Fit and Proper Areas
Persons rendering financial services under the FAIS Act are all aware of the ability, and sometimes, the need to render services under supervision. This means that the person has not yet fully complied with some of the fit and proper requirements as stipulated under FAIS.
The main areas of fit and proper requirements for persons that are representatives under FAIS are:
For more detail you can view the full fit and proper requirements here. Just make sure you lie down as jou will inevitably fall asleep a few times while reading it. You can read about some of the new additions to the fit and proper list in this previous post. In that post we detailed the time-frames that one has to comply with the new changes. Some of which are continual in terms of their application unless you fall within the exemptions for certain of the Competence requirements. Remember full exemption in itself is not the same as rendering services under supervision, which is what we will cover next.
A person can currently render services under supervision if they do not meet the following Fit and Proper Requirements:
The Financial Sector Conduct Authority provided interim relief recently to persons appointed rendering services under supervision before 1 August 2018 to comply by 1 August 2019 and people appointed after 1 August 2018 to comply by 31 January 2019 with class of business training requirements. Yes, if compared, the two time-frames do not make much sense and it seems a bit unfair. We are speaking to the FSCA about it.
You can read more about the Transitional Exemptions here and here. One would have thought just planning ahead and drafting one exemption and aligning time-frames would be simpler. Anyway, we appreciate that they at least provided these exemptions in the end.
Possible Supervision in the Future
Recently the FSCA issued a consultation paper that would change the landscape a little in that the supervision provisions are expanded to include some of the new fit and proper requirements. This will inevitably replace the old and transitional period provisions. This would go a long way to assist FSP's in complying. You can view the paper here.
Some Suggested CPD and Class of Business Providers
If you do need to comply with the class of business and CPD requirements you can perhaps contact some of the following providers:
This is only a very limited overview of the new and proposed changes. If you need specific guidance on the aforementioned, please contact us. Although there are some exemptions and extensions with regards to the time-frames its best to get things in place sooner than later. FSPs are advised to acquaint themselves with the changes, their implications and implementation.
With the advent of the new FAIS Fit and Proper amendments the Financial Services environment has been shaken up a bit. Due to the complex nature of the requirements and short deadlines many have been left in the dark as to what exactly they should do and how. As usual we aim to quickly tease out some of the basic elements of what is in store. If you need more in depth details please contact us for advice.
Product Specific Training
Product Specific training is intended to address the specific characteristics that differ from the general characteristics of products in the market. Product Specific training is usually provided by the FSP’s product supplier and must be done by KI’s and reps before rendering or overseeing financial services, as applicable.
Class of Business Training
Class of Business Training, on the other hand, is intended to address training in the subclasses of each product, as identified by the FSCA and must be done by KI’s and reps before rendering or overseeing financial services, as applicable. Only accredited provider or education institution can provide this type of training. At this stage there are only limited providers that offer this training.
There are certain FSP's that some of the training does not apply to. Contact us to find out more.
For Product Specific training:
Appointed before 1 April 2018 (excl. supervision):
For Class of Business training:
Reps & KI’s of Cat II, IIA, III, IV and Reps of Cat I: Appointed before 1 April 2018 (excl. supervision):
It remains to be seen how many FSP's will be compliant in time with the above-mentioned due dates, however we expect some teething problems. Never a dull moment in the state of constant change in the financial services industry.
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).
Seeing your country being pulled down by corruption is hard for anyone. As compliance officers, it's even more difficult as we are often faced with situations where clients and other businesses are actually involved in this to some degree. I can tell you, from experience, that it is not something that one should take lightly. Let's take a look at the risks one faces with PEP's and what to do with them.
The FIC Amendment Act of 2017 still includes the concept of PEPs, however, the naming conventions have now changed to distinguish between foreign and domestic PEPs as follows:
What is the risk?
We must be able to identify PEPs because their prominent public position may increase the risk of their involvement in bribery and corruption and consequently of laundering the proceeds of any such activity (as one can see from the recent corruption scourge that plagued our country).
A high ranking South African government official opened a number of accounts with an overseas bank. However, his activity raised a number of concerns that the account was being used to launder the proceeds of corruption. The value of cash deposits into these accounts was inconsistent with the stated purpose of the accounts and the customer’s income. In addition, the official opened an offshore company in a “tax friendly” jurisdiction with himself as sole director and sole shareholder. The deposits paid into the company accounts were considerably more than expected and, contrary to what is expected of a functioning business, there were no outgoing payments. After a Suspicious Transaction Report (STR) was submitted, the individual was investigated and charged with money laundering offences and subsequently sentenced to prison.
Their prominent public position may increase the risk of their involvement in bribery and corruption and consequently of laundering the proceeds of any such activity.
What are the proposed controls?
Due to the susceptibility of bribery and corruption associated with PEPs, businesses often don’t want to do business with them, however this is an unintended consequence of the associated risk. Processes and procedures need to be in place to identify customers who are PEPs and when you identify a PEP you must follow your business procedures and compliance policies.
When looking at guidance from international bodies such as the Wolfsberg Group and the Financial Action Task Force, PEP relationships are considered higher risk and should ideally be subject to Enhanced Due Diligence (EDD) such as verifying their source of wealth, regular CDD/KYC reviews and the requirement for Senior Management to give their approval prior to entering into or maintaining the customer relationship. It can also happen that a PEP is not a customer of the accountable institution, but rather a related party such as a beneficial owner. The accountable institution needs to decide what its approach will be in these instances as well. This will usually be contained in the internal rules/policy/processes.
