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No More Online JR Registrations

2/28/2022

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

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

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

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


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

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

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

​We'll keep you posted on developments.
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The Debarment Issue

1/28/2022

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

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

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

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

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

9/28/2021

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​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:
  1. General Solvency Requirement (Overall Outcome: Assets > Liabilities)
  2. Working Capital Requirement (Overall Outcome: Current Assets > Current Liabilities)
  3. Liquidity Requirement (Overall Outcome: Maintain Liquid Assets >= x/52 weeks of Annual Expenditure according to the FSP category)
 
What important changes took place regarding subordinated loans?
The most important change that we come face to face with almost monthly is the change where Category 1 FSPs may no longer subtract subordinated loans from the current liabilities in the working capital requirements. This requirement is applicable to Category 1 FSPs Holding Client Funds, and Category 1 FSPs Not Holding Client Funds.
 
How can an FSP ensure it meets the requirements?
The FAIS Act states that all FSPs should maintain monthly management accounts if these accounts are continuously monitored and compared with the financial soundness requirements the FSP should be able to maintain the financial soundness requirements.
 
What can an FSP do if they suspect that the requirements are not being met?
It is immensely important that the FSP follow one of these two steps as soon as the FSP suspects or foresees that the financial soundness requirements are not being, or will not be met, these are listed and explained as follows:
  1. Early Warning Report
  2. Rely on FSCA Exemption
 
  • The Early Warning Report is a report that can be submitted to the FSCA by the FSP or its Compliance Officers. The FSP must submit or request their Compliance Officer to submit an Early Warning Report that is certified by the CEO, controlling member, managing or general partner or trustee of the FSP, if one of the following financial statuses are true for the FSP:
  1. Assets exceed liabilities by less than 10%
  2. Current assets exceed current liabilities by less than 10%
  3. If any of the financial soundness requirements are not met or if the FSP becomes aware of any situation that may result in any of the above  

  • FSCA Exemption Application is an application that can be sent to the FSCA before the financial year end to assist the FSP with meeting the financial requirements as set out in the exemption application, this exemption does not mean that an FSP does not have to meet any of the requirements as set out in the Financial Soundness Requirements, but this exemption allows for some leeway between the Financial Soundness Requirements and the exemption requirements to assist the FSP to meet the requirements even if it is then by only meeting the requirements as set out by the exemption. There is additional documentation that must be sent together with this application within 7 days of relying on this exemption, these are as follows:
  1. Annexure 6 (Form A: Liquidity Calculation) of BN194 of 2017 to the FSCA (Liquidity Calculation certified by the CEO, controlling member, managing or general partner, or trustee of the FSP.
  2. An Action Plan showing how the FSP plans to re-establish its financial position to meet the financial soundness requirements and this plan should include the steps that the FSP will take and in what timeframe these steps will take place to ensure the financial soundness requirements that is not currently met, are met as soon as possible.

​In addition to the above, the FSP must submit the following items every 6 months from the date that
​        the FSP relied on the exemption:
  • Management accounts
  • Regularly updated Liquidity Calculation (Form A)
The exemption conditions are as follows:
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​How to calculate an FSPs Financial Soundness Requirements?
The Financial Soundness requirements can be explained and calculated as follows:
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​*Liquid Assets are calculated as follows:
  • Cash & cash equivalents +
  •  (Plus) Participatory interest in a Money Market Portfolio
  • (Plus) 70% of the market value of a participatory interest in a CIS, other than an investment in a money market portfolio or a CIS hedge fund
  • (Plus) 70% of the market value of a security listed on a licensed exchange provided it does not constitute more than 50% of total liquid assets
  • = Liquid Assets
​
*Annual Expenditure is calculated as follows:
  • Annual Expenditure
  • (less) staff bonuses
  • (less) employees’ and directors’, partners’ or members’ share in profit
  • (less) emoluments of directors, members, partners or sole proprietor
  • (less)  other appropriation of profits to directors, members and partners"
  • (less) remuneration that is linked to-
    • (aa)     a percentage of the FSP’s revenue; or
    • (bb)     a percentage of the revenue generated by an employee, representative or contractor of the FSP; and
    • that in the absence of such revenue the FSP has no obligation to pay the remuneration"
  • (less) depreciation
  • (less) bad debts
  • (less) any loss resulting from the sale of assets
 
Contact us for any information on the Compliance Officer services we provide for information on the financial soundness requirements, our team at Horizon Compliance are always keen to help.
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FSCA sanctions on Momentum Wealth and Momentum Collective Investments

7/14/2021

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a reminder to accountable institutions to regularly submit CTRs, risk-rate clients (and potential clients) and comply with your own RMCP
This blog is about the recently imposed administrative sanctions on Momentum Wealth (Pty) Ltd and Momentum Collective Investments RF (Pty) Ltd by the FSCA.

