The FSCA paused their compliance reports last year due to them not being done with the new format compliance reports. Although we do not have written confirmation or any notice to this effect - we've heard from some of their staff that it also affects AUM reports and Handover reports (still to be confirmed). And it does not seem that we have any news on new compliance reports for this year. However, there is some other news.

They are busy though, with onsite inspections. Some of our clients were recently inspected and only on FICA. From discussions with people in the industry they are doing inspections on a broad number of FSP's so you should be ready in case they come to visit you.

You should focus on your FICA compliance ASAP. If you do not have the basics in place your are at risk of being fined. Yes, several FSP's have recently been fined for not complying with even the smallest aspects of FICA after the inspections were conducted (none of our clients though).

What do you need to have in place?

• Your RMCP(Risk Management and Compliance Programme) needs to be in place
• The RMCP must be adopted by senior management or directors
• Ensure you are registered as AML Compliance Officer with the FIC and that your FSP is registered
• You must have a list of active clients with details
• Training must be done on FICA compliance with a test for all staff on a refresher basis (contact us-we have an online solution)
• Your client files need to be complete
• It is very important that you must show that you risk rated all your ongoing clients according to your RMCP
• Very important that you know what your RMCP states and how to use it as they will ask you these questions.
• RMCP's need to be tailored to your business - your logo and name must be reflected and it must reflect the processes you actually use

How will the inspection happen?
They will usually contact the Key Individual and inform them of the impending inspection. They will ask for certain documentation beforehand to peruse it before they visit you. They then provide you with a date on which they will arrive and state what you need to have ready on the day. You will likely not have a fun time during the inspection, but with our help we can make it a little less daunting.

This is a quick summary of what to look out for. If you need assistance please let us know - we are here to help.

Perhaps the most important part of being a Financial Advisor is that you need to market or advertise your services. After all, how will people know you exist if you do not advertise in some way? Because it is such an important part of a business you as an FSP need to know what you should include in your marketing and what you should not. 

It is important that you always make reference to your license in your adverts and business documentation. Altough not specifically required, a good practice is also to add it to your email signature. You also need to provide a disclosure of who you are and what you are allowed to do when you first see or speak to clients. If your advertising is done via phone then you need to record all the calls and keep them for future reference.

Above all else, do not promise something false or overstated.

The above-mentioned is just a short summary but please feel free to read a extract from the relevant FAIS Act rules on the subject matter below. Remember when you read this that direct marketers are FSP's that advertise via phone.

FAIS Act General Code of Conduct Section 14 and 15:

14.
(1)     An advertisement by any provider must -
 
(a)     not contain any statement, promise or forecast which is fraudulent, untrue or misleading;
 
(b)     if it contains-
 
(i)      performance data (including awards and rankings), include references to their source and date;
 
(ii)     illustrations, forecasts or hypothetical data
 
(aa)    contain support in the form of clearly stated basic assumptions (including but not limited to any relevant assumptions in respect of performance, returns, costs and charges) with a reasonable prospect of being met under current circumstances;
 
(bb)   make it clear that they are not guaranteed and are provided for illustrative purposes only; and
 
(cc)    also contain, where returns or benefits are dependent on the performance of underlying assets or other variable market factors, clear indications of such dependence;
 
(iii)    a warning statement about risks involved in buying or selling a financial product, prominently render or display such statement; and
 
(iv)    information about past performances, also contain a warning that past performances are not necessarily indicative of future performances; and
 
(c)     if the investment value of a financial product mentioned in the advertisement is not guaranteed, contain a warning that no guarantees are provided.
 
(2)     Where a provider advertises a financial service by telephone-
 
(a)     an electronic, voicelogged record of all communications must be maintained. Where no financial service is rendered as a result of the advertisement, such record need not be maintained for a period exceeding 45 days;
 
(b)     a copy of all such records must be provided on request by the client or the registrar within seven days of the request;
 
(c)     all the information required by sections 4(1)(a) and (c) and 5(a) and (c) shall not be required: Provided that the client is provided with basic details (such as business name and telephone number or address) of the provider or relevant product supplier, and of their relevant compliance departments: Provided further that, if the promotion results in the rendering of a financial service, the full details required by those sections are provided to the client in writing within 30 days of the relevant interaction with the client.
 
