On 18 August 2023, following the issuance of a notice in the Government Gazette, the amendment of Section 56 of the Financial Intelligence Centre Amendment Act of 2017 came into effect. This amendment is explained by the FIC’s Draft Guidance Note 104A, issued on 18 January 2023, as well the FIC’s International Funds Transfer Reports user guide, dated 9 February 2023.
In essence, Section 43 of FICA introduces an amendment to Section 56 within the Act. This Section deals with the repercussions when an accountable institution, as mandated, fails to report the prescribed information concerning cross-border electronic funds transfers (EFT’s).
This amended Section 56 now includes a sub-section (2) which specifies that if an accountable institution fails to report the prescribed information related to an electronic money transfer in accordance with Section 31, it not only becomes liable for an offense but is also considered non-compliant and subject to an administrative penalty.
Section 31 of FICA imposes an obligation on accountable institutions to submit an international funds transfer report (IFTR) -
• within three days of the transaction or transfer date, when conducting electronic money transfers.
• This report must be submitted directly to the Financial Intelligence Centre (FIC).
• These electronic money transfers must be moved on behalf, or on the instruction, of another person,
• across South African borders,
• involving amounts of R20 000 and above (excluding transaction fees).
Who must Report?
The obligation to report international fund transfer transactions exceeding the prescribed threshold applies solely to specific categories of accountable institutions authorized to conduct the business of cross-border electronic funds transfers, for example authorised dealers (banks), the Post Office, authorised dealers with limited authority (remittance and forex dealers), FSP’s that have a direct reporting dispensation under the Exchange Control Regulations and the South African Postbank, etc.
These FSP’s will, in terms of the Exchange Control Regulations, be authorised by the Treasury in accordance with conditions as the Treasury may impose, to do the following:
• Take or send out of the Republic any bank notes, gold, securities or foreign currency, or transfer any securities from the Republic elsewhere.
• Send, consign or deliver any bank notes, gold, securities or foreign currency to any person for the purpose of taking, sending or removing such bank notes, gold, securities or foreign currency out of the Republic.
• Take any South African bank notes into the Republic or send or consign any such notes to the Republic.
• Make any payment to, or in favour, or on behalf of a person resident outside the Republic or place any sum to the credit of such person.
• Draw or negotiate any bill of exchange or promissory note, transfer any security or acknowledge any debt.
• Grant any financial assistance to any person in the Republic, where as security for such financial assistance, the person granting the financial assistance in turn relies on any security, guarantee, undertaking or financial assistance, directly or indirectly furnished by –
(i) any person resident outside the Republic; or
(ii) an affected person.
• Grant any financial assistance to any person in the Republic, where such person –
(i) is not resident in the Republic; or
(ii) is an affected person.
Failure to Report?
The IFT Report must contain the specified details as stipulated in Regulation 23E of the Money Laundering and Terrorist Financing Control Regulations. Failure to adhere to these provisions constitutes an offense, subject to potential penalties including imprisonment for up to three years or a fine of up to R1 million.
Additionally, failure to submit an IFTR within the stipulated timeframe classifies the entity or individual as non-compliant and subjects them to administrative sanctions, which may involve financial penalties reaching up to R10 million for individuals and R50 million for legal entities.
The Financial Sector Conduct Authority (FSCA) recently released FSCA FAIS Notice 32 of 2023, which extends several exemptions pertaining to Private Equity Funds. These exemptions, which were originally set to expire on the 30th of June 2023, have now been prolonged until the 30th of June 2026. Notice 32 of 2023 comes into operation on the 1st of July 2023.
These exemptions include:
• Exemption for Financial Service Providers (FSPs) Dealing with Private Equity Funds
• Exemption for FSPs Dealing with Private Equity Funds from Section 13(1)(c) of the FAIS Act
• Exemption for Certain Juristic Representatives from Liquidity Requirements
Considering that these exemptions are nothing new, we will only provide you with a basic overview of such.
Exemption for Financial Service Providers (FSPs) Dealing with Private Equity Funds
The exemption for Category II FSPs dealing with Private Equity Funds solely applies to older mandates concluded before the 13th of December 2012. This exemption entails that, for discretionary investment mandates entered into before the aforementioned date, there is no obligation to include a general statement addressing risks associated with investing in local and foreign financial products, including currency risks.
