South African investment firms suffer with compliance while the bad guys roam free

South Africa’s onerous financial compliance and regulation requirements hurt legitimate firms without stopping Ponzi schemes and scams.

This is the warning from many financial and investment specialists, who said the Financial Sector Conduct Authority (FSCA) has gone overboard with its 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 FSCA’s 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, said 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 licenced 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.”

David Shapiro from Sasfin Securities said that compliance in South Africa is demanding and draining.

“In the old days, an investment firm or wealth manager would have a compliance officer. Today, you have a whole team in compliance.”

Compliance hurting the good guys and not the bad guys

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

There has been an increase in investment scams and Ponzi schemes in South Africa, and increased compliance did nothing to prevent it.

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 complaint 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.

Daily Investor asked the FSCA about its onerous compliance measures and related problems, but it did not respond by the time of publication.