*This post is updated as and when information changes or regulations are added. Latest Update: 04/22/2020.
In this post we tell you all about how financial services companies can operate lawfully and safely during the lockdown. We are all aware of the lockdown currently implemented in South Africa due to the COVID-19, and even though we are in a lockdown, we should not confuse this period for a complete shutdown for financial services. Businesses that produce, distribute and deliver essential services are allowed to continue operations if necessary, whilst adhering to the correct health and hygiene procedures during this time.
There was a release of a third amendment which brings greater clarity to what is regarded as essential services in the financial sector. This amendment is the third amendment to the Regulations to the Disaster Management Act 2002, published by Government Notice No 318 of 18 March 2020, as amended by Government Notice No 398 of 25 March 2020 and Government Gazette Notice No 419 of 26 March 2020 (Regulations).
What is regarded as essential services in the financial market?
Essential Services in the financial market includes the following services necessary to maintain the functioning of a financial system as defined in section 1(1) of the Financial Sector Regulation Act, only when the operation of a place of business or entity is necessary to continue to perform those services:
What is our interpretation of FSP's rendering services during lockdown period?
We would argue the services that FSP's render fall under the essential services definition as mentioned above and can therefore continue operations if necessary to service current clients. This does not mean you should go out and canvass for new clients face to face. The essential services exemption is there to assist current clients in need that have no other option but to see you in person - i.e. vulnerable persons and those of little means. The FSP needs to have a CIPC certificate to continue operations and the staff need a permit issued by the FSP itself if they are traveling to and from clients.
Important information for FSP's during this lockdown period:
Where do I request a permit issued by the CIPC for my FSP?
The permit for an FSP to render essential services can be requested online, and is issued by the CIPC. Follow this link to request a permit or click on the "Request a CIPC permit" button below: bizportal.gov.za/essential_service.aspx
Where do I get a permit for the staff of my FSP if they are traveling to clients?
The permit to render essential services for staff of an FSP can be issued by the FSP. Use the form in this link, or click on the "Issue a Permit for my staff" button below: guideline_permit_essential_services.pdf
Are there any exemptions to provide relief to my FSP during the pandemic?
Annual Financial Statement submission dates are usually 4 months after the financial year end, it has now been extended by 4 months, therefore submissions are due 8 months after your FSP's financial year end.
An exemption for compliance with Financial Soundness Requirements was also issued and can be summarised as follows:
GENERAL SOLVENCY REQUIREMENT (Assets must exceed Liabilities)
Exemption: Liabilities may exceed Assets by no more than 20%
Applies to: All Cat 1’s / Cat 2 / Cat 4
WORKING CAPITAL REQUIREMENT (Current Assets must exceed Current Liabilities)
Exemption: Current Liabilities may exceed Current Assets by no more than 20%
Applies to: Cat 1 Holding Funds / Cat 2 / Cat 4
LIQUIDITY REQUIREMENT (Maintain Liquid Assets equal or greater than X/52 weeks of Annual Expenditure)
Exemption: The Liquid Assets may not be less than 50% of the specified Liquidity Requirement:
If you decide to rely on the exemption for Financial Soundness Requirements, there are certain conditions to be met. For more details, please refer to FAIS Notice 21/2020 on the FSCA website.
Note that there are also no Compliance Reports due for 2020.
Practical measures you must comply with
The FSCA and Prudential Authority also issued a joint Directive to state that those financial services businesses that are operating need to comply with the following:
"Financial institutions are hereby directed as follows:
A head of a financial institution must, where that head determines staff as essential as contemplated in Regulation 11B(2), endeavour to limit these members of staff to as small a number as possible and, as far as possible, enable remote working, including working from home to support essential services.
A financial institution must take appropriate precautionary measures to reduce the risk of exposure, transmission and spread of the COVID-19, including to limit the number of staff required to be at offices in order to provide the elevant required essential financial services to a minimum and must put appropriate measures in place to promote minimum physical contact between staff, by-
A financial institution must-
A financial institution must develop and implement an infectious disease preparedness and response plan that can help guide protective actions gainst COVID-19, which must include plans and policies aimed at compliance with this Directive.
A financial institution must identify a workplace coordinator who will be responsible for COVID-19 related issues and their impact at the workplace and for timeously responding to the Authorities upon request for information."
Just like with the Corona virus we are currently experiencing, prevention is better than cure in your financial services practice as a financial advisor. In this Blog Post we take a look at the new RDR (Retail Distribution Review) updates affecting the naming conventions of financial advisors that came out in December 2019.
It is important to note that the RDR proposals are at stage 3 out of a possible 6. Stage 3 means “informal stakeholder consultation and/or technical work at an advanced stage”. Thus, the specifics of around the classes and impacts around it are still suggestions and will likely look different in the implementation stage. My bet is it will take more than a year to implement. Given the Coronavirus issue it might delay it further. Time will tell.
Essentially there will be two classes:
PSA = Product Supplier Agent
This is a person tied to a specific product supplier only. They may only sell their products. They are not allowed to opine or advise on other products in the market and are more subjective.
RFA = Registered Financial Advisor
This designation is for independent financial advisors. They can advise on other products in the market and can take a more objective stance.
The above designations are for registration purposes only and client facing designations are still being deliberated on. The FSCA stated that one can only be one of the above designations and not both but space will be made for minimal exemptions.
For more information see the Discussion Paper from the FSCA here: https://www.fsca.co.za/Regulatory%20Frameworks/Pages/Treating-customers-fairly.aspx
Comments and feedback to be provided to the FSCA via email@example.com by 31 March 2020.
