The Costs and Benefits of the Financial Advisory and Intermediary Services Bill

1. The Costs and Benefits of the Financial Advisory and Intermediary Services Bill Morabo Morojele & Stephan Malherbe Genesis Analytics Presentation to the Parliamentary Portfolio Committee on Finance 23 January 2002

2. Introduction Structure of the presentation • The uses and limitations of cost-benefit analysis • There are cost and non-cost issues • Analysis of costs • Analysis of benefits • The position of emerging brokers

3. The uses and limitations of CBA Some points to bear in mind • A CBA is one of a number of ways of assisting the making of policy choices • It disciplines decision-making by putting quantities to costs and benefits – of legislation as a whole as well as components • It is by nature a projection into the future – while its estimates cannot be exact, they have to be justifiable, i.e. fair and reasonable. • Some important consequences cannot be quantified – still need to be borne in mind.

4. The uses and limitations of CBA Objective of the exercise Objective: a CBA of the FAIS Bill through: • Review and adaptation of of FSA methodology; • Review of documents – the Bill, submissions and draft subordinate legislation; • Interviews of and data collection through industry participants. • Analysis of costs and benefits

5. Introduction Whom we saw • ST and LT insurance bodies; • Bodies for independent brokers, emerging brokers and representatives; • New companies established to provide compliance and other services on account of the FAIS Bill and the PPR; • Independent and emerging brokers; • Ombudsmen; • Other interested parties, e.g. in banking and health benefits

6. Introduction Methodological difficulties • The complexity of the industry, including its bifurcation into modern and emerging sectors; • The complexity of the FAIS Bill (including PPR, subordinate legislation, exemption, discretion, etc.); • The volume and density of submissions on the Bill; and • Lack of data, particularly in respect of the emerging sector.

7. Issues in the Bill Separating cost from non-cost issues 67 distinct issues identified from submissions & discussions: • 7 ambit issues • 7 legislative overlap issues • 10 issues concerning the FSP Ombud • 25 other legal issues • 6 barrier to entry issues • 12 cost issues: 1 general + 11 specific

8. Issues in the Bill Separating cost from non-cost issues Cost is not the only issue! Many concerns can be resolved by applying regulatory – and legal – wisdom. Subjecting it to economic logic wouldn’t help much. In other cases, quantification and economic reasoning may help.

9. Issues in the Bill 12 cost issues

10. Costs and benefits Approach to costing A ‘per individual intermediary’ approach • Initial versus recurring costs • Four intermediary categories • Digital divide: emerging versus established brokers • Conservative estimation of opportunity cost of time spent on regulatory matters • Identify PPR and FAIS costs separately • Multiply individual costs by ‘number’ estimates to get aggregates • Extremely conservative.

11. Costs and benefits How many intermediaries?

12. Costs and benefits How many intermediaries? Reconciliation with LOA data

13. Costs and benefits How many intermediaries? Estimate of corporate FSPs

14. Costs and benefits Framework for costs

15. Regulatory costs– assume to be passed on

16. Initial costs: assumptions & data

17. Initial costs: estimates

18. Annual costs: assumptions & data

19. Annual costs: estimates

20. Aggregated costs

21. Aggregated costs: insurance Market flows

22. Aggregated costs: insurance Costs relative to market flows • I/m income estimated assuming net margin of 66.6%

23. Aggregated costs: banking Costs relative to deposit base

24. Estimate of benefits: insurance Reducing lapses • Conservative assumptions • Consumer surveys • Assuming FAIS can bring about a 50% improvement, value to consumer is R275 million.

25. Estimate of benefits: insurance Readily quantifiable benefits • Due to the size of the industry, a small improvement is worth a lot in aggregate.

26. Estimate of benefits Benefits & costs that cannot readily be quantified • Professionalisation of the industry • Reduction in Masterbond-type financial disasters • Complaints resolution mechanism for consumers • Greater disclosure and confidence should bring about greater participation. But . . . • The Bill must not lead to an overall decline of take-up of investment products – given low household and national savings rates. • What will the impact be on industry structure and levels of competition?

27. Costs and benefits Weighing up • Recurring costs of R334 million • Estimated recurring quantifiable benefits of R1.15 billion • Quantifiable benefits are 3X larger than quantifiable costs • Bill as a whole is attractive • . . . But what about the component elements and markets?

28. FAIS and empowerment The emerging broker The environment of emerging brokers: • Apparently considerable competition from micro-lenders; • Growing competition from direct marketers; • Growing unemployment, contributing to declining demand; • Low levels of education amongst customers; • Some shifts in demand for product types.

29. FAIS and empowerment Challenges to emerging brokers Emerging brokers challenged by: • Low and declining incomes – now averaging between R3,000 – R7,000 p/m • Low levels of education; • High and unaffordable infrastructure costs; • Black-listing by Credit Bureau; • The PPR and FAIS Bill which have and will impose new, perhaps unsustainable costs.