This presentation is about portfolio management

portfolio management

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. 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
The uses and limitations of CBA
Objective of the exercise

5. 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
Introduction
Whom we saw

6. 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.
Introduction
Methodological difficulties

7. Issues in the Bill
Separating cost from non-cost issues
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
67 distinct issues identified from submissions &
discussions:

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
#Issue Clause
1General cost of compliance
2Central register of key individuals & representatives 13(3)
3Refer to holding of license 8(7)(b)
4Audit required 19
5Bar for compliance officer appointment 17(1)(a)
6Record-keeping of representatives 18(e)
7Keep reocrd of advice basis Gen Code
8Records of cancellations, complaints & compliance 18(a)(b)(c)
9Code of conduct General Code
10Ombud's cost 20
11Ombud's powers. 1(1)(xii)
12Client education 32

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?
Category
Estimated # of
individuals
Source
In individual broker FSPs
Independent brokers (IBC) 3,600 IBC data
Independent brokers (LUASA) 1,300 LUASA data
Other brokers in established market 4,000 Genesis estimate
Brokers in emerging market 3,000 BBF estimate
Total 11,900
Representatives
In life offices (tied agents) 10,950 LOA Database
In corporate & bank brokerages 5,450 SAFSIA estimate
Direct selling by ST insurers 200 Genesis estimate
Bank staff outside broking arms 8,174 Genesis estimate
Total 24,774
Total individuals 36,674

12. Costs and benefits
How many intermediaries?
Item Number Source
Total # of LOA registrees 34,100 LOA
Less: life offices tied agents (10,950)LOA
Less: brokers affiliated to large corporate
brokerages
(5,450)SAFSIA estimate
LOA estimate of independent registrees 17,700
Less: "sub-code" registrees: (7,080)Insurer estimate @ 40%
Estimate of full-time brokers: 10,620
Genesis estimate of full-time brokers: 12,000
Note: "sub-code" registrees tend to be spouses or administrative personnel registered
for administrative convenience but who are not full-time brokers.
Reconciliation with LOA data

13. Costs and benefits
How many intermediaries?
Estimate of corporate FSPs
Type # Source
Corporate brokerages 235 SAFSIA
Investment managers 260 FSB
ST insurers 53 SAIA
LT Insurers 35 LOA
Banks (excluding broking arms) 55 Banking Council
Total corporates 638
Memorandum item: estimate of # of potential corporate FSPs

14. Costs and benefits
Framework for costs
Licensing
License fee
7(1)
FSB Levy for FSPs
Representative body fee
(increment)
6(4)
Fit and Proper
Competency training
8(1)(ii) +sl
Operational ability 8(1)(ii) +sl
Auditing
Proper books
19(1)(a)
Fin statements
19(1)(b)
Audited statements 19(2) +sl
Compliance
Complaints processing
Compliance officer
Ombud
16, 16(2)(b),
18 & Code
Cost Clause
Record-keeping
Transactions
Advice/analysis
Code of Conduct
Disclosure
Appropriate advice

15. Regulatory costs– assume to be passed on
Start-up Annual
Total staff expenditure 7,824,000
Recruitment 260,000 26,000
Advisory Committee 120,000
Computer support & maintenance 65,000
General expenses (monthly) 271,716
Gen expenses (annual) 45,700
Gen expenses (initial) 10,000 -
Legal fees 180,000
Printing & postage 245,000
Stationary 8,000 24,000
Telephone 97,740
Travel 132,000
Professional Indemnity 108,000
Professional Fees 74,544
Computer licenses 130,000 96,000
Rental 662,136
Income protection plan 99,396
Total 408,000 10,071,232
Cost
Item

