2022 Compliance Reports

The FSCA has confirmed that there will be no compliance reports yet for this year. They are still busy drafting the new Conduct of Business Reports it seems. The last compliance reports were issued in 2018. It is not clear why it is taking them 4 years + so far to draft new CBR reports. My guess is that they are waiting for the COFI Act first, which still has to become law. Or maybe some more coffee is needed, post-haste. But that is just an educated guess at this stage. In the meantime we continue to make sure our clients are compliant in terms of what the law requires of them.

You can read more here.

FICA FATF Review
In other news, the FIC issued a document with a complicated title: "Important communication regarding FATF Mutual Evaluation: Immediate Outcome 4 - Preventative Measure". I am going to save you the time you would have spent to read the 10 page document and summarise if for you. 

The document basically details that the Financial Action Task Force (the global rule maker responsible for FICA being in your lives) did an assessment on the compliance in South Africa and found us wanting. They say that entities do not understand the money laundering risk and also fail to identify reportable transactions and fail to report them to the FIC.

What does this mean? If South Africa (meaning, effectively, our regulators) does not pull up it's socks, then South Africa might get grey listed. Just know - this is not good. This also means the FIC and FSCA might do more intensive inspections of their own to prevent this. On the bright side, they will also assist the industry more. So expect more guidance and perhaps more changes to come.

Read more about this here.

By now it is old news that many of Russia's Politically Exposed Persons, entities and Prominent Influential Persons have been sanctioned. In terms of FICA, you may not deal with any sanctioned person and this may also be a reportable activity if any financial transactions are attempted.

This is just a reminder that all FSP's must check if their clients are sanctioned at onboarding stage (and keep proof of this) and whenever you are updating FICA information in line with the client risk rating being low medium or high.

If you are not using AML software to onboard clients you can search for sanctioned persons and entities on the following websites. The links work as a time of publishing this blog post.

The OFAC sanctions list is most up to date and works best:
https://sanctionssearch.ofac.treas.gov/

The FIC search function exists but in my opinion is not 100% reliable and has some bug (for instance, it does not return results if all information is not entered):
https://www.fic.gov.za/International/sanctions/SitePages/Home.aspx

We've recently attempted to register a number or Juristic Representatives in terms of the FAIS Act for our clients and were met with a rather peculiar situation. Previously, after we conducted a Due Diligence and all parties signed the necessary agreements one needed to merely add the JR on the register via the FSCA E-portal.

Much to our own surprise, it seems like this function is no longer available on the online system. When we phoned the FSCA we were told: "We no longer do it that way - you have to send it in for review.". Interesting.

There seems to have been no communication to anyone that this would change beforehand. And this seems to be a trend with the FSCA in terms of their licensing departments not communicating changes to their own stakeholders. As a further example of this we see many different kinds of documents being asked of FSP's without informing them beforehand so they can get them ready. There also does not seem to be an even playing field regarding this as the items they ask for can differ in substance and form.

When asked if they can perhaps publish these new requirements beforehand we are always met with the same answer: "in terms of Section 8(2) of the FAIS Act, The Authority may require an applicant to furnish such additional information, or require such information to be verified, as the Authority may deem necessary."

​Now, in my opinion I do not think this section means you can just make up random requirements or nit-pick with regards to headings and file formats (we were recently asked to provide a statement of financial position in three different formats by three different analysts in three different license applications - there seems to be no internal communication or alignment about what is indeed required). In one recent case they asked for a Tax Clearance certificate - but for no other applications have I ever seen this in 10+ years of applications.

My friendly suggestion to the FSCA would be this: Decide on your formats, communicate it to everyone beforehand and be consistent in the application of your rules - you will have a much smoother process with happier stakeholders.

So what do the online cancellation of JR registrations mean? Maybe that they want to review the applications and maybe scrutinize it more closely, I suppose. It certainly means it will take longer than it did in the past. It could also be in preparation for COFI. I am just taking an educated guess and that is the main problem here - if you do not communicate, people guess and speculate. But, that being said - communication about these things still seems to be a problem and can be hugely improved.

​We'll keep you posted on developments.

Long ago in a land not so far away the FSCA decided that it no longer wanted the obligation to investigate and debar people that should not be in the industry. One can only ponder as to why this is. Lack of resources is my best guess (as a person that used to, among others, work with and in a department that used to do this). As a result, this is something that now befell the FSP to do in 90% of the instances.

