The Financial Services Board (FSB) has warned consumers to be aware of the rise in pyramid schemes and other illegal investment opportunities offered by entities posing as authorised financial services providers.
“The increase in investigations highlights that these types of schemes are on the increase,” commented Caroline da Silva, deputy executive officer for FAIS at the FSB. “Consumers therefore need to be vigilant of these types of offenses.”
A pyramid scheme works on the basis of active recruitment by members, where successfully recruiting new members or investors earns you money. In other words, the more members you recruit the more money you make, so that people at the top of the pyramid make the most money.
Ponzi schemes promise unrealistically high and often guaranteed returns on your investment in a very short period of time and usually at no risk. They depend on a steady flow of investors, since money from later investors is used to pay earlier investors.
Ponzi schemes inevitably collapse when cash outflow exceeds cash inflow.
According to Da Silva, illegal schemes tend to involve deposit taking or the sale of shares in unlisted companies. Both of these activities, Da Silva says, fall under the Department of Trade and Industry (dti) or the South African Reserve Bank (Sarb).
“Due to the fact that these schemes do not fall under the FSB’s jurisdiction, we have worked hard to establish strong lines of communication with all the other relevant regulators to ensure such matters are referred without delay and are dealt with promptly,” she said.
Any institution accepting deposits needs to be registered with the Sarb, while those providing credit should be registered with the National Credit Regulator (NCR).
The NCR falls under the dti. NCR CEO, Nomsa Motshegare told Moneyweb last month that the regulator hasn’t done a single investigation of a credit provider without informing the Reserve Bank. Motshegare said coordination between regulators had improved considerably. For instance, regulation on credit insurance was drafted in consultation with the FSB and the FSB helped the NCR to train its compliance officers.
The FSB regulates individuals and organisations providing advice on financial investments.
Da Silva urged investors to ensure that they seek the advice of a reputable and accredited financial advisor before “parting with any hard earned cash”.
Patience, patience, patience
“We love to buy things that are going to give us no risk and maximum growth and that’s what unscrupulous product providers are trying to promise you,” commented Warren Ingram, executive director of Galileo Capital.
“Something that sounds too good to be true usually will prove to be a problem and we see it time and time again,” Ingram said.
He is wary of any product with a capital guarantee, although points out that there are legitimate products with capital guarantees issued by banks, for example.
Still, Ingram favours a long-term investment in the stock market saying you’re very unlikely to lose money over a five-year period if you invest it in shares. “If you’re patient and buy the index, you’re going to get the dividends and the most likely outcome is that you will at least get your money back or have very significant growth,” he maintained.
“Keep it simple, do the homework and understand the investments you are making. If you’re buying an Internet company with some new-fangled idea that you don’t understand then perhaps you shouldn’t make that investment decision,” Ingram said.