(3)     Where a provider advertises a financial service by means of a public radio service, the advertisement must include the business name of the provider.
 
15.
(1)     A direct marketer must, when rendering a financial service to or on behalf of a client, at the earliest reasonable opportunity furnish the client with the following particulars:
 
(a)     the business or trade name of the direct marketer;
 
(b)     confirmation whether the direct marketer is a licensed financial service provider and details of the financial services which the direct marketer is authorised to provide in terms of the relevant license and any conditions or restrictions applicable thereto;
 
(c)     telephone contact details of direct marketer (unless the contact was initiated by the client);
 
(d)     telephone contact details of the compliance department of the direct marketer;
 
(e)     whether the direct marketer holds professional and indemnity insurance;
 
Provided that where the direct marketer is a representative, the information contemplated in sub-paragraphs (a) to (c) above must be provided in respect of the provider to which the representative is contracted.
 
(2)     When providing a client with advice in respect of a product, a direct marketer must at the earliest reasonable opportunity:
 
(a)     make enquiries to establish whether the financial product or products concerned will be appropriate, regard being had to the client’s risk profile and financial needs, and circumstances;
 
(b)     furnish the client with the following particulars where appropriate:
 
(i)      business or trade name of the product supplier;
 
(ii)     legal status and relationship with product supplier;
 
(iii)    the following details in respect of the product:
 
(aa)    Name, class or type of financial product concerned;
 
(bb)   Nature and extent of benefits to be provided;
 
(cc)    Manner in which such benefits are derived or calculated, with specific reference to the underlying assets of any investment component and the manner in which the value of such investment component is determined;
 
(dd)   Monetary obligations assumed by the client as well as manner of payment;
 
(ee)    Whether cooling off rights are offered and, if so, procedures for the exercise of such rights;
 
(ff)    Any material investment or other risks associated with the product;
 
(c)     take reasonable steps to establish whether the financial product identified is wholly or partially a replacement for an existing financial product of the client and, if it is such a replacement, inform the client of actual and potential financial implications, costs and consequence set out in clause 8(1)(d) of this Code before any transaction is concluded.
 
(3)     A direct marketer must prior to the conclusion of any transaction and where a contract is concluded provide the client with the following information, provided where such information is provided orally, it must be confirmed in writing within 30 days:
 
(a)     Telephone contact details of the compliance department of the product supplier;
 
(b)     To what extent the product is readily realisable or the funds concerned are accessible where appropriate;
 
(c)     Details of manner in which benefits will be paid;
 
(d)     Any restrictions on or penalties for early termination or withdrawal from the product, or other effects, if any, of such termination or withdrawal;
 
(e)     Charges and fees to be levied against the product including the amount and frequency thereof and where the product has an investment component, the net investment amount ultimately invested for the benefit of the client;
 
(f)     Commission, consideration, fees, charges or brokerages payable to the direct marketer by the client, or by the product supplier or by any other person;
 
(g)     On request, the past investment performance of the product, where applicable, over periods and at intervals which are reasonable with regard to the type of product involved;
 
(h)     Consequences of non-compliance with monetary obligations assumed by the client and any anticipated or contractual escalations, increases or additions;
 
(i)      In the case of an insurance product in respect of which provision is made for increase of premiums, abbreviated disclosures of such contractual increases;
 
(j)      Concise details of any special terms and conditions, exclusions, waiting periods, loadings, penalties, excesses, restrictions or circumstances in which benefits will not be provided;
 
(k)     Any guaranteed minimum benefits or other guarantees where appropriate.
 
(l)      That recordings of telephone discussions (where applicable) will be made available to the client on request
 
(4)     A direct marketer must provide a client (where appropriate) with a record of advice as contemplated in section 9(1)(a) to (d) in writing.
 
(5)     A direct marketer shall be obliged to record all telephone conversations with clients in the course of direct marketing and must have appropriate procedures and systems in place to store and retrieve such recordings. Records of advice furnished to a client telephonically need not be reduced to writing but a copy of the relevant voicelogged records must be provided, on request, to the client or Registrar within a reasonable time.
 