However, investors must have been informed in writing about these risks within six months of the publication of Board Notice 208 of 2012 (i.e., by the 13th of June 2013).
This exemption also states that a Category II FSP is exempt from meeting the liquidity requirement set out in the Determination of Fit and Proper Requirements of section 48(2) until 30 June 2026, on the condition that it only manages private equity funds.
Exemption for FSPs Dealing with Private Equity Funds from Section 13(1)(c) of the FAIS Act
Category II FSPs that provide financial services to private equity funds are also exempted from section 13(1)(c) of the FAIS Act, which prohibits individuals from offering financial services or entering into contracts related to financial services except in the name of the FSP they represent.
Exemption for Certain Juristic Representatives from Liquidity Requirements
Juristic representatives of Category II FSPs that exclusively provide financial services to private equity funds are exempted from complying with the liquidity requirements outlined in sections 48(2) and 48(4) of the Determination of Fit and Proper Requirements.
In recent years, Cryptocurrencies and Crypto Assets have gained significant attention and popularity. The Financial Sector Conduct Authority (FSCA) declared Crypto Assets to be financial products with immediate effect from 19 October 2022. The aforementioned means that anyone who provides financial services related to Crypto Assets will need to be appropriately licensed as a Financial Services Provider (FSP) and must apply to the FSCA for an FSP licence between 1 June 2023 and 30 November 2023.
Understanding the FSCA FAIS Notice 25 of 2023: Exemptions for Crypto Asset FSPs
To regulate the financial services provided in relation to Cryptocurrencies and Crypto Assets, the FSCA has issued FAIS Notice 25 of 2023, which will apply to all licenses Crypto Asset FSPs and took effect on the date of publication, i.e. 11 May 2023. This notice outlines certain exemptions for persons rendering financial services involving Crypto Assets. In this blog post, we will explain the key points contained in the Notice.
Exemption from General Code of Conduct and Regulatory Examinations
Crypto Asset FSPs, its Key Individuals and Representatives are exempted from maintaining suitable guarantees or professional indemnity or fidelity insurance cover, as is required in terms of section 13 of the General Code of Conduct and Board Notice 123 of 2009. This exemption applies solely to the rendering of financial services in relation to crypto assets.
Additionally, Crypto Asset FSPs and its Key Individuals are temporarily exempted from the regulatory examination requirements as captured in Part 5 of Chapter 3 of the Determination of Fit and Proper Requirements. This exemption lasts for a period of 18 months from the effective date of the notice.
Exemption for Crypto Asset Supervised Representatives
The notice also provides exemptions for Crypto Asset supervised Representatives, with different requirements based on their appointment status. If a supervised Representative was never appointed as a Representative of an FSP before the publication of this notice, they can be exempted from the Regulatory Examination requirements. However, the exemption is conditional upon the completion of the relevant regulatory examination within two years from their first appointment as a Representative for providing financial services in relation to Crypto Assets.
For those supervised Representatives who were previously appointed only to render financial services for Tier 2 financial products or perform sales execution, they must comply with the applicable regulatory examination requirements within two years from the date they were first appointed as representatives for providing financial services related to crypto assets.
Continuing Professional Development (CPD) Requirements
It is a requirement that Crypto Asset FSPs, its Key Individuals and Representatives complete a minimum of 6 (six) hours of CPD activities per CPD cycle specifically relating to crypto assets.
A Crypto Asset supervised Representative (including a supervised Representatives who were, before publication of this Notice, appointed only to render financial services for Tier 2 financial products or perform sales execution, and thereafter appointed as a representative to render financial services, other than the execution of sales, in relation to crypto assets) must also complete a minimum of 6 (six) hours of CPD activities relating to crypto assets per CPD cycle. The CPD cycle starts from the date when the supervised individual meets the applicable regulatory examination and qualification requirements for crypto assets, or after six years from their initial appointment as a crypto asset supervised representative, whichever occurs first.
It is essential for all parties involved, including Crypto Asset FSPs, its Key Individuals, Representatives and Crypto Asset supervised Representatives to comply with the conditions specified in the Notice. Failure to meet these conditions will automatically result in the exemption no longer being applicable to the respective individuals or entities.