This has some unintended consequences such as:

• People being debarred for the wrong reasons
• People not being debarred at all
• People being debarred and then debarments lifted only days later because the FSP does not have time to defend the decision, if this is appealed by the debarred person at the Financial Services Tribunal. It is extremely easy to get a debarment lifted and very time consuming to defend the decision.

In the recent case of ​NJ Du Plessis Wessels v African Wealth Organisation (Pty) Ltd and Others a person was debarred for a breach of restraint of trade. This is not grounds for the debarment of a person as this is a civil contractual matter and not something that affects the Fit and Proper status of the person. The appeal was granted as a result.

I've even seen stranger things like that time a person complaining about a cheating husband which must be debarred. Although this is uncouth and perhaps morally reprehensible, it is not grounds for debarment and has nothing to do with the person's work. 

Be aware of your rights as a person that has been debarred - certain processes need to be followed to make this lawful. And if you are working in an FSP make sure your debarments are lawful as you may end up red-faced in the end.

We've seen many brokers use debarments as a way of getting back at each other and this is the unfortunate consequence of outsourcing your regulatory responsibilities to FSP's instead of having that power sit with the Regulator that can impartially look at cases with an expert eye.

Earlier this year the coming into effect of PAIA (Promotion of Access to Information Act) for all companies, private or public was extended to December. This meant certain companies were exempt (most companies) and others where not depending on staff size and turnover as well as industry.

This extension of exemption lapses on the 31st of December this year. Many thought they might extend this further but there has been no mention made of any further extensions. Thus, practically all companies in South Africa must as of 1 January 2022 have a PAIA manual on their website or, if they do not have one, they must have it available at their place of business.

Luckily the Information Regulator has made a template available as a suggestion of how this should look so one does not have to fork out money or wonder about the content. It is easy to implement and not much drafting is needed. One can view it here at the bottom of the page - be sure to fill it in correctly and add to your website under the legal section. Compared to POPI, PAIA basically consists of signing off the policy prescribed by the regulator and sticking it on your web page.

Or our clients can access our conveniently formatted version we sent to them and that we've made available on our client portal. If you are not a client you can buy one here.

In closing, I am baffled as to why all companies have to have this kind of policy as it is entirely likely that it will never be used by 99% of all companies. It is very useful if you want to obtain information as a journalist from state owned entities where our rights as citizens are concerned. However, persons will rarely use this as a method of obtaining their own information (freely available from the entities). By the way, people's own information is usually the only information that they care about and this is catered for by POPI.

Like with POPI, I do not see that the regulator will be checking all companies from the get-go to see if this is in place. Better safe than sorry though.

I am a fan of regulations and compliance that have reasons and make sense. I am also a fan of "less is more" when it comes to regulation. In that vein I do believe much of our current financial services regulation in South Africa over-corrects to protect investors at the expense of economic activity and innovation. I've written a previous blog post about it that you can find here.

It seems like Crypto is heading the same way if some voices of reason do not speak up. It is not new that a country wants to control or outright ban Crypto. China has banned, un-banned and re-banned it many times over. Other countries have seen the light and provided enabling regulations for Crypto to flourish and grow. Mainstream adoption is growing exponentially in the form of ETF's being issued and even card issuers like Visa joining the party. Some Crypto Exchanges have even listed on major stock exchanges.

So, what have our regulators done so far? They have issued zero final regulations. To their  credit, there was a draft regulation on the advice and intermediary services on Cryptocurrencies issued in November of last year. But nothing has been said of that since a year ago. All that happened in the meantime is that the FSCA issued another draft regulation barring Pension Funds from holding Crypto assets. I would assume this includes NFT's (non-fungible tokens) in the form of Art which had sales of $10.7 billion in Q3 of 2021. The Reserve Bank has also reportedly pushed banks to prevent customers from buying Crypto with their cards and from buying Crypto from any company domiciled overseas. 

So basically we only have confusion and frustrated businesses. I can't begin to tell you how many Crypto businesses approached us in the last two years to find out how they can comply and get licensed. Unfortunately you can't yet.

