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:
*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."
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:
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.
The RDR (Retail Distribution Review) process started by our regulator, the FSCA, has resulted in the amendment of certain pieces of legislation. Good times. Coupled with that and the Twin Peaks changes there are still more changes to come. One of the positively thorny changes that directly affects the industry in a big way is the manner in which brokers/advisers are compensated. In this post we will briefly look at the current state of play with regards to asking a client for addition fees above and beyond agreed/regulated commissions. We will look at Short-Term Insurance, Long-Term Insurance, Other Financial Products and Leads/Referrals.
Short-Term Insurance (STI)
So it is probably no secret to most of the Short-Term Insurance Brokers among you that broker fees structures that Insurers can collect on your behalf have changed and was implemented via the new PPR (Policy Holder Protection Rules) under rule 12.4 and 12.4.1 issued by the FSCA Insurance Department.
By 15 December 2018 Insurers will have to comply with this rule and it will also unavoidably have an affect on the the short-term insurance broker as well to does fee addition costs to the client.
The requirement states:
"An insurer may not facilitate the deduction or charging of any fee payable by a policyholder to an intermediary or any other person, unless the insurer has satisfied itself that the amount and purpose of the fee have been explicitly agreed to by the policyholder in writing, and that it appears from such agreement that the fee –
Most Insurers have issued notices to linked brokers to obtain such approvals from clients before 15 December. In future it is also a good idea to have this kind of document signed when signing up a new client or incorporating it into your service agreement with your client or other document (such as the ROA, NDA etc). As long as the client agrees to it.
Long-Term Insurance (LTI)
Long-term Insurance brokers/intermediaries never had the dispensation that short-term insurance brokers had to even collect extra fees. Now the position looks exactly the same in the Long-Term Insurance Act and the wording of the PPR rule concerning additional fees is exactly the same as the rule in the Short-Term Insurance Act above, even to the number or the rule. So it can be argued that brokers can now collect extra fees if the clients do agreed to it.
So here, also, if you want to collect extra fees you need to obtain client consent in the same way and it must comply in the same way by the same date.
My opinion on others outside the space of LTI and STI that are FAIS approved and do ask extra professional fees to do as follows. Outside of LTI and STI fees are not currently regulated but the regulator is looking at it for the future.
Disclose it to the client and have them agree to it in writing if you are asking extra fees. Enumerate what it is for and makes sure the client understands what she is paying for. A good rule of thumb is not to make the client pay double for something. So when fees are required make sure you have not already been paid for those services. This will ensure you do not fall foul of TCF requirements (Treating Clients Fairly).
Referral Fees and Leads
This is not currently regulated but it is on the table for phase 2 of RDR which is still under review and research. A suggestion is to keep a close eye on this space. At minimum, make sure there is an agreement in place if you are getting paid for or receiving referrals and make sure this is disclosed to the client by the broker/adviser.
Until next time, may your business be fruitful and your compliance fit for purpose!
Bob Dylan sang, "The times they are a changin'...". This song is especially relevant in the wake of the ongoing regulatory changes and we need to keep up with them if we want to keep our eye on the horizon (see what I did there?). In line with the Twin Peaks changes, on 1 April the regulator we all know and love as the FSB (Financial Services Board) has changed its name to the FSCA (Financial Sector Conduct Authority). Most of the staff complement is the same for now but will likely change a bit during the transition period. The website itself seems to still have allot of work that needs to be done.
Although the guardhouse has a new coat of paint, FAIS (the Financial Advisory and Intermediary Services Act) itself is still keeping watch. It does have a few new accoutrements in the form of Fit and Proper amendments. These changes include:
There is a big move towards a principles based approach of regulation and it will be interesting to see how the FSB will enforce this and whether they will provide further guidelines on some of the gray areas.
Have a look at the new FSCA website and let us know what you think. The old FSB site will still be up and running for a while during the transition phase (sorry if the link is no longer working due to obvious reasons).
by: Horizon Compliance team