The Financial Sector Conduct Authority (FSCA) issued a Press Release which states that the FSCA will be making an effort to protect their staff, the financial sector and aid Government efforts by using precautionary measures to contain the COVID-19 pandemic.
What precautionary measures will the FSCA take to limit the sprad of COVID-19?
The FSCA cancelled all on-site inspections and will communicate new dates to the financial institutions affected.
What FSCA activities will remain unchanged?
For more information on this topic:
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).
Be ready for a FICA inspection - a few FSP's have been fined already
What do you need to have in place?
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.
"There is a great deal of advertising that is much better than the product. When that happens, all that the good advertising will do is put you out of business faster." -Jerry Della Femina
What you should do according to the FAIS Act
FAIS Act Section 8(b):
"ensure that a reference to the fact that such a licence is held is contained in all business documentation, advertisements and other promotional material;"
FAIS Act General Code of Conduct Section 14 and 15:
(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.
(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.
There is certainly a role for regulation, but regulation should always take into account the impact that it has on markets, a balance that must be constantly weighed.
This document is also one of the easiest documents to provide because it is usually only 1-2 pages and it does not change often. You need to ensure that you have proof that you provided it to the client (i.e. client signature and/or email to the client). Best practice is to give it to the client as soon as you can with first contact. This document is one of the basics that you cannot get wrong.
The content of this Introduction Disclosure is also very important - it must be correct. One of my clients pointed out and highlighted to me the importance of - for instance - the fact that you need to display the contracted product providers on your introduction disclosure if you have any.
Take a look below at the information that should be contained in this disclosure taken from the FAIS General Code of Conduct:
INFORMATION ON PRODUCT SUPPLIERS
(1) A provider other than a direct marketer must at the earliest reasonable opportunity, and only where appropriate, furnish the client with full particulars of the following information about the relevant product supplier and, where such information is provided orally, must confirm such information within 30 days in writing:
(a) Name, physical location, and postal and telephone contact details of the product supplier;
(i)the contractual relationship with the product supplier (if any), and whether the provider has contractual relationships with other product suppliers;
(ii)names and contact details of the relevant compliance and complaints departments of the product supplier.
(c)the existence of any conditions or restrictions imposed by the product supplier with regard to the types of financial products or services that may be provided or rendered by the provider; and
(d)where applicable, the fact that the provider -
(i)directly or indirectly holds more than 10% of the relevant product supplier’s shares, or has any equivalent substantial financial interest in the product supplier;
(ii)during the preceding 12 month period received more than 30% of total remuneration, including commission, from the product supplier,
and the provider must convey any changes thereafter in regard to such information at the earliest opportunity to the client.
(2) A product supplier which is an authorised financial services provider, and which has entered into an intermediary contract or similar contractual relationship with another provider (not being a representative) for the purpose of rendering a financial service in respect of its financial products, must within a reasonable time after being requested to do so by such other provider, provide such other provider with sufficient particulars to enable the provider to comply with the disclosure requirements of this Code relating to the furnishing of details of the product supplier and the product in question.
(3) A provider must, where the relevant licence, terms of employment or mandate enables such provider to provide clients with financial services in respect of a choice of product suppliers, exercise judgment objectively in the interest of the client concerned.
(4) A provider may not, in dealing with a client, compare different financial products, product suppliers, providers or representatives, unless the differing characteristics of each are made clear, and may not make inaccurate, unfair or unsubstantiated criticisms of any financial product, product supplier, provider or representative.
INFORMATION ON PROVIDERS
5. Where a provider other than a direct marketer renders a financial service to a client, the provider must at the earliest reasonable opportunity furnish the client with full particulars of the following information and, where such information is provided orally, must confirm such information within 30 days in writing:
(a)Full business and trade names, registration number (if any), postal and physical addresses, telephone and, where applicable, cellular phone number, and internet and e-mail addresses, in respect of the relevant business carried on, as well as the names and contact details of appropriate contact persons or offices;
(b)concise details of the legal and contractual status of the provider, including details as regards the relevant product supplier (or, in the case of a representative, as regards the relevant provider and product supplier), to be provided in a manner which can reasonably be expected to make it clear to the client which entity accepts responsibility for the actions of the provider or representative in the rendering of the financial service involved and the extent to which the client will have to accept such responsibility;
(c)names and contact details of the relevant compliance department or, in the case of a representative, such detail concerning the provider to which the representative is contracted;
(d)details of the financial services which the provider is authorised to provide in terms of the relevant licence and of any conditions or restrictions applicable thereto;
(e)whether the provider holds guarantees or professional indemnity or fidelity insurance cover or not.
(f)whether a representative of a provider is rendering services under supervision as defined in the Determination of Fit and Proper Requirements; and
(g)the existence of a specific exemption that the Registrar may have granted to the provider with regard to any matter covered by the Act.
CONTACTING OF CLIENT
6. A provider must-
(a)in making contact arrangements, and in all communications and dealings with a client, act honourably, professionally and with due regard to the convenience of the client; and
(b)at the commencement of any contact, visit or call initiated by the provider, explain the purpose thereof and at the earliest opportunity, provide the information referred to in section 5.
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.
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.
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).
RE Exam Prep Guides
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
More information on the content of the Supervision Contract
The agreement must:
For full information on these processes please see the relevant board notice here or contact us for more information.
by: Horizon Compliance team