(6)     Notwithstanding the above or contrary provision in the code, such of the information required to be provided to the client in terms of clauses 4, 5 and 7 of this Code as has not yet been recorded or provided to the client in writing before the conclusion of any transaction, must be provided to the client in writing within 30 days thereafter.

In this post we are changing our usual coverage of this blog to touch on something controversial that is important to any manner of business in South Africa - be it financial or otherwise - overregulation. South Africa has steadily slipped in the Ease of Doing Business rankings according to the world bank from number 32 in 2008 worldwide to number 82 worldwide in 2018 out of 190 economies. More information and how this ranking is achieved can be viewed here.

What is also telling is when you delve in the the ranking for starting a new business where we rank number 134 out of 190 economies. South Africa is defined globally as a developing nation and according to the World Economic Forum we've slipped in our competitiveness ranking as well. Also our GDP growth has also seen a decidedly negative trend over the last 20 odd years if one looks at the graph below taken from Statistics South Africa as a Source.

I would still like to do an in-depth study on the number of laws and regulations that South Africa has enacted over this period but - just looking at Financial Regulation - I think it is trite that legislation and regulation has increased exponentially in our country. Because some legislators are lazy or just incompetent most of our financial regulation is copied from those overseas in developed countries like the UK. The fact of the matter is their legislation does not apply to ours very well. They have mature economies where a large middle class ensures stability who understands the regulations and can comply with their requirements. In South Africa we have the unlucky position of being somewhere between a developed and developing nation. Which evidently means we have all the laws that apply to western first world nations but with a population that is largely uneducated. With only 13.9% of our population that have a post high school education and only 29.2% of our population has Matric/Grade 12 it does not paint a good picture.

The difficult regulatory environment creates a timebomb where smaller businesses are forced to close down or sell due to the difficulty and cost of compliance in bad economic times. The only winners - big businesses such as insurers and other product providers since they then easily lap up the clients and collect the commission that the broker actually earned by providing the service. Since 2004 when the FAIS Act was implemented to 2018 the number of FSP's have gone from 14529 in 2008 to 11 075 in 2018. That's a 23.77% decline in the number of Financial Services Providers. I acknowledge that some might have closed due to reasons not related to my concerns but it does not detract that there is a large negative trend in that more FSP's close than are opened. A negative mortality rate. 

I  have not conducted a formal study and done a sample of a large population (although I am seriously considering doing so) but many a financial services business has lamented that enormous compliance requirements expected of a medium to small brokerage that does not seem commensurate to their size of business. Even larger businesses are complaining at the amount and cost of implementing some of the compliance rules. For example - an FSP of any size needs to have an emergency evacuation plan on paper which means a person operating from his house needs a cumbersome document stating how he is going to run from his home office to his front door. I oversimplify but you get the just of some of the ridiculous intended consequences one faces with this. 

Because of the increasing amount of compliance it also seems like the regulator has not planned for the increase in man hours it will take for them to review this. Their service level agreement for the turnaround time for license applications ins 3 months for a Cat 2 FSP. It recently took us 9 months to cat a Cat 2 license for one of our clients. 

​Being a Compliance Officer myself that worked within a regulator, a global bank and other institutions - not to mention working with our own clients - I have seen many things in the regulatory space. One of the questions in my mind since my very first days in compliance has been "Do our regulations make sense or not? Are they detrimental to the economy as a whole or do they uplift the economy? Do the people who know and oversee our regulations know what they are doing or not?"

I am 100% for regulations that have been designed with due forethought and quantitative impact studies that ultimately support the growth of the economy. They are necessary and will keep our country competing with other nations.

Unfortunately I witnessed many occasions where regulation is currently designed by persons that spent none to little time in any financial services business. Usually the focus is only on protecting the public but not protecting the industry and the well-being of the industry as well as the broader economy. We need regulators that are pro-business and pro customer. One cannot exist without the other after all.

You might have been wondering what happens if you do not complete your CPD hours by the end of a cycle. To give you context, we'll look at basic and ongoing competency requirements.

As you already know, non-compliance with the normal fit and proper requirements (RE exams, qualifications, experience and class of business training) within their specified timeframes, causes that a representative must be removed from the register. This means the rep can no longer render financial services until he/she is fully compliant with the basic competency requirements. 

