember Rusconi life assurance retirement annuity cost can reduce your final benefit by as much as 50% over 40 years) 15. tax issues (traded endowments can have 3x CGT) 16. choice of investment product (e.g. unit trust, life assurance endowment, Lisp wrapper, share portfolio)

23 20 steps to protect yourself 17. choice of product provider 18. measure the results e.g. benchmarks (inflation, indices) 19. rebalance your portfolio 20. revisit your investment strategy (when the tax regime changes, your personal circumstances change, when there are big changes in your assets)

24 and when it still goes wrong there are remedies regulators statutory ombuds voluntary ombuds the courts

25 Credit Information Ombud Manie Van Schalkwyk call centre: website:

26 Financial Service Providers Ombud & Financial Services Ombud (FSOS) Charles Pillai telephone: website:

27 Ombudsman for Long Term Assurance (Life Assurance) Peet Nienaber telephone: website:

28 Pension Funds Adjudicator vacant (previously: Vuyani Ngalwana) telephone:

29 Banking Adjudicator Neville Melville telephone: website:

30 Council of Medical Schemes Patrick Masobe telephone: website:

31 Short Term Insurance Ombudsman Peter Martin Telephone: Website:

32 National Credit Regulator Gabriel Davel Telephone: Website:

33 Financial Services Board Rob Barrow Telephone: Website:

34 thank you Bruce Cameron Editor: Personal Finance