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Col 15: Breaking the financial cartel

South Africa has a very advanced financial system, but consumers are still exploited. Far too often the financial service product providers have, and, in some sectors, still give every impression of being a cartel.


Bruce Cameron Column 15 Breaking the financial cartel 21May2024

By Bruce Cameron
Co-author of The Ultimate guide to Retirement in South Africa


Financial services: The exploitation of consumers.

Far too often the financial service product providers have, and, in some sectors, still give every impression of being a cartel. Despite many changes, they simply pretend to protect consumers while ripping off their own clients, using misleading advertisements and press releases backed by badly trained product floggers.

An example is the three-monthly media release of the financial services industry, the Association of Savings and Investment SA (Asisa), about claims paid out by the life industry.

But there are only hints in the statements of how the consumer is still being exploited by the life industry.

Query the hints about the enormous costs to policyholders of surrenders and lapses of policies and Asisa basically ‘stone walls’ often using true but misleading statements.

For example: Asisa says the reports are aligned “with the reporting requirements introduced by the Insurance Act of 2018”.

Although this is true, there is no requirement for the industry to stick only to regulation. It could do a lot more to disclose the true position of life assurance investment sales so that potential policyholders can really understand what they are buying.


Cartel arrangements causes lack of confidence:

In my opinion this misleading information of life assurance products is a major reason for people avoiding much needed risk cover. Many simply do not trust the industry.

And it is really time for the Financial Sector Conduct Authority (FSCA) to do a lot more about implementing its regime of Treating Customers Fairly – and trust is a key element of TCF.

In most cases when you lapse or surrender a policy, particularly, polices that contain both risk cover and investment, misleading called universal life policies, huge amounts are lost by consumers (in the R-billions) because of the one-sided contractual nature of the products.

Over a recent reporting period, Asisa said 5 million new policies were issued, but 4,3 million policies were lapsed. That is the contract premiums for the policies were not paid at some stage, mainly in the first five years.

This means that the life industry has what can only be described as ‘bad business’ for 86% percent of the policies it sells. This is like a restaurant having 86% of its clients sending back their food.

Most of these investment products issued by the life industry demand that you to sign a medium to long-term contract on the regular payment of premiums. If you do not stick to the contract, particularly in the early years, you will be penalized.

The causes of lapses and surrender for a policyholder can be anything from losing a job, being badly in debt, being seriously injured and unable to work, and, most importantly, bad advice from badly trained life assurance financial advisers (product floggers).


The cartel-like system still exists.

The cartel-like life industry is still the main proponent for not properly informing policyholders with the banks following it up.

Many years ago, the life assurance industry dominated both the risk and savings markets (apart from bank deposits). The surrenders and lapses used to be far worse than they are now. We need to thank the former Minister of Finance, Trevor Manuel, for significantly reducing the penalties. He is now the current chairman of Old Mutual.

At one stage the life industry did not have to worry about ‘bad business’ as they simply claimed a very generous amount back from you by confiscating all or much of your savings.

Life assurance companies operated in secrecy making enormous profits.


Much has been reduced.

Much of the cartel-like operations of the financial services industry have been significantly reduced by legislation and competitiveness.

This is a brief description of how the apparent cartel has, so far, been broken:

  • Liberty Life. Sir Donald Gordon launched liberty life in 1957 and started trading in investment-linked life policies. So, if you liked his collection of investments, you knew that the value of your policy would go up and down according to the listed securities included in the portfolio. The rest of the industry initially stuck with unknown underlying investment formulas. Both, however, had high costs for consumers.

  • Sage launched the first unit trust fund in 1965. Until 1980 only 10 new unit trust funds were launched. The problem with Liberty’s life products and later look-alike policies issued by the other life companies, was high costs. Unit trusts lowered these costs enormously. Incidentally, the first mutual fund (unit trust) in the world was launched in the United States by the Massachusetts Investors Trust in 1924 – and it is still around today.

  • LISPS: In 1986 the now-defunct UAL Merchant Bank creating the first linked-investment service provider (LISP). This enabled the transfer from one unit trust fund from one unit trust provider company to another; and, from one fund of the same product provider to another. The transfer was done at a cost 0,25% of the capital value. This was much better than the laborious and expensive way of buying and selling of unit trusts, which could amount to more than three or four percent of the capital value.

The LISPs also managed to reduce asset management costs. The LISP activity was mainly used for pension funds savings and investment linked living annuities.

Importantly, at the same time retirement funds, were starting to change from defined benefit, where the employer and the product provider took the risk, to defined contribution, where the members carried both investment and capital risk. Although this was an improvement there were still dangers in poor advice from untrained advisers. Most of the advisors were not properly informed of the dangers to individual investors by the lisp product providers. This was solved by the regulator (now the Financial Sector Conduct Authority) starting to step-up the requirements on the skills in financial advisers and putting a stop to the more extraordinary attempts by product providers to rip off clients.

  • Exchange traded funds (tracker funds). The first individually available tracker funds, later to be known as the Vanguard 500 Index Fund (tracking the S&P 500), was launched by Princeton-graduate, John Bogle, in December 1975. Interesting the fund was initially denounced as ‘un-American’ and ‘Bogle’s folly’. It is now one of the biggest fund managers worldwide with numerous product offerings.

In South Africa it took longer to introduce ETFs, mainly because of the opposition of highly paid mangers of actively managed funds. In 2000 the JSE launched the first ETF - the Satrix Top 40. In 2002 the first two ETF sector-specific funds were launched – the Satrix INDI and the Satrix FINI. Initially they could only be sold as traded securities on the JSE.

Then came the next big break through. The Financial Services Board (now FSCA) recognized ETF as a collective investment, under which unit trusts are also regulated. The main issue was that an ETF must track the same underlying securities as unit trust funds.


Big profits

Active managers, who were making a fortune in high costs from their fees came out very strongly against ETFs. Most of their arguments were totally misleading, using much the same sort of language used against Bogle.

And the active managers are still at it amongst other things charging what are duplicated fees, with annual fees and complex performance fees.

Old Mutual, for example, was strongly opposed to tracker funds but was forced into opening one for a retirement fund, and then it found it had to offer trackers to consumers.

The JSE launched Exchange Traded Notes (ETNs), which are a form of a bond that invest in commodities (agricultural and mineral) and futures. They are not a collective investment scheme and must be bought from a stock exchange.

We are making progress towards sound investment products - we just need to stop dealing with people who sell you misleading rubbish.

There is a lot more detail on this in the book, The Ultimate Guide to Retirement in South Africa. For more information on how to purchase the book go to Buy Now on our website


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