Банкеръ Weekly



In July, the Financial Supervision Commission announced the beginning of the long-awaited and long-term pension revolution. Its essence lies in the introduction of multifunds (that will create an option for voluntary pension contributors to chose the risk profile of investments made with their contributions to the pension funds) as well as a gradual decrease of the investment fee collected by these funds. However, what remained almost unnoticed was the intention of the pension insurance supervision body to change the regulation on advertising and information policy of the market players and the funds managed by them.
The aim of the Insurance Supervision body
is to introduce in the Social Security Code a list of conditions that the information materials as well as INTERNET pages of the sector companies must meet. While the proposals for amendments and supplements to the existing regulation act are on their way to plenary session at Parliament, the experts from the Financial Supervision Commission are not wasting their time and have already taken measures to put the existing requirements in conformity with the existing market conditions. On September 1, the supervisory body announced that the head of the Insurance Department, Bisser Petkov, has approved new rules on advertising and information materials of the companies in the pension insurance sector. They will become effective as of October 1.
At present
the conditions the information materials must meet
are not part of a legislative act. The only thing that the Code mentions is that market participants cannot advertise products and services they don't offer at the moment, nor can they promise future yields from their investments or include in their advertising materials unclear phrasing as regards the results they have achieved.
All other requirements are written in a regulation approved by a document of the Financial Supervision Commission vice chairman. However, the Commission may impose sanctions only to infringements defined in the Code, and their range is very narrow and fails to cover all information tricks the funds use to promote themselves.
Maybe someone would ask why the Supervision Commission should look into such accessory activities such as advertising, having in mind how important problems the sector is to solve (securing decent pensions to people and finding solutions to problems opened by the global financial crisis.)
But as of the beginning of the year, all funds have been far away from their goal: the good returns from their investments from people's individual accounts. In the same time, the consumers of the services still don't show high interest in them and don't show understanding of the risks they undertake with their insurance contributions. There are only few who realize that the losses incurred will be at their own expense. That is why, in the wording of the vice-chairman of the Financial Supervision Commission, Bisser Petkov, it is a must for the companies to expressly state in their advertising and information materials that they cannot promise a minimum return rate, nor even that they will manage to keep the full extent of the money people invest with them.
In quite a few complaints to the Financial Supervision Commission, consumers claim they were enticed to sign a contract with a voluntary pension fund because they were misled by information on yields achieved by the particular entity, but nobody informed them that the value of their shares may drop, and that they even may generate negative results, representatives of the Commission explained.
the lack of interest and entrepreneurship of the consumers
is not the only problem. As it seems, some of the market players take advantage of the low level of experience and knowledge of insured and try to steal clients from their competitors. In the archives of the Financial Supervision Commission there are reports on many disloyal practices. Some of them include falsifications of signatures on applications for transferring to another fund. The introduction of a notary-certified signatures dramatically decreased the number of frauds, but the problem is in the small settlements where mayors play also the role of notaries and there the situation still exists, representatives of the sector say.
There are other forms of disloyal competition. For example, companies spread rumours that a competitor pension insurer does not exist any longer or has been declared bankrupt. Otherwise, incorrect data on a competitor's legal status may be used as a tool, or even debit cards with small amounts in them as a factor able to make insured people think of changing their fund.
And while these instances may be considered as
false statements from a vile competitor
the Financial Supervision Commission has also detected cases where the funds try to mislead potential clients by advertisements. Commission experts told the banker weekly that since the beginning of 2008 two complaints have been submitted to the Commission in which insured people claim they were misled by information materials of pension insurers. In both cases, the fund was one and the same. In July the supervisory body found an infringement of the Social Security Code when a fund included misleading information in an advertisement. The fund was ordered to withdraw the advertisements and was imposed a fine.
These examples explain why the Financial Supervision Commission wants to set up
a clear framework of allowed information practices
As a matter of fact, the most significant change in the requirements, as approved at the beginning of the week by Mr. Petkov, were that when funds announce their investment returns, they have to follow certain rules and take into their calculations certain indicators. Insurance companies will also have to inform their potential clients not only of their yields (nominal and real, that is - adjusted to the inflation rate) but also about the level of the investment risk they undertook.
In fact, the most stable pension insurers have long been asking for clear advertising rules. At the beginning of 2007, for example, during the annual press conference of Allianz Bulgaria Holding, the executive director of the pension insurance entity in the group, Sofia Hristova, said: People must be aware of the risk they undertake and to have the option to take informed decisions as to where to invest their money. At present smaller investment funds make riskier choices so that they may meet the minimum yield they announced. However, they must keep in mind that pension insurers are conservative investors. In other words, the important thing here should be what the results are going to be at the end of the insurance process. However, a more aggressive investment attitude yields better results in period of upward overall trend, but is a preposition for higher losses in a period of crisis. That is why insured people have to be very much aware of the methods their money are being invested by.
As of October 1,
the indicator for consumers
will be the Sharp's coefficient. It informs on the likelihood of posting a profit or a loss by comparing yields from investment management and the levels of risk undertaken to achieve them. The underlying philosophy of the index is that an investment risk may be undertaken only to gain a profit exceeding the so called non-risk yields. The absolute value of the index is calculated through a complex formula, taking the effective interest rate on overnight deposits, as published by the European Central Bank, for a non-risk basic yield level. The most important when comparing two companies according to the Sharp's index is that it compares in fact higher yields to a unit of risk.
The other new idea in the requirements is that the pension funds will be allowed to compare their results with other sector representatives. Of course, the comparison with a single competitor will not be allowed. A fund will be able to use comparisons only when presenting the whole market picture.
Finally, as the experience has showed, there is not much sense in leaving excessive freedom to pension funds. At least because of the specifics of the business and the customers, because they are not that likely to know what the right choices are, depend too much on experts, who, sometimes, transgress certain ethical norms.

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