Africa’s capital markets need to shift focus for society to benefit more
Recent events and long-standing market conduct issues have widened the trust deficit
Structural changes and regulatory interventions may be required to correct Africa’s capital markets’ tendency to benefit financial practitioners more than they benefit the society, says CFA Institute president Paul Smith.
The institute is headquartered in the US and, on a recent visit to SA Smith met representatives of CFA Society SA, the African Securities Exchanges Association and regulatory bodies for soul-searching discussions, including the role of investment professionals in developing their countries.
“We’ve acknowledged the problem. It comes from a combination of things. It’s the products, services, firm structures and industry structure. It’s going to require some regulation because people do need to be nudged in the right direction, there is no question about that,” Smith says.
To rebuild trust in a country such as SA where recent events and long-standing market conduct issues have widened the trust deficit, Smith reckons structural changes are required - from industry ownership to incentive structures - and the way investment professionals are recruited.
The low-hanging fruit to regain trust, he says, lies in simple things such as designing products that are fit for purpose, pricing them fairly and making sure that they are simple enough for average consumers to understand.
But Nerina Visser, president of the CFA Society SA, says any regulatory intervention will work best if it incentivises good behaviour rather than punishes bad behaviour. She says tax-free savings accounts - investing in products for which performance fees and individual fees are not allowed - are an example of regulation that created “soft constraints” which successfully changed behaviour.
“Hard rules and sticks have proven to be not as effective because the harder you make the regulations, the more you squeeze behaviour into dark corners,” Visser says.
Although there have been several regulatory interventions in SA to ensure that financial services companies treat their customers fairly, financial advisers recently berated asset management companies for complex fund and fee structures at the Morningstar adviser conference in Johannesburg. Some said they were struggling to understand these structures and questioned how average investors were supposed to make informed decisions.
Smith says he believes change will come when investment companies start questioning whether their priorities lie in the right place. He says investment managers who prioritise creating profit for their shareholders speak volumes about their regard for the people from whom they make their money.
“If you say I’m in business to serve my clients, in which case you’ve reverse the process and your clients come before shareholders, that’s professionalism,” he adds.
Smith says investment managers have to start cleaning up their acts with a simple task - defining in layman’s terms what they do in the financial services value chain. “Most South Africans still have no idea what we are doing. They think we are just overpaid, and I’m not disputing that. And they think we don’t do much that impacts on the average South Africans’ lives,” he says
The industry has to question and better articulate its purpose, because the kneejerk reaction from authorities when the role of an entity isn't clear is to over-regulate, he adds.
“The investment industry has a wonderful sense of purpose; to help South Africans achieve their financial aspirations and we should be very proud of that," says Smith. "The problem is that a lot of activities we do is hard to relate directly to that good - but we do do good things.”
Smith says there is recognition that the industry needs to do more in the social investment sphere by directing more capital towards imperatives such as infrastructure, enterprise financing and pure social investments like education and housing. The challenge, he adds, is that it is not as easy to quantify returns on social investments as it is for economic infrastructure.
“It’s a social accounting problem. We don’t have models to quantify the true value of building a school that will educate young South Africans for the next 20 years,” he says. "We are not pricing into the conversation all of the costs and benefits that social investment activities can have. That’s why capital is being misallocated.”
The CFA Institute has partnered with the African Securities Exchanges Association to assist in developing the continent’s capital markets, and to provide ethics training among all players in the financial markets ecosystem.
Visser says the institute is hoping to train the “moral muscles” of investment professionals so that they can respond more ethically when confronted with unethical behaviour and to help the industry rebuild the trust it has lost with society.