16. Initial costs: assumptions & data
Cost source ClauseExplanatory notes
Licensing
Registration processing
7(1)
Costs of registering an FSP: R500. Source Sanlam. Cost to PS of Rep register
piggy-backing on LOA: 50% of R40,000 / 2000 Reps + R10 per Rep internal
costs. LOA Register costs + estimates.
Fit and Proper
Competency training
8(1)(ii) +sl
Category I requires NQF 4 training estimated at R1,500. Category II and III
require NQF 5 and NQF 6 training respectively, estimated at R3,500. Source:
FPI. Training after-hours, so no time cost.
Operational ability 8(1)(ii) +sl
For EBs: As defined in draft SL will not require office or computer. But will
require sound filing and basic practice management. BBF indicated that EBs
need training in these 2 areas. Will also require phone and fax connection.
Training costs are 16 hours @ R50 plus R200. Fax machine costs R700.
Auditing
Proper books
19(1)(a)
Assumption: audit requirements limited to those I/m that already effectively
need to audit (investment managers, Brokers that collect ST insurance
premiums.
Code of Conduct
Disclosure Recond-
keeping
16, 18 &
Code
IBs with access to electronic services, upfront fee of R450. Source: Sanlam
and 9*R50 IBC development costs. Reps: true once-off costs of record-keeping
and disclosure ito PPR for Prestasi. EBs: printing costs of R1,400 and record-
keeping system of R600.
General training re
Code.
IBs 8 hours @ R250 + R500 = R2,800. Reps: actual costs of PPR training per
rep at Prestasi (hours incl.). EBs: 8 hours at R50 plus R500 training costs.
Appropriate advice
IBs and Reps, cost of financial planning software license. EBs: 8 hours at R50
plus R500 training costs.

17. Initial costs: estimates
Insurance Banking
Licensing
Registration
processing
7(1) R 500 R 50 R 50 R 500
Fit and Proper
Competency training
8(1)(ii)
+sl
R 3,500 R 1,500 R 1,500 R 1,500
Operational ability
8(1)(ii)
+sl
- - - R 1,700
Auditing
Proper books
19(1)(a) - - -
Code of Conduct
Disclosure
Recond-keeping
16, 18 &
Code
R 450 R 3,400 R 1,700 R 2,000
General training re
Code.
R 2,800 R 1,250 R 1,250 R 900
Appropriate advice R 1,500 R 1,500
(in general
training)
R 900
R 8,750 R 7,700 R 4,500 R 7,500
R 1,950 R 4,900 - R 2,900
R 6,800 R 2,800 R 4,500 R 4,600
Representative (Rep)
Cost source Clause
Independent
broker (IB)
Emerging
broker (EB)
Comprised of
Total costs
PPR costs
FAIS costs

18. Annual costs: assumptions & data
FSB cost recovery
Annualised license fees &
levies
7(1)
FSB budgeted recurring expenses (R10.07 million per annum) dividided
by 36,674 individual intermediaries (+ small margin) and allocated per
individual I/m.
Other licensing
Representative body fee
(increment)
6(4)
IBs & EBs: Additional membership cost incurred by being representative
body is R50 per month from IBC, of which 1/3 estimated for Fit &Proper.
Reps: Assuming cost of Rep register at R50 per annum.
Auditing Proper
books
19(1)(a)(b)
(c)
Assume (a), (b) already in place for tax purposes. Assume (c) audit only
required for I/ms that take client money.
Code of Conduct
Disclosure Recond-
keeping
16,
16(2)(b),
18 & Code
IBs: IB Direct costs of R350 p/m est. in future, Sanlam's R150 p/m
requires additional own costs (+-R200 p/m). EBs: non-electronic, 1.5
hours @ R50 X 48 weeks. Reps: Insurance based on actual PPR
experience, banking estimated on basis of that.
Code of Conduct
Appropriate advice
Code
For IBs: annual cost is .5 hours X R250 X 48 weeks = R6,000 plus
software update of R500. For EBs: 0.5 hours X R50 X 48 weeks =
R1,200. For insurance reps: 0.5 hours X R150 X 48 weeks = R3600, for
bank reps half that. For insurance reps add software update.
Compliance
Complaints processing
5 extra complaints annually other than high-volume EBs, with 10 extra.
For IBs: 5 X 1 hour X R 250 = R1,250. For EBs: 10 X 1 hour X R50 =
R500. For insurance reps: 5 X 1 X R150 = R 750, for bank reps half that.
Compliance officer For IBs and EBs: 8 hours @ R300. For insurance reps: R1000 p/y From
Prestasi, for bank reps half that.
Ombud
Fee/cost
For all, R 6 million annual cost of ombud divided by 36,674 individual
intermediaries.
Explanatory notesSource of cost Clause

