![]() 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
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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 National Treasury issued the second draft of the new COFI (Conduct of Financial Institutions) Bill on 29 September 2020. For those of you that do not know, the COFI Act will will replace the FAIS Act in totality and be the focus for your compliance in coming years. In addition, the COFI Act will regulate the conduct of other services and product providers. The bill also wants to ensure a level playing field. We need to keep the regulator accountable and we need to ensure the regulation makes sense whilst preventing the situation where "all animals are equal, but some animals are more equal than others", as the book of Animal Farm in the picture above warns. The latest changes in the second draft are:
We are responding and commenting as a compliance firm to the draft. If you are a member of an industry representative body (like the FIA or FPI) you can also provide your comments through them. If you are not a member of an industry representative body then you can send your comments directly to National Treasury or to us to add it to our comments and to send on your behalf. this piece of legislation will control your business in the future and determine the shape and form of your industry for years to come. I, for one, am concerned at the new practise we see at the FSCA where they seem to ask extra and unlimited amounts of questions to new licensees without informing the applicant if these new requirements beforehand which leads to copious delays. In addition to that, I am concerned at how difficult it is with the FAIS Act in its current form to become a Key Individual or to start your own FSP. We will be taking up these and other concerns in our comments to the FSCA.
We encourage everyone to comment in whatever form because this piece of legislation will control your business in the future and determine the shape and form of your industry for years to come. Any risks, detriment to you or unnecessary red tape that is not addressed will become part of your life and we'd like to avoid that as much as possible. The due date is 30 October 2020 but we've heard from some sources that they are still receiving comments after that as extensions were provided to certain industry representative bodies until 16 November 2020. Comments submitted directly to National Treasury can be sent to: marketconduct@treasury.gov.za . You can view the full published bill and other documents here. You may be aware of third parties that offer the service of comparing product details when replacements are made on financial products. These comparisons are often relied on by advisors without ensuring all details contained therein are an accurate reflection of the financial product and all its unique and most updated features.
When the advisor relies on the comparison without ensuring 100% correctness, incorrect advice may be given and the client may make a decision based on the incorrect advice. Consequently, when disputes arise, the advisor wants to hold the third party responsible for providing incorrect information. The FSCA is concerned about this practise and recommends that advisors check the factual correctness of all compared product features, before giving advice to the client. It is the responsibility of the advisor to ensure correctness, therefore, if a dispute arises, the advisor could be held responsible. The same is true for pre-populated ROA's without replacements. We often see that advisors have a general statement that may or may not be tweaked to fit a client's circumstances, that paragraphs are copied between different clients' ROA's, or that one paragraph is copied and pasted over-and-over on the same ROA. This practise is a recipe for negligence and consequently, disputes. We urge all advisors to provide unique descriptions of a client's needs and reasons for preferences/choices, to ensure an accurate audit trail is kept and thus minimising opportunities for disputes. The FSCA communication on this subject can be accessed by clicking on the "FSCA Post" button below: Summary Recent changes (June - July 2020) were made to the General Code of Conduct, Fit and Proper Requirements and Short Term Deposit Codes of Conduct to give effect to the RDR (retail distribution review), among other process that commenced long ago. Most of the changes that will affect an FSP are those contained in the General Code of Conduct. It is to be noted that most of the legislative changes that have an effect on FSP's come into effect only 6 months after publication. We summarise the changes here shortly and will further disseminate and assist our clients in the coming months to implement this. Fit and Proper Changes The bulk of the changes under Fit and Proper are administrative in nature such as aligning definitions across product legislation and FAIS legislation and correcting numbering so there is not too much that will affect you here. Notable changes to the regulations here are:
Changes to the General Code of Conduct Here are many changes that will impact the operation of an FSP in general. Close attention is to be paid here. Notable changes are:
Changes to the Short Term Deposit Code of Conduct These changes mainly apply to banks and are of an administrative nature where definitions are aligned to the new changes in the General Code of conduct. Not much to see here. Please the full set of notices here if you are feeling particularly sadistic and want to read the legislation yourself.
*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: Applies to:
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. Two Classes 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. Other Impacts
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 fsca.rdrfeedback@fsca.co.za 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:
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by: Horizon Compliance teamCompliance Experts Archives
June 2022
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