I understand that many people have been taken for a ride by Crypto scammers. But, many people have also been taken for a ride by money scammers. Does declaring investing in normal fiat money a crime, solve the problem? No, you but can rather provide trust by licensing exchanges and funds at best. One cannot eliminate all crime by force over-regulation as the criminals will still find ways to do the crime (rather beef up the criminal justice system). What you will accomplish with this heavy handed regulatory approach is overburden those that want to comply en ensure that less people are economically active in this space.

Instead, enable the industry through a measured approach with limited regulation that is both practical and that encourages new entrants to the market.

Blockchain technology is already changing the world and offering better use cases, privacy and trust for all involved. Cryptocurrency is just one use case of  blockchain technology and we are at risk of getting left behind if do not create a better space for it to grow.

​What are the financial soundness requirements?
The FAIS Act explains the Financial Soundness requirements for FSPs in Chapter 6 of the Fit and Proper Board Notice 194 of 2017. The FSP must meet the financial soundness requirements at all times.
There are different requirements for different types of FSPs, however the three main categories for most of the FSPs are as follows:

1. General Solvency Requirement (Overall Outcome: Assets > Liabilities)
2. Working Capital Requirement (Overall Outcome: Current Assets > Current Liabilities)
3. Liquidity Requirement (Overall Outcome: Maintain Liquid Assets >= x/52 weeks of Annual Expenditure according to the FSP category)

 
What important changes took place regarding subordinated loans?
The most important change that we come face to face with almost monthly is the change where Category 1 FSPs may no longer subtract subordinated loans from the current liabilities in the working capital requirements. This requirement is applicable to Category 1 FSPs Holding Client Funds, and Category 1 FSPs Not Holding Client Funds.
 
How can an FSP ensure it meets the requirements?
The FAIS Act states that all FSPs should maintain monthly management accounts if these accounts are continuously monitored and compared with the financial soundness requirements the FSP should be able to maintain the financial soundness requirements.
 
What can an FSP do if they suspect that the requirements are not being met?
It is immensely important that the FSP follow one of these two steps as soon as the FSP suspects or foresees that the financial soundness requirements are not being, or will not be met, these are listed and explained as follows:

1. Early Warning Report
2. Rely on FSCA Exemption

 

• The Early Warning Report is a report that can be submitted to the FSCA by the FSP or its Compliance Officers. The FSP must submit or request their Compliance Officer to submit an Early Warning Report that is certified by the CEO, controlling member, managing or general partner or trustee of the FSP, if one of the following financial statuses are true for the FSP:

1. Assets exceed liabilities by less than 10%
2. Current assets exceed current liabilities by less than 10%
3. If any of the financial soundness requirements are not met or if the FSP becomes aware of any situation that may result in any of the above  

• FSCA Exemption Application is an application that can be sent to the FSCA before the financial year end to assist the FSP with meeting the financial requirements as set out in the exemption application, this exemption does not mean that an FSP does not have to meet any of the requirements as set out in the Financial Soundness Requirements, but this exemption allows for some leeway between the Financial Soundness Requirements and the exemption requirements to assist the FSP to meet the requirements even if it is then by only meeting the requirements as set out by the exemption. There is additional documentation that must be sent together with this application within 7 days of relying on this exemption, these are as follows:

1. Annexure 6 (Form A: Liquidity Calculation) of BN194 of 2017 to the FSCA (Liquidity Calculation certified by the CEO, controlling member, managing or general partner, or trustee of the FSP.
2. An Action Plan showing how the FSP plans to re-establish its financial position to meet the financial soundness requirements and this plan should include the steps that the FSP will take and in what timeframe these steps will take place to ensure the financial soundness requirements that is not currently met, are met as soon as possible.

​In addition to the above, the FSP must submit the following items every 6 months from the date that
​        the FSP relied on the exemption:

• Management accounts
• Regularly updated Liquidity Calculation (Form A)

The exemption conditions are as follows:

​How to calculate an FSPs Financial Soundness Requirements?
The Financial Soundness requirements can be explained and calculated as follows:

​*Liquid Assets are calculated as follows:

• Cash & cash equivalents +
•  (Plus) Participatory interest in a Money Market Portfolio
• (Plus) 70% of the market value of a participatory interest in a CIS, other than an investment in a money market portfolio or a CIS hedge fund
• (Plus) 70% of the market value of a security listed on a licensed exchange provided it does not constitute more than 50% of total liquid assets
• = Liquid Assets

​
*Annual Expenditure is calculated as follows:

• Annual Expenditure
• (less) staff bonuses
• (less) employees’ and directors’, partners’ or members’ share in profit
• (less) emoluments of directors, members, partners or sole proprietor
• (less)  other appropriation of profits to directors, members and partners"
• (less) remuneration that is linked to-
  • (aa)     a percentage of the FSP’s revenue; or
  • (bb)     a percentage of the revenue generated by an employee, representative or contractor of the FSP; and
  • that in the absence of such revenue the FSP has no obligation to pay the remuneration"
• (less) depreciation
• (less) bad debts
• (less) any loss resulting from the sale of assets

 
Contact us for any information on the Compliance Officer services we provide for information on the financial soundness requirements, our team at Horizon Compliance are always keen to help.

This blog is about the recently imposed administrative sanctions on Momentum Wealth (Pty) Ltd and Momentum Collective Investments RF (Pty) Ltd by the FSCA.

The broad reason for the sanctions was the ineffective money laundering/terrorist financing control measures of both accountable institutions, as required by the FIC Act. The total financial penalty imposed by the regulator on these institutions amounted to R11,100,000.00 (excluding an amount of R100,000.00 which is suspended for three years).

The breaches identified by the FSCA were the following:

1. Non-compliance with cash threshold reporting (CTR) requirements on historic transactions (2010-2017).
2. Risk-rating failures:

• Momentum Wealth failed to identify, verify and risk rate a beneficiary of one trust in terms of s 21B of the FIC Act.
• Momentum CIS failed to risk rate 38 clients in line with their own RMCP.

 
These cases serve as a reminder to accountable institutions to regularly submit cash threshold reports, risk-rate clients(and potential clients) and comply with your own RMCP.

​For more information click here

In this blog we deal with the case of Ernest Lehanie ta Ernest Venter Makelaars and FAIS Ombud and Another where the Appeals Tribunal found against the FAIS Ombud. Because this deals with a Property Syndication investment this is also important for other cases of a similar nature. 
 
This matter relates to the appeal of a decision made by the FAIS Ombud. Briefly, the FSP breached the FAIS Act and Code of Conduct by not making a full disclosure regarding the high-risk investment product and all associated risks to the investor (who was a pensioner) for the investor to make an informed decision. Also, physical evidence of an analysis of the client’s financial needs and risk profiling seems is absent. Moreover, the prospectus given to the client contained contradictions relating to investor funds.
 
The FAIS Ombud’s decision:
The FSP breached its duty to act with skill, care and diligence by failing to ensure that the client invested in product that was right for his financial needs. This breach made the FSP liable to the client (investor). The FSP’s liability was based on its failure to provide a full disclosure to the investor and for not being able to reasonably foresee the investor’s loss.
 
The Financial Services Tribunal concluded as follows:
The lack of a full disclosure by the FSP about the investment was not sufficiently linked to the investor’s loss. That is, the FAIS Ombud erred in stating that the FSP should have reasonably foreseen the collapse of the Sharemax Property Syndication, thereby holding the FSP liable. The FSP’s failure to discharge its statutory duty, is not remotely linked to the investor’s loss. The investor’s risk is therefore, not entirely  the FSP's fault. Further evidence is required in order to establish a link if indeed there is any. This resulted in the entire application being disposed of. Therefore, the matter was referred back to the Ombud for further reconsideration.

For more information on this Financial Services Tribunal decision click here

​PAIA is the acronym for the Promotion of Access to Information Act and it enables people to gain access to information held by public and private bodies so they may exercise any rights they have in relation to the information. It was historically only applied to government organisations and the legislation was expanded to apply to more businesses.

The PAIA manual does not have to be submitted to any regulator or person at this stage, it is, however, very important that the PAIA manual reflects on your company's website should PAIA apply to your company. There are thresholds' in place to indicate which companies are subject to a PAIA compliance and the rest of the companies that fall beneath these threshold amounts are exempt from having to comply with PAIA.

The PAIA thresholds are as follows, and should your company have this amount of employees of annual turnover per specific sector, you need to have a PAIA Manual in place (this may change from time to time):

The due date for PAIA and POPI is 1 July 2021, and it is immensely important that your company complies within the given due date to prevent any fines or penalties by the regulator.

Please contact us if you require any assistance with your PAIA Manual, we will gladly assist you. You can also go to our website for more information on how to contact us.