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

The breaches identified by the FSCA were the following:
  1. Non-compliance with cash threshold reporting (CTR) requirements on historic transactions (2010-2017).
  2. Risk-rating failures:
  • Momentum Wealth failed to identify, verify and risk rate a beneficiary of one trust in terms of s 21B of the FIC Act.
  • Momentum CIS failed to risk rate 38 clients in line with their own RMCP.
 
These cases serve as a reminder to accountable institutions to regularly submit cash threshold reports, risk-rate clients(and potential clients) and comply with your own RMCP.

​For more information click here
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FAIS to be replaced by COFI - 2nd bill tabled

10/21/2020

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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:
  • The application of the COFI Bill in relation to existing legislation.
  • The approach to conduct standards
  • Refined licensing approach
  • More detail around transformation (BEE and EE) and enforcement thereof
  • Medical schemes are removed until more work is done
  • Streamlining of interaction between the Financial Markets Act and the COFI Act
  • Application to the non-retail business where clients are corporates or where clients are professional investors, for example

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.
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Pre-populated ROA's

8/31/2020

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​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:

FSCA Post
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New FAIS changes - FAIS Code of Conduct

7/9/2020

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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:​
  • an FSP may not appoint an unrehabilitated insolvent
  • if a representative is sequestrated after appointment the FSP can only keep the representative if risk mitigating measures are put in place
  • operational ability requirements of the FSP is expanded where data and physical security of client information is concerned
  • where FSP applicants are concerned, expenditure considered less certain items one would normally include such as bonuses, bad debts etc.
  • Professional Bodies can only accredit CPD activities that are verifiable
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:
  • General
    • Direct marketing is now seen as rendering services via telephone, internet, digital platform or email
    • One is not allowed to use regulators logo or name
    • Not use FAIS approval to support business or products that is not regulated
    • New definition of a direct marketer
    • Immaterial financial interest now includes loyalty rewards
  • Independence & Fees
    • Not allowed to say they are independent if certain condictions are prevalent
    • One is only allowed the fees that are agreed to with the client and commensurate to the services rendered
    • Methods on recommendation of products and conflict of interest and fair treatment of clients are further prescribed
  • FNA 
    • New definition of FNA
    • One must take into consideration the level of knowledge of client
    • Allowance for focused or limited FNA is further expanded
    • Replacement advice further expanded
    • Cancellation of products is further expanded
    • Comparison of products not allowed if features are not compared and disclosed clearly
  • Advertisements
    • Need to have process/policy for advertisements
    • Negative option marketing is not allowed
    • Clients must be allowed to opt out of unwanted direct marketing
    • Comparative Marketing is further regulated
    • Testimonials is further regulated
    • Loyalty Benefits is further regulated
    • Forecasts is further regulated
    • Puffery (advertising overstatements) is further regulated
  • Complaints Management
    • Framework is expanded
    • Responsibilities is expanded
    • Complaints categorisation is expanded
    • Escalation and review, decisions and communication is expanded
    • Record keeping and anlalysis is expanded
  • Ombud Interactions
    • Must have processes to communicate and state ombud details
    • Monitor cases and improve internal processes​
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.
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Financial Sector Transformation Council Deadline

6/4/2020

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What is this?
We've recently received some calls from clients on the FSTC (Financial Sector Transformation Council) reporting BBBEE communication sent out by the FSCA on behalf of the FSTC. See the original communication here. To be clear, the FSTC is not to be confused with the FSCA. Although this does not fall in the realm of FAIS compliance we thought it is a good idea to perhaps just summarise the requirements and application thereof. Usually the BEE components of a business is handled internally/with HR or accountants in consultation with Verification Agents (BEE Compliance Officers) if need be.

The FSTC  is mandated to obtain BBBEE statistical data from entities operating in the financial services sphere on their progress relating to BBBEE. They send out a request once a year for statistical data so they can compile their annual report on the progress of Financial Institutions with the Financial Sector BBBEE codes.