FAIS Notice 25 of 2023 therefore provides exemptions for individuals and entities involved in rendering financial services related to crypto assets. These exemptions are subject to specific conditions, including compliance with regulatory examination requirements and fulfilling CPD activities. It is important for those operating within this sector to stay updated with any amendments or withdrawals of the exemptions that may be published by the FSCA.
Please also note that the new license application forms that now include Crypto FSP License Applications have now been published.
For any help on getting licensed contact us today to get a quote!
Checklist for Compliance: What Brokers Need to Keep on File for Retail Clients According to FAIS and FICA Regulations
Compliance with the Financial Advisory and Intermediary Services (FAIS) Act and the Financial Intelligence Centre Act (FICA) regulations is crucial for Financial Service Providers (FSPs) when dealing with clients. To meet regulatory requirements, FSPs must maintain a comprehensive compliance file for each client. In this blog post, we provide a general checklist of the items that should be included in a compliance file for a retail client in accordance with FAIS and FICA regulations. Please note this might not cover all instances and each client and product type has some changes
Compliance File Checklist:
Disclosure documentation: A letter of engagement outlining the services provided, fees and commissions charged, and any potential conflicts of interest.
Record keeping: A record of all client interactions, including meetings, telephone calls, emails, and correspondence.
Needs analysis: A thorough needs analysis to ensure that the products and services offered are suitable for the client's needs, objectives, and risk profile.
Risk profiling: A risk profiling assessment to determine the client's risk appetite and tolerance.
Product information: A detailed explanation of the products and services being offered, including any risks involved.
Compliance requirements: All compliance requirements related to FICA KYC (Know Your Customer) and AML (Anti-Money Laundering) regulations.
Record of advice: A record of all advice given to the client, including the rationale behind the advice.
Quotations: A record of all quotations provided to the client.
In conclusion, maintaining a comprehensive compliance file is essential for FSPs in the financial services industry. By ensuring that all necessary documentation and records are kept, FSPs can demonstrate their commitment to meeting regulatory requirements and providing clients with the necessary protection and information to make informed decisions. As a compliance outsourcing firm, we remind our clients to keep a detailed compliance file for each retail client in accordance with FAIS and FICA regulations. By doing so, our clients can have peace of mind knowing that they are meeting regulatory requirements and promoting ethical business practices within the industry.
On Thursday, 17 November 2022, one of our Compliance Officers, Adriaan van Wyk, was invited to a discussion on Money Laundering at the radio station POWER FM 98.7 hosted by Faith Mangope.
You can listen to the Podcast here: omny.fm/shows/power-lunch/money-laundering-in-south-africa#description
We recently attended a workshop hosted by the FSCA on their new envisaged FAIS compliance reports called, Conduct of Business Reports (in typical regulatory nomenclature) also known as CBR reports.
Here is a summary of the key points from the Workshops conducted by the FSCA on the 7th and 8th of July 2022. Both workshops, (one aimed at smaller and one aimed at larger FSPs) contained the same contents albeit the questions posed by the participants were somewhat different.
Purpose of the CBR report: The FSCA published the report in its draft form to give the industry an idea of the questions they can expect and should prepare for. They also want the industry to comment on the applicability and format of the questions.
Some of the feedback the industry gave at the workshop was as follows:
Comment/question: The report does not seem to be in line with “cutting of red tape” for the industry as it is overly burdensome
Feedback from the FSCA: The Insurance industry is already reporting in a similar manner and although the financial services industry has not used the reports before, just as with the compliance reports, the CBR reports will take some getting used to. The FSCA also reiterated the fact that although the report will eventually be tweaked here and there, the contents and questions asked will not change
Comment/question: Smaller FSPs (especially 1 man run entities) do not see how it will be practically possible for them to be able to complete and submit the report, while conducting business and ensuring the timely submission of all other regulatory requirements
Feedback from the FSCA: The answer to this question was essentially the same as above. The FSCA also added that the questions for larger and smaller FSPs are exactly the same.
Comment/question: The industry is concerned about the actual length and complexity of the report. It was also suggested that the definitions section should be expanded further, especially because some of the terms and concepts used are not in legislation
Feedback from the FSCA: The FSCA will try and expand on the definitions and will also issue guidance notes.