19. Annual costs: estimates
Insurance Banking
FSB cost recovery
Annualised license fees &
levies
7(1) R 300 R 300 R 300 R 300
Other licensing
Representative body fee
(increment)
6(4) R 200 R 50 R 50 R 200
Auditing
19(1)(a)(b)(c) - - -
Code of Conduct
Disclosure
Recond-keeping
16, 16(2)(b), 18
& Code
R 3,600 R 2,300 R 1,800 R 2,400
Code of Conduct
Appropriate advice
Code R 6,500 R 4,100 R 1,800 R 1,200
Compliance
Complaints processing
R 1,250 R 750 R 375 R 500
Compliance officer
R 2,400 R 1,000 R 500 R 2,400
Ombud
Fee/cost
R 164 R 164 R 164 R 164
Total costs R 14,414 R 8,664 R 4,989 R 7,164
Comprised of
PPR costs R 11,350 R 7,150 - R 4,100
FAIS costs R 3,064 R 1,514 R 4,989 R 3,064
Representative (Rep)Independent
broker (IB)
Emerging
broker (EB)
Cost Clause

20. Aggregated costs
Insurance Banking
Total initial costs 77.9 127.8 36.8 22.5 265.0
Comprised of
Initial costs: PPR 17.4 81.3 0.0 8.7 107.4
Initial costs: FAIS 60.5 46.5 36.8 13.8 157.6
Total annual costs 128.3 143.8 40.8 21.5 334.4
Comprised of
Annual costs: PPR 101.0 118.7 0.0 12.3 232.0
Annual costs: FAIS 27.3 25.1 40.8 9.2 102.4
Memorandum item: # of
intermediaries (number)
8,900 16,600 8,174 3,000 36,674
Rmillion
Independent
broker (IB)
Representative (Rep) Emerging
broker (EB)
Total

21. Aggregated costs: insurance
Market flows
Individual LT Insurance - -
Single premium 2000 35,776 n.a. n.a.
Recurring premiums 2000 32,113 n.a. n.a.
Total 67,889 5,517 8.1%
Group schemes & pension
funds
Lumps sums 2000 20,674 n.a. n.a.
Other premiums 2000 23,291 n.a. n.a.
Total 43,965 516 1.2%
ST Insurance
Motor 2000 6,720 806 12.0%
Other 2000 16,980 3,396 20.0%
Total 23,700 4,202 17.7%
Total 135,554 10,235 7.6%
Commission / InflowRmillion Year
Premium / investment
inflow
Commission flow

22. Aggregated costs: insurance
Costs relative to market flows
I/m income estimated assuming net margin of 66.6%
Description Rm
Premiums &
Inflows
Commission
Earnings
Estimated I/m
income
PPR Costs 232.0 0.17% 2.27% 3.40%
Additional FAIS costs 61.6 0.05% 0.60% 0.90%
Total costs 293.6 0.22% 2.87% 4.31%
Cost as percentage ofEstimated recurring cost

23. Aggregated costs: banking
Costs relative to deposit base
Depositor group (all
in Rmillion)
Long-term
deposits as
defined by SARB
Estimated
deposits > 1 year
Annual FAIS costs
as % of deposit
base
Individuals 18,951.0 9,475.5
Unincorporated
businesses
308.0 154.0
Non-profit enterprises 984.0 492.0
Total 1 20,243.0 10,121.5 0.40%
Incorporated private
businesses
10,188.0 5,094.0
Total 2 30,431.0 15,215.5 0.27%
40.8Memorandum item:estimated annual costs to banking sector (Rm)

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.
Rm
Annualised
premium
Loss to
policyholders
Affordability &
misselling ratio
Remediable loss
First Year
Lapses
806 269 66% 177
Other Lapses 753 1,130 33% 373
Total 1,559 1,398 550

25. Estimate of benefits: insurance
Readily quantifiable benefits
Due to the size of the industry, a small
improvement is worth a lot in aggregate.
Amount
(Rm)
275
121
559
200
1,155
In LT insurance
In ST insurance
Total
Improved return in one year of .5%
2% savings in LT commissions
Source of benefit Note
Reduction in LT policy lapses
1% reduction in ST insurance
premiums
Assume 50% success rate wrt
remediable lapses only.
From reduced misselling & improved
disclosure.
From reduced misselling & improved
disclosure.
From increased competition &
disclosure.

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. 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.
FAIS and empowerment
The emerging broker

29. 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.
FAIS and empowerment
Challenges to emerging brokers