Include principles of CPA in FSB legislation
Since the FSB is a more appropriate body to develop legislation to protect consumers of longer term investment products, maintaining the CPA exemption that funds currently enjoy and, instead, allowing the FSB to craft legislation reflecting the spirit and intention of the CPA while integrating it into existing pension funds legislation, is a more effective way to protect the consumers and guide managers of retirement funds.
The Financial Services Board (FSB) plans to amend the Pensions Fund Act to incorporate the principles of the Consumer Protection Act (CPA) and the Financial Services Board Act - making it clear that the FSB has ultimate jurisdiction over financial institutions, including pension funds.
Since the intention is to establish the FSB as the regulatory authority with respect to retirement funds and administrators, “the CPA exemption that funds currently enjoy should be maintained until amendments to the relevant legislation are finalized” says Lizzie Vambe, Legal Adviser, Legal Services, Alexander Forbes Financial Services.
From the outset it was always going to be difficult for the Department of Trade and Industry (DTI) to extend legislation providing consumers of physical products and short term services with protection for longer term investment products – all in the same wording. This is why, following the CPA coming into effect on 1 April 2011, funds were granted substantive exemptions.
While, in the meantime, the FSB has not developed the supporting regulations to give effect to the spirit and principles of the CPA in a retirement fund environment, in time the FSB is expected to develop these regulations. Legislative provisions contained in the draft Financial Services Laws General Amendment Bill 2012 (FSLGA Bill) give an indication of how the FSB intends to deal with CPA provisions with respect to retirement funds. The proposal in the FSLGA Bill is that the CPA does not apply to financial institutions falling under the FSB and that the FSB has jurisdiction over all financial sector legislation.
As such, until the FSLGA Bill provisions become law, the current CPA exemption of funds should be maintained for a number of reasons:
Should the CPA apply to funds, resolution of complaints by retirement fund members may be confusing. Since both the Pension Funds Adjudicator (PFA) and the National Consumer Commissioner (NCC) both have jurisdiction to hear complaints in respect of retirement funds, it is not clear which body should hear what complaints under which circumstances. “Administrative expense and duplication aside, creating two centres of legislative control for retirement funds is bound to lead to forum shopping, contradiction, confusion and, ultimately, poor oversight” says Vambe.
The Pension Funds Adjudicator has over time developed a body of determinations that has assisted in bringing more certainty to funds and members. The NCC would have to start afresh as the CPA is a new piece of legislation.
The PFA was set up to deal specifically with pension complaints. As such, it is meant to be a free and expeditious forum for dealing with fund members’ issues. Since the NCC however deals with a wider array of complaints, covering both goods and services, there is likely to be differing interpretations between the two forums resulting in distortions in the pensions’ regulation environment. “This will introduce the possibility of very different, and therefore unfair, treatment for complainants” warns Vambe.
Penalties that can be imposed by the NCC (up to 10% of the previous year’s turnover) could result in major depletion of fund assets. These penalties would most likely have to be passed on to members, reducing members’ benefits - “negating the purpose for which a retirement fund is set up, namely, to provide security for members’ retirement” says Vambe.
Many of the provisions of the Pensions Fund Act already in place would clash with CPA provisions conceived and designed to promote a more simple and short term transactional environment. For example, on a fund that offers member investment choice, trustees choose, say, ten portfolios, out of many hundreds. Members are then allowed to choose combinations of these ten portfolios. Allowing wider member choice than that allowed by the trustees “does not sit well with the rules of running a fund, and may negatively impact the growth of members’ retirement savings if members are allowed to make imprudent investment choices” explains Vambe. Rather, it is critical that funds are managed, and consumer choice limited in this way, if fund trustees are to perform well and deliver growth. Yet limiting consumer choice is a direct contravention of one of the central pillars of the CPA. “Clearly there is a contradiction in the two legislations here” observes Vambe.
Furthermore, consumers are often members of funds as a result of employer choice. This lack of choice is, again, a direct violation of the spirit of the CPA which would envisage, for example, every person being able to choose their own retirement fund. This would, however, create very different results for different employees while also limiting companies’ ability to manage their own remuneration strategies. Moreover, “it would also limit the inclusion of employer sponsored retirement funds as part of remuneration and employee retention strategies” adds Vambe.
The CPA also has strict prescriptions on communicating simply with customers. Since these prescriptions need to take the education levels of the least educated member into account, this, in reality, could mean that all communication with members will need to take place in their own language. The cost to funds of talking to all members simply in all 11 official languages would need to be borne by the funds, increasing fund expenses and, again, reducing the capital invested towards retirement. The FSB also has very different prescriptions on how fund managers should communicate with members. Some of these are in conflict with CPA requirements.
With “trustees jobs already complicated by FSB regulation to the extent that many boards battle to recruit the right skills to operate within the law, adding another level of competing legislation will further compromise the ability of South African trustee boards to ensure compliance with this wide array of legislation while still delivering effectively to members” says Vambe.
The CPA requires that the providers of services and products obtain permission before they record consumers’ details on a data base, contact them or target consumers with direct marketing material. Under the CPA should a retirement fund, for example, issue a new portfolio the trustees would be required to get the permission of every member, once again, making fund administration almost impossible.
The CPA was conceived to provide consumers both protection and redress in the event of faults with physical goods or the poor or failed delivery of short term services. Since a fund is a provider of long term services as opposed to goods, cancellation of retirement services by members may not be possible. More simply put, “how would funds reimburse members where services have already been rendered?” asks Vambe.
If CPA provisions allowing consumers to cancel or opt out of a service are applied to funds, the government’s intention of keeping members in funds for longer will not be realised as members are encouraged and allowed to withdraw from funds, swap funds or cash out early.
Since brokers, consultants, asset and investment managers are all highly regulated by the Financial Advisory and Intermediary Services (FAIS) Act consumers are, in fact, already provided significant protection even without the application of the CPA.
As such, the approach that the FSB has adopted of exempting retirement funds from the application of the CPA and rather integrating the principles of the CPA into existing pension fund legislation under the jurisdiction of the Financial Services Board Pensions Registrar is the right way to go since the Registrar is already overseeing and governing the industry effectively and efficiently. The Pension Funds Adjudicator should then be left, as it is currently doing, to determine pension complaints at no additional cost to members choosing to lodge complaints.
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