Comment/question: How will feedback be provided (if any) after reporting
Feedback from the FSCA: The main idea is not for the FSCA to provide feedback but rather to regulate market conduct. The main entities that will be consulted, will be the outliers within a particular sector.
Imagine if you asked the same questions and took the same approach for all clients when rendering financial services. The FSCA would have a massive problem with that but it is exactly what they are doing with the current format of the CBR reports.
The FSCA acknowledged that the report is not perfect and may have a few errors, but the content is what the industry should focus on, as not all functionality has been built in yet.
It is concerning to us that the regulator does not seem to take complaints of increased red tape seriously and often dismisses it or ignores it. Of equal concern is the fact that the same questions are asked of large and small FSPs - this makes no sense. Imagine if you asked the same questions and took the same approach for all clients when rendering financial services. The FSCA would have a massive problem with that but it is exactly what they are doing with the current format of the CBR reports.
Luckily the industry seems to all have the same concerns and we'll keep a close eye on how the FSCA handles it.
Submission of the reports
When? The reports are not yet due, and the implementation will be done in a staggered approach over the next two or so years. The FSCA did indicate that there will be a Pilot Project in early 2023 and FSPs are encouraged to volunteer for the same. The obvious pro in volunteering, would mean you would get first-hand experience with the final report and feedback on the same. As stated in the Omni CBR Roadmap, this is a multi-year project, and the FSCA will consult on the implications of the reporting more than once and support the industry in implementing it in an incremental manner.
Therefore, the current phase is specifically for the practicality of questions. Next year the FSCA will be dealing with the functionality and practicality of the report. Implementation will start in 2024 in phases.
If you would like to volunteer for the Pilot Project, kindly send an email to email@example.com or firstname.lastname@example.org
The FSCA finally published drafts of their new compliance reports and in line with all things bureaucratic decided to call them Conduct of Business Reports or CBR for short. This report seems like it will attempt to enable all financial institutions ranging from Banks to one-man run FSPs to fill it in. It will do this by changing the content of the report depending on the input of the person filling it in.
At first glance the report seems broken as certain fields do not work and some of the auto selection an population content does not activate when it should. What we can see at this stage is that the information asked for is copious and some of it does not seem related to aspects of legislation.
The content was informed by overseas regulators in western developed nations. Although this is a good base to start from, one must significantly adapt as we are not a western developed nation. We must still develop and overregulation will not get us there. Our President recently embarked on a campaign of cutting red tape to enhance business creation and operation. I do not think this complex reporting approach is in line with this goal.
Much more action and responsibility needs to be taken by the authorities when malfeasance is brought to their attention instead of placing a heavy regulatory reporting burden on financial services providers. And in these economic times there is even less breathing space for businesses as it is. We'll publish our comments via our industry bodies in line with this approach but please feel free to comment on your own as well or via your industry bodies.
Their documentation states that they will only commence Phase 2 of the Consultation in Q1 2023 and that first reporting will likely only start in 2024.
There are workshops on the CBR reports and we will attend them on your behalf but anyone can attend them and voice their opinions if they’d like. Please see the links and documents at the end of this post.
Their documentation states that they will only commence Phase 2 of the Consultation Process in Q1 2023 and that first reporting will likely only start in 2024.
Written comments must be submitted via the secure FSCA “Comments” portal, available on the FSCA website under Home > Regulated Entities > E-services or by clicking here. The comments template is web-based and is available for completion by any individual on behalf of a licensed financial institution or industry association.
The “Comments” portal will only be available from 10 June 2022 and all written comments must be submitted by 10 August 2022. The portal will be closed for any further submissions after this date.
Workshops can be booked for here:
Large FSPs (turnover >R5)
Smaller FSPs (turnover <R5m)
For more information about this Communication please contact Ms Juanita Smit at Juanita.Smit@fsca.co.za and copy FSCA_Omni_CBR_Comments@fsca.co.za
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:
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.
Category 1 FSPs may no longer subtract subordinated loans from the current liabilities
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:
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:
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:
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:
*Annual Expenditure is calculated as follows:
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.
The investor’s risk is not entirely absorbed by the FSP.
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
by: Horizon Compliance team