Product Specific Training and more importantly, CPD, is part of ongoing competency. Thus, even if you comply with the basic competency requirements and you do not comply with ongoing competency, you are also not allowed to render financial services until you are compliant. 

CONSEQUENCES
The essence is this: if a representative or KI does not complete his/her full CPD hours by the end of a cycle, he/she must be removed from the rep register no later than the 31st of May. If he/she is only removed on the 1st of June (or later) due to non-compliance, the FSP has an obligation to debar the representative or KI. The rep can only be re-registered or the debarment can only be uplifted once he/she has obtained all the necessary hours. 

Product Specific Training, also part of ongoing competency, is required for new products and changes in existing products that you are selling. Some industries/products might require more frequent refresher training than others (i.e. the health industry might be yearly, where insurance and investments might be every second or third year). The frequency will further depend on the different product providers. If, for example, an untied agent has contracts with 4 different product providers, he/she must keep record of all training attended for each product provider.

RECORD KEEPING
The question arising is: How does the FSP keep record of each representative's training?
There is no specific format at this stage in which you are required to prove attendance for Product Specific Training. However, it does not excuse an FSP from keeping record of it. There are many different ways in which an FSP can keep these records that might come in formats like hard copy, email or electronic certificates. One has to be able to prove attendance and what the representative learned from the session. The context of the course is of the utmost importance. Do not count on product providers to keep these records on your behalf, it is your responsibility as an FSP and as the first line of defense. We have specific solutions for our clients so contact us if you have any questions. 

Why is compliance with ongoing competency requirements important? It is especially important when complaints are raised against representatives by clients who are dissatisfied with the advice received. If a representative was not updated with the latest changes in his/her industry and, as a result, provided advice that can/have caused damage to a client's financial well being, the representative will have difficulty in proving the correctness of the advice.

Debarments are lenghty and costly processes. It can cause difficulty with an FSP's staff turnover which, in turn, can cause a gap in servicing clients. Complaints are time-consuming and can cause your FSP reputational damage. Be vigilant in your compliance so your business can flourish. 

In a recent FSCA email newsletter the FSCA informed the industry that they have not completed their work on the new format of compliance reports (I am liberally paraphrasing) and as a result there will be no compliance reports for 2019 but instead there will be a General Information Request. Some are speculating that this is a result of the increased workload and resulting lack of resources in the FSCA with all the new changes. I am guessing that this might very well be the case, because, to everyone's chagrin, we have seen turnaround times with license applications and profile changes increase exponentially as of late.

Although the format of the format of this information request is unknown, it is expected that it will compare the information on the FSCA's systems and that of the FSP to ensure that they are correct when the new COFI Act comes into play. Things like bank accounts, reps, KI's, contact numbers and business addresses - to name a few.

It is important to note that all FSP's must submit the information when it is requested, even those FSP's that do not have to submit compliance reports (like the funeral services providers).

The FSCA also sent the latest RE Exam Prep Guides for RE 1 and 5 that you can download here or on our client portal. The RE Exam Preparation Guides have undergone many changes recently and there are many versions floating around. Make sure you and your staff are using the right set of guides!

For a FAIS Rep to be supervised she needs to meet certain requirements and the FSP and KI comply with certain parameters. Here we shortly sum up the items that need to be covered. We also look into what needs to be covered in the Supervision Agreement as new regulations have been issued that impacts that content.

Summary of Supervision Requirements

1. The Rep must meet the entry level requirements for qualifications;
2. The Rep must finish the RE exams, Class of Business Training, CPD requirements and experience requirements within the set periods;
3. There must be a supervision agreement that conforms to the requirements of the FSCA in terms of content;
4. The FSP must complete its duties during the supervision period;
5. The Supervisor must complete her duties during the period;
6. The Rep must complete her duties during the period;
7. The intensity of the supervision must be of a commensurate level with regard to the representative skill level, the risk to clients and nature of the financial services rendered.

More information on the content of the Supervision Contract

​The agreement must:

1. Identify who the Supervisor is;
2. Set out tasks and functions the Rep performs and categories under which she will render services;
3. Set out knowledge and skills required to perform the job correctly;
4. Set out the training needs of the Rep
5. Set out supervision arrangements such as:

• ​Duties of both parties
• Supervision Methodology and Procedures
• Assessment Procedures and intervals thereof
• Referral to the intensity of supervision
• Sign-off criteria by the supervisor

For full information on these processes please see the relevant board notice here or contact us for more information.

