South Africa’s regulations hurt businesses while criminals flourish

South African businesses buckle under the weight of an increasing regulatory burden, while criminals, who ignore all laws, flourish.

The burdensome regulations not only harm current businesses but also prevent new businesses from starting due to the high barrier to entry.

This warning comes from Sasfin Wealth chief global equity strategist David Shapiro, who discussed the issue with BizNews founder Alec Hogg.

Shapiro said business leaders are overwhelmed by the country’s regulations, and most have given up complaining.

“The corporate leaders just don’t have the energy to go through battling with the government any longer,” he said.

He highlighted the challenges of starting a financial or investment company, particularly in terms of regulatory requirements and compliance.

“It just wears you down to the point that people just say, you know what, I am out of here,” Shapiro said.

He said it used to be very easy to open an account for a client and start serving them. This oiled the wheels of business.

However, today, the regulations around financial services make it very long and cumbersome to onboard a new client.

He said financial institutions in South Africa now need large compliance departments with numerous employees to adhere to regulations.

This means that a bank or investment firm must redirect resources from those who develop and grow the business to compliance.

Standard Bank serves as a good example. It employs 3,000 people solely to comply with regulations across its businesses.

“3,000 people are a staggering amount. It is terrible. The cost of doing business is excessive,” Stanlib chief economist Kevin Lings said.

Lings’ comments are indicative of the broader compliance costs companies must pay to operate in South Africa.

The International Monetary Fund (IMF) measured South Africa’s ease of doing business against 49 other countries, and it came last.

The IMF said if South Africa could achieve an ease of doing business comparable to the average, the country’s economic growth rate could double. 

Regulations stifle competition and limit innovation

The biggest problem with regulations in South Africa is that they place a tremendous burden on business but have little impact on stopping criminals.

A good example comes from the South African investment sector, which faces particularly cumbersome compliance and regulation requirements.

Registering a company as a financial services provider in South Africa has become so difficult and time-consuming that it disqualifies most small businesses.

Complying with all the Financial Sector Conduct Authority’s (FSCA) requirements is even more onerous and hurts both small operations and large financial institutions.

The ever-looming threat of fines and penalties means that many investment firms and wealth managers have more compliance officers than investment specialists.

It is easy to see why. The FSCA’s administrative penalties increased from R100 million in the 2022/23 financial year to R1 billion during the 2023/24 financial year.

So, instead of focusing on client service and investment advice, South African firms are forced to spend most of their resources on compliance.

The impact of the increased compliance burden on the South African investment and wealth management industry is significant.

The regulations, paperwork, rules, and bureaucracy related to financial services in South Africa stifle competition and make it difficult to open a new investment firm.

This also means that investors are discouraged from switching to a new service provider and that new entrants in the market are limited.

Wayne McCurrie, formerly from First National Bank Wealth and Investments, previously explained that it is “horrendous” for people to start their own financial services business in South Africa.

He said it is relatively easy to pass the exams to become a licensed financial advisor and help people with their portfolios.

“However, the only way to start your own business without killing yourself with the administration is to partner with a company where it is all in place,” he said.

“You join a company with all the compliance in place and enter into a profit-sharing arrangement with it.”

“So, although you essentially run your own business, you piggyback on someone else’s licence. That is the only way you can do it.”

Regulations do not stop the bad guys

McCurrie highlighted that all the compliance and regulations do not stop Ponzi schemes or investment scams.

There has been an increase in investment scams and Ponzi schemes in South Africa, and increased compliance has had little effect in preventing them.

The South African Banking Risk Information Centre (SABRIC) reported a significant rise in bank customers’ involvement in fraudulent investment schemes.

“These scams, which promise high returns with little to no risk, have already affected thousands of customers,” SABRIC said.

“These schemes are highly sophisticated, employing professional-looking websites, fake news articles, false endorsements, and even deepfake videos,” SABRIC CEO Nischal Mewalall said.

Allan Gray also warned about an increase in fraudulent schemes targeting unsuspecting individuals looking to increase their wealth.

Allan Gray’s Faizil Jakoet said the increase in artificial intelligence tools has led to a significant increase in investment fraud.

South Africa has seen some of the biggest investment scams and Ponzi schemes globally, including the BHI Trust and MTI.

The FSCA and its regulations are irrelevant to scammers and fraudulent investment schemes which operate outside of the law.

The FSCA is typically slow to act when fraudulent schemes emerge, which is why South Africans have lost billions through them.

The reality is that the burdensome compliance measures hurt legitimate and honest service providers and have no impact on fraudsters.

It also creates a situation where it is so difficult to run a compliant financial service provider in South Africa that scammers have a huge advantage.

For example, legitimate firms must force clients to fill in numerous tedious paperwork and processes to be onboarded.

Fraudsters, in comparison, make it extremely easy for people to give them their money. It swings the advantage in their favour.