Who does this apply to?
The sectors/companies asked to report are:
  1. ​Banking;
  2. Long-term insurance;
  3. Short-term insurance;
  4. Re-insurance;
  5. Retirement fund administration;
  6. The management of collective investment scheme assets;
  7. Financial services intermediation and brokerage (FSP's);
  8. Public entities involved in the financial sector e.g. DBSA, Land Bank;
  9. Asset management, consulting and administration;
  10. Private equity, venture capitalist and impact investors;
  11. Management of investments on behalf of the public, including, but not limited to, private equity, members of any exchange licensed to trade equities or financial instruments in South Africa and entities listed as part of the financial index of a licensed exchange;
  12. Underwriting management agents; and
  13. Industry Trade Associations operating in the sector.

This Amended FSC does not apply to:
  1. Natural or juristic persons who do not have trading operations in the Republic of South Africa;
  2. The trading operations of natural or juristic persons outside the Republic of South Africa; and Managers of investments on behalf of the public who are not subject to regulation by the FSCA, such as lawyers who hold money in intermediate trusts etc.

How do I report if I need/want to?
  1. Exempted Micro Enterprises must submit an affidavit confirming their annual turnover and level of black ownership to the FSTC.
  2. Financial Institutions that meet the requirements of a Qualified Small Financial Institution (QSFI), that has an annual turnover of more than R10 million but less than R50 million, and are more than 50% black owned (where there is an existing equity deal in place) or at least 51% black owned (for all deals concluded after the commencement date of the amended Code) or 100% black owned, should submit an affidavit confirming their annual turnover and BBBEE status to the FSTC.  
  3. Financial institutions with an annual turnover of R50 million or more must have their BBBEE status verified by a Verification Agent. This agent must submit a verification certificate together with the full verification report to the FSTC within 30 days of issuing the verification certificate. 

FIs were requested to submit the full final verification reports, to the FSTC no later than the end of the business Friday, 05 June 2020. All reports are to be submitted electronically via email to reporting@fstc.org.za with the subject: FSTC 2018/19 Report– (name of entity). In the past, however, they did allow entities to still submit after this date, however we cannot guarantee this.

Should an entity encounter difficulty in providing the above-requested information they should contact the FSTC at reporting@fstc.org.za, or call (011)838 6696 or get in touch with their respective Trade Associations for more clarity

​Any Penalties?
  1. All entities that do not submit the required reports to the Council will automatically be discounted by one BEE level in the next rating period.
  2. The Council also reserves the right to name institutions that have not submitted reports on a list, however we have not seen them doing so yet.
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RDR Update – Adviser Classes

3/24/2020

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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
  • Advisers will not be allowed to be on more than one licsence – with some exceptions. This does not apply to KI’s.
  • Juristic Representatives to be allowed to continue but the FSCA wants more compliance and oversight on them. There are currently over 4000 juristic representatives and 10000+ FSP’s.
  • No commission can be transferred if a PSA changes to being a RFA and vice versa. RFA’s can transfer commission from one FSP to another if it is not a Product Supplier.
  • Commission can only be paid out for services rendered and ongoing commission only where ongoing services are in fact, rendered.
  • PSA’s must refer clients away that want a product type which the Product Provider does not have. Referral fees can be paid with this referral, so there is an opportunity for Product Suppliers and independent advisers to partner in this regard.
  • PSA’s are not allowed to use the word “Independent” and one can also not use the term if you are owned or if you own a stake in a Product Supplier directly.
  • There is a proposal that only CFP’s are allowed to use the term Financial Planning, Financial Planner. However, I expect this to be opposed as most advisers use this terminology and I think it would be unfair and confusing to clients. The designation of being a CFP should be enough to show clients that you’ve attained the certification. If you do not agree, I’d like to hear your thoughts in the comments on the matter. I am open to changing my mind if the argument makes sense.
 
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.
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FSCA COVID-19 Precautionary Measures

3/17/2020

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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 will suspend all in-person engagements with external stakeholders. (This includes walk-in clients at the Pretoria office, which is also suspended.)
  • The FSCA will be making use of remote working, this includes the use of technology to accommodate meetings. 
  • The FSCA postponed all events such as roadshows, workshops and seminars.
  • The FSCA will deal with Licensing and Business Centre activities enquiries using e-mail or telephone communication.
  • The FSCA cancelled all on-site inspections and will communicate new dates to the financial institutions affected.
The FSCA cancelled all on-site inspections and will communicate new dates to the financial institutions affected.
What FSCA activities will remain unchanged?
  • Desk top supervision is to continue as normal 
  • Electronic communication with the FSCA will continue as normal
For more information on this topic:
  • Please visit: www.fsca.co.za
  • Please follow this link to view this press realease directly from the FSCA: FSCA takes precautionary measures to limit spread of Covid-19
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