​

According to FAIS regulation a KI or Rep in an FSP needs to comply with the CPD (continuous professional development) requirements.  CPD cycles starts on 1 June to 31 May of every year. Every FSP must keep a register of who has done what and it must have a Policy that talks to its planning on training and CPD.

The RDR (Retail Distribution Review) process started by our regulator, the FSCA, has resulted in the amendment of certain pieces of legislation. Good times. Coupled with that and the Twin Peaks changes there are still more changes to come. One of the positively thorny changes that directly affects the industry in a big way is the manner in which brokers/advisers are compensated. In this post we will briefly look at the current state of play with regards to asking a client for addition fees above and beyond agreed/regulated commissions. We will look at Short-Term Insurance, Long-Term Insurance, Other Financial Products and Leads/Referrals.

Short-Term Insurance (STI)
So it is probably no secret to most of the Short-Term Insurance Brokers among you that broker fees structures that Insurers can collect on your behalf have changed and was implemented via the new PPR (Policy Holder Protection Rules) under rule 12.4 and 12.4.1 issued by the FSCA Insurance Department.

By 15 December 2018 Insurers will have to comply with this rule and it will also unavoidably have an affect on the the short-term insurance broker as well to does fee addition costs to the client.

The requirement states:
​
"An insurer may not facilitate the deduction or charging of any fee payable by a policyholder to an intermediary or any other person, unless the insurer has satisfied itself that the amount and purpose of the fee have been explicitly agreed to by the policyholder in writing, and that it appears from such agreement that the fee –

• relates to an actual service provided to a policyholder;
• relates to a service other than rendering services as an intermediary; and
• does not result in the intermediary or other person being remunerated for any service that is also remunerated by the insurer."

Most Insurers have issued notices to linked brokers to obtain such approvals from clients before 15 December. In future it is also a good idea to have this kind of document signed when signing up a new client or incorporating it into your service agreement with your client or other document (such as the ROA, NDA etc). As long as the client agrees to it.

Long-Term Insurance (LTI)
Long-term Insurance brokers/intermediaries never had the dispensation that short-term insurance brokers had to even collect extra fees. Now the position looks exactly the same in the Long-Term Insurance Act and the wording of the PPR rule concerning additional fees is exactly the same as the rule in the Short-Term Insurance Act above, even to the number or the rule. So it can be argued that brokers can now collect extra fees if the clients do agreed to it.

So here, also, if you want to collect extra fees you need to obtain client consent in the same way and it must comply in the same way by the same date.

Other Brokers/Advisers/Intermediaries
My opinion on others outside the space of LTI and STI that are FAIS approved and do ask extra professional fees to do as follows. Outside of LTI and STI fees are not currently regulated but the regulator is looking at it for the future.

Disclose it to the client and have them agree to it in writing if you are asking extra fees. Enumerate what it is for and makes sure the client understands what she is paying for. A good rule of thumb is not to make the client pay double for something. So when fees are required make sure you have not already been paid for those services. This will ensure you do not fall foul of TCF requirements (Treating Clients Fairly).

Referral Fees and Leads
This is not currently regulated but it is on the table for phase 2 of RDR which is still under review and research. A suggestion is to keep a close eye on this space. At minimum, make sure there is an agreement in place if you are getting paid for or receiving referrals and make sure this is disclosed to the client by the broker/adviser.

Until next time, may your business be fruitful and your compliance fit for purpose!

From the 1st of April 2018 (I'm sure you are quire tired of this date by now) the FSCA has changed the debarment process and rules a bit. In the past an FSP could debar the person themselves or could refer it to the FSB (now FSCA) to investigate and debar the person. The debarment was done under section 14A of the Act if the FSB did the conducted the investigation and debarment but that section is new removed by the Financial Sector Regulation Act 9 of 2017. This means that the responsibility rests with the FSP to debar any Key Individual or Representative that:

1. Does not meet the fit and proper requirements; and
2. has contravened or failed to comply with the provisions of the FAIS Act in a material manner.

