CAPE TOWN – The Cambist online platform has been operating since early 2012. More than two years have passed since it first advertised its eye-catching returns, initially at 24% and later at 19.5%.
From those early days, Moneyweb and others have raised concerns about whether those returns can really be guaranteed or sustainable. It has been apparent to many that the risks inherent in the model just seem too high.
So why have the regulators been so quiet on the matter? Surely they have television sets and have seen the famous adverts?
The truth, it turns out, is that that their silence should not be confused for inactivity. The deputy executive officer at the Financial Services Board (FSB), Caroline da Silva, recently confirmed to Moneyweb that the FSB, the South African Reserve Bank (Sarb) and the National Credit Regulator (NCR) have all had a look at the business.
“We picked up on it a while back and did our own enquiries,” Da Silva says. “The issue was referred to the Reserve Bank and there was a full inspection. In terms of their own jurisdiction, however, they found that Cambist wasn’t a deposit-taking institution. But they did have concerns about sustainability.”
What followed was a meeting in March 2014 between the FSB, Sarb and the NCR at which it was agreed that the NCR should take the matter forward. It has been conducting its own investigations, and the other parties are awaiting its report.
This is at least encouraging. Even though the NCR is not willing to disclose anything regarding the investigation until it is complete, at least we know someone is on the case. However, there is still a lot to be concerned about.
The first is the question around jurisdiction. Cambist clearly operates like a financial product, but it has cleverly positioned itself outside of the definition contained in the Financial Advisory and Intermediary Services (FAIS) Act.
Strictly speaking, that means that the FSB is not legally able to regulate it. After all, the FSB can’t assume powers that it does not have. But should the matter just be left there?
“I would argue that Cambist is clearly a financial services provider,” says Geordin Hill-Lewis, the DA’s Shadow Minister for Trade & Industry. “It should fall under the FSB because it is providing an investment platform to retail investors. If it is not covered by the Act, then the Act should be amended.”
In this respect, it is noteworthy that the FAIS Act does contain a catch-all provision which states that “any other product similar in nature to any financial product” can be deemed a financial product if it is declared so “by the registrar by notice in the Gazette”.
So there is apparently scope for the FSB to act.
As Billy Seyffert, a compliance officer with Moonstone notes: “Giving someone money and expecting a return, in any layman’s view is an investment. So there is something of the general principle that if it walks like a duck and quacks like a duck, then it is a duck.”
And that being the case, the regulator should be in a position to call it what it is and act on it.
However, the FSB’s Da Silva says that declaring something like Cambist to be a financial product would be a formidable process, that actually requires amending the legislation. That takes a lot of time and is hardly an effective way of managing such an issue.
Which leads to the second big worry, which is the time it takes for regulators to act in a case like this. It took two years for the matter to be formally referred to the NCR for it to conduct a full investigation, and another nine months later there is still no final report.
Anything like Cambist where the risks are so high is likely to have a limited lifespan. For regulators to be effective, they have to be able to step in as quickly as possible to prevent investors losing money before it is too late.
The time frames above unfortunately don’t fit that bill. Right now Cambist appears very fragile, and it is possible that whatever final report the NCR comes out with will be moot.
The DA’s Hill-Lewis argues that this delay is symptomatic of the systemic weakness at the NCR.
“It is clear that the NCR is not fully capable of fulfilling its mandate,” he says. “There is a capacity constraint, in that it is underfunded given the size of the problem and the size of its mandate.”
However, the CEO of DebtBusters, Ian Wason, believes that it is also important to bear in mind that the regulator can only be as good as the legislation behind it.
“The National Credit Act (NCA) was extremely well-intended and even ahead of its time,” he says. “But it unfortunately has a lot of holes in it and doesn’t give the regulator nearly as much power as it should. It’s put a guard dog in place, but hasn’t given the dog any teeth.”
Amendments to the NCA that will make the regulator much stronger have been passed through Parliament and even assented to by the president, but have not yet become effective as they need to be re-drafted. The delay is further affecting the ability of the NCR to fulfil its mandate.
“The amendments give a lot of power to the NCR and clear up a lot of things,” Wason says. “For instance, they basically give the regulator the power to take away people’s licences.”
The FSB’s Da Silva also acknowledges that the time it takes to act when something appears problematic is a big issue for regulators to face. However, she believes it is a fundamental concern that will be addressed by the new Twin Peaks model and the introduction of the Conduct of Financial Institutions Act.
The clause in the FAIS Act that allows the registrar to declare anything that works like a financial product to be so is also under scrutiny. If that process can be speeded up, it would be an important tool in empowering the regulator in instances like this.
“That clause has been something extensively debated in terms of new market conduct regulations so that the regulator can be more proactive and quicker to respond,” Da Silva says. “So where the market conduct legislation is put before Parliament we hope these kinds of issues will be strengthened.”
It is actually a key theme of the proposed legislation that regulators be given power to act more proactively. The establishment of a market conduct regulator that can pre-emptively tackle products that are currently unregulated, fraud and the misuse of investor’s assets is part of what is envisaged.
South Africans should hope that this legislation succeeds in giving more teeth to regulators, but also that regulators themselves become more accessible. It is worth asking why, if the regulators have been looking at Cambist, nobody has known about it? Why have they not at least issued a statement to say that they have some concerns around this product and they advise the public to treat it with caution until they have finalised their investigations?
The FSB’s Da Silva admits that the regulators probably haven’t communicated properly on the matter, but at the same time they have to be cautious about what they say.
“These reports and inspections are obviously treated with as much confidentiality as they deserve,” she says. “And that can be frustrating, because there is an awful lot happening behind the scenes, but due to these confidentiality issues unfortunately the public might think nothing is being done.”
The concern for the public, however, is that we want to know that the institutions that should be tackling these matters are doing so. In that respect, a little more communication would go a long way.