Financial Advisory and Intermediary Services Act (“FAIS”) Regulatory Update

Proposed Conduct of Business Report

The Registrar of Financial Services (“Registrar) published the proposed Conduct of Business Report (the “Report”) on the Financial Services Board (“FSB”) website on 6 December 2016.  Financial Services Providers (“FSPs”) and Compliance Officers have been invited to submit their comments on the proposed Conduct of Business Report by 28 February 2017.

The regulatory framework has evolved since the implementation of the FAIS Act and the focus is now on market conduct.  This shift in focus as well as the trends identified during analysis of the current compliance reports submitted by FSPs has necessitated a change in the manner of reporting by FSPs.

The Report aims to eradicate the problem of the tick box approach in the current compliance reports.  The Report seeks to hone into the business model of the FSP and the exact nature of its business activities.  The Report consists of a pool of questions that have been developed for various types and categories of FSPs.  The Registrar’s idea behind the Report is to customise the Report for a particular FSP based on its activities.

 

Proposed Exemptions of Certain Financial Services Providers

On 31 August 2016, the Registrar published three exemptions for public comment on the FSB website.  Due to the nature of comments received from industry, the Registrar has endeavoured to make a final decision regarding the exemptions by 28 February 2017.  These exemptions expire on 31 December 2019.

  1. Exemption of particular juristic representatives from section 13(1)(c) of the Act.

Section 13 of the FAIS Act was amended by the Financial Services Laws General Amendment Act 45 of 2013 by the inclusion of Section 13(1)(c), which provides that a person may not render financial services or contract in respect of financial services, other than in the name of the FSP of which such person is a representative.

The proposed exemption will allow a juristic representative of a Category I or Category IV FSP that is also registered as a long-term or short-term insurer, in its own name, to collect, receive or hold premiums on behalf of the FSP in respect of a financial product issued by the FSP.  This is subject to the conditions that the juristic representative must at all times have a written mandate from the FSP to render the specific financial service and must annually obtain written confirmation from the FSP that the FSP is duly authorised to act as an FSP and is a registered long-term or short-term insurer.

  1. Exemption of particular FSPs from section 19(3) Audit Report and Liquidity Requirements

Category I and Category IV FSPs that collect, account, receive or hold premiums in terms of a written mandate on behalf of an insurer in respect of a financial product issued by that insurer will be exempted from having to:

  1. submit to the Registrar the audit report which confirms the amount of money and assets at year-end held by the FSP on behalf of Clients and which confirms that the money and assets were throughout the financial year kept separate from those of the business of the FSP;
  2. meet the soundness requirements set out in section 9(3)(b) and (c) of the Fit and Proper Requirements of 2008.
  3. Exemption of particular FSPs from section 13 of the General Code of Conduct

Category I or Category IV FSPs that only act as underwriting managers will be exempted from having to maintain minimum professional indemnity and fidelity insurance cover as required under Section 13, provided that the FSP has a written mandate from the relevant insurer.

 

Proposed Amendments to the Fit and Proper Requirements

The latest proposed amendments to the fit and proper requirements were published on 17 December 2015 and are designed to meet the consumer protection adjectives of the FAIS Act and to ensure clarification of applicable requirements.  Some of the pertinent sections are discussed herein.

Operational Ability

  1. Key Individuals and representatives of FSPs:

One of the most significant proposed amendments is with regards to the operational ability of FSPs, representatives and key individuals.  The proposed requirement is that an FSP must, on a regular basis, assess its key individuals’ operational ability to adequately and effectively perform their functions, taking into account the nature, scale, range and complexity of the FSP’s financial services activities.

Additionally, a key individual must be able to demonstrate to the Registrar that he/she has the required operational ability to effectively and adequately manage or oversee the financial services activities of the FSP. The onus will therefore be placed both on the FSP and the key individual to prove that they do have the operational ability to be the key individual of an FSP and its related services.

  1. Specific requirements:

Currently, an FSP is required to have a business continuity plan in place.  In the proposed requirements, this has been extended to say that an FSP must “establish, maintain and apply an adequate business continuity policy which in the case of an interruption to its systems and procedures, will limit any losses, will preserve essential dates and functions, the maintenance of its regulated activities, or where that is not possible, the timely recovery of data and the timely resumption of activities.”  This will require FSPs to ensure that their continuity plan extends to a policy, setting out the elements mentioned in the proposed requirements

In the current climate of rising costs and a struggling economy, financial risk is one that all FSPs should consider and evaluate. It is therefore imperative for FSPs to deciding on a plan of action to follow should a financial risk materialize.

In the current requirements, an FSP’s procedures and controls must include processes to ensure that the records of the business are backed-up and that the business has a plan in the event of any interruption which has typically formed part of the Disaster Recovery Plan.  The proposed amendments have extended the recovery procedures to include a plan “for the restoration of its financial situation following a significant deterioration and viable resolution plans setting out options for the orderly resolution of the FSP in the case of failure”.

Financial Soundness

The current requirements are only applicable to FSPs while the proposed amendments will also apply to juristic representatives.  Another proposal which could have an impact even on existing FSPs, is if an FSP or juristic representative is subject to “pending proceedings” which could result in being declared insolvent or provisionally insolvent or being placed under liquidation, they would not be able to continue as an FSP or juristic representative.  In addition, any FSP or juristic representative which persistently fails to manage its financial obligations or to provide a satisfactory credit record will not be able to continue to operate as such.

Continuous Professional Development

The proposed amendments define a Continuous Professional Development (“CPD”) activity as one that is accredited and tracked by a professional body recognised by the South African Qualifications Authority as a professional body and one that is verifiable.  An FSP, key individual and representative must maintain their required competence to render financial services by undertaking CPD activities that are relevant to their functions, contribute to their skills, knowledge and expertise and importantly, adequately take into account changing internal and external conditions in the market that are relevant to the financial products they offer.

An FSP, key individual or representative must complete a minimum of between 6 and 18 hours of CPD activities per CPD cycle (from 1 June every year to 31 May the following year) depending on the financial product which they offer.

Thipa Denenga will continue to monitor developments relating to the proposed Report, Exemptions and Amendments to the Fit and Proper Requirements and the implications for our Clients.

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