The FSCA might only double check the reasons for debarment after it is done by the FSP. It is interesting to note that an FSP can do this if the person was a representative of the FSP at the time that the reasons for debarment occurred. Thus, it would seem, one can debar a person even if the person has left the FSP. This might open a can of worms where scores are to be settled and revenge is exacted but this may further be clarified once a guidance document is published.

At the time of writing this there is no guidance document on the process but it will be published in the near future as the FSCA stated on their website. The new forms for submitting the debarment to the FSCA can be found here.

For the full procedure according to the FAIS ACT you can read the extract from the amended FAIS Act below:

(1)
(a)     An authorised financial services provider must debar a person from rendering financial services who is or was, as the case may be-
 
(i)      a representative of the financial services provider; or
 
(ii)     a key individual of such representative,
 
if the financial services provider is satisfied on the basis of available facts and information that the person-
 
(iii)    does not meet, or no longer complies with, the requirements referred to in section 13(2)(a); or
 
(iv)    has contravened or failed to comply with any provision of this Act in a material manner;
 
(b)     The reasons for a debarment in terms of paragraph (a) must have occurred and become known to the financial services provider while the person was a representative of the provider.
 
(2)
(a)     Before effecting a debarment in terms of subsection (1), the provider must ensure that the debarment process is lawful, reasonable and procedurally fair.
 
(b)     If a provider is unable to locate a person in order to deliver a document or information under subsection (3), after taking all reasonable steps to do so, including dissemination through electronic means where possible, delivering the document or information to the person’s last known e-mail or physical business or residential address will be sufficient.
 
(3)     A financial services provider must-
 
(a)     before debarring a person-
 
(i)      give adequate notice in writing to the person stating its intention to debar the person, the grounds and reasons for the debarment, and any terms attached to the debarment, including, in relation to unconcluded business, any measures stipulated for the protection of the interests of clients;
 
(ii)     provide the person with a copy of the financial services provider’s written policy and procedure governing the debarment process; and
 
(iii)    give the person a reasonable opportunity to make a submission in response;
 
(b)     consider any response provided in terms of paragraph (a)(iii), and then take a decision in terms of subsection (1); and
 
(c)     immediately notify the person in writing of-
 
(i)      the financial services provider’s decision;
 
(ii)     the persons’ rights in terms of Chapter 15 of the Financial Sector Regulation Act; and
 
(iii)    any formal requirements in respect of proceedings for the reconsideration of the decision by the Tribunal.
 
(4)     Where the debarment has been effected as contemplated in subsection (1), the financial services provider must-
 
(a)     immediately withdraw any authority which may still exist for the person to act on behalf of the financial services provider;
 
(b)     where applicable, remove the name of the debarred person from the register referred to in section 13(3);
 
(c)     immediately take steps to ensure that the debarment does not prejudice the interest of clients of the debarred person, and that any unconcluded business of the debarred person is properly attended to;
 
(d)     in the form and manner determined by the Authority, notify the Authority within five days of the debarment; and
 
(e)     provide the Authority with the grounds and reasons for the debarment in the format that the Authority may require within 15 days of the debarment.
 
(5)     A debarment in terms of subsection (1) that is undertaken in respect of a person who no longer is a representative of the financial services provider must be commenced not longer than six months from the date that the person ceased to be a representative of the financial services provider.
 
(6)     For the purposes of debarring a person as contemplated in subsection (1), the financial services provider must have regard to information regarding the conduct of the person that is furnished by the Authority, the Ombud or any other interested person.
 
(7)     The Authority may, for the purposes of record keeping, require any information, including the information referred to in subsection (4)(d) and (e), to enable the Authority to maintain and continuously update a central register of all persons debarred in terms of subsection (1), and that register must be published on the web site of the Authority, or by means of any other appropriate public media.
 
(8)     A debarment effected in terms of this section must be dealt with by the Authority as contemplated by this section.
 
(9)     A person debarred in terms of subsection (1) may not render financial services or act as a representative or key individual of a representative of any financial services provider, unless the person has complied with the requirements referred to in section 13(1)(b)(ii) for the reappointment of a debarred person as a representative or key individual of a representative.

​