It is important to remember that categorising a customer as a PEP does not mean that they are, or have been, involved in any criminal activity. The can also be risk rated in terms of the accountable institution’s Risk Based Approach (RBA).
The FIC Amendment Act also requires that the following requirements be met for higher risk Foreign Prominent Public Officials and Domestic Prominent Influential Persons:
Risk rating your customers are very important in the new improved version of FICA and PEP's are certainly no exception. Do not take any chances and report any instances of proven or suspected criminal activity via the right channels. You would be doing yourself and everyone, for that matter, a great service.
Responsibilities are Key
The requirements and responsibilities placed upon Key Individuals (KI's) by the FAIS Act are numerous and it is important to note that although they can delegate some of their functions (for instance, compliance) the ultimate responsibility lies with the KI from the regulator's point of view.
The responsibilities of KI's can be divided into two main pillars:
· Maintaining the personal character qualities of honesty and integrity; and
· Competence and operational ability.
We'll look at these two pillars separately below. This is just a short overview but it will give you a good indication of where the battle lines are drawn.
Honesty & Integrity
According to the General Code of Conduct, to assess whether a FAIS KI complies with the requirement of honesty and integrity, the Registrar may refer to any information brought to its attention. Thus, any dishonesty or lapses of integrity that are material can be taken into consideration. Without detracting from the broad statement above, any of the following items also constitutes prima facie (on first encounter) evidence that a KI is no longer compliant with the honesty and integrity requirements if he/she:
(a) has been found guilty in any criminal proceedings or liable in any civil proceedings by a court of law (whether in the Republic or elsewhere) of having acted fraudulently, dishonestly, unprofessionally, dishonourably or in breach of a fiduciary duty;
(b) has been found guilty by any statutory professional body or voluntary professional body (whether in the Republic or elsewhere) recognised by the Board, of an act of dishonesty, negligence, incompetence or mismanagement, sufficiently serious to impugn the honesty and integrity of the Financial Services Provider (FSP), KI or representative;
(c) has been denied membership of anybody referred to in subparagraph (b) on account of an act of dishonesty, negligence, incompetence or mismanagement, sufficiently serious to impugn the honesty and integrity of the KI;
(i) been found guilty by any regulatory or supervisory body (whether in the Republic or elsewhere), recognised by the Board; or
(ii) had its authorisation to carry on business refused, suspended or withdrawn by any such body,
on account of an act of dishonesty, negligence, incompetence or mismanagement sufficiently serious to impugn the honesty and integrity of the KI;
(e) has had any license granted to the financial services provider by any regulatory or supervisory body referred to in subparagraph (d) suspended or withdrawn by such body on account of an act of dishonesty, negligence, incompetence or mismanagement, sufficiently serious to impugn the honesty and integrity of the KI; or
(f) has at any time been disqualified or prohibited by any court of law (whether in the Republic or elsewhere) from taking part in the management of any company or other statutorily created, recognised or regulated body, irrespective whether such disqualification has since been lifted or not.
Furthermore, any material non-compliance with the Act, in a manner which is dishonest and negatively affects the KI's honesty and integrity can also be taken into account.
For example: When there is a conflict of interest prevalent, the KI has an obligation to mitigate and avoid the conflict of interest. If the conflict is not mitigated or avoided it would constitute non-compliance with, among others, section 3(1) b and possibly section 3A(1)(b) of the General Code of Conduct.
The result of an honesty and integrity transgression is seen as serious by the Registrar of Financial Services Providers. It could lead to debarment of any KI's and Representatives involved and a withdrawal of the FSP licence in some cases. In less serious cases of where breach of any section of the Act is prevalent a penalty may be imposed.
Competence and Operational Ability
Although it might be misleading, Competence, when referred to in the Act, does not refer to a person's actual ability to conduct work. It rather refers to the qualification and experience requirements of the KI's as put in place by the FAIS Act and its subsidiary fit and proper regulations.
Operational ability refers to the KI, in respect of his or her management and oversight of an FSP. The KI must have, and be able to maintain, the operational ability to fulfil the responsibilities imposed by the Act on FSPs, specifically the oversight of financial services (regarding of advice and intermediary services) provided by the FSP.
This is quite a broad responsibility in that it effectively states that the KI is ultimately responsible for the oversight of all the rendering of financial services and the operations ancillary thereto. The KI must be able to illustrate that he/she can do this. This relates to all items in the Act, Rules, Codes of Conduct and Determinations. Thus any material non-compliance of the Act can also be included. For example: Where an FSP does not have the necessary indemnity insurance in place as required by section (7) of Part VIII of the Determination of Fit and Proper Requirements.
The result of a lack of operational ability is that the FSP license may be withdrawn in serious cases and a penalty may be imposed in less serious cases. So think carefully when accepting a KI appointment. And for those KI's that have been doing it for a long time make sure you cover all of the bases.
The new amendments of FICA changes the compliance framework for accountable institutions to a great extent and we'll discuss some of the more pertinent items in this blog post.
Risk Based Compliance
According to the new requirements of FICA, accountable institutions now need to take a risk based approach to FICA and the implementation thereof. This includes:
One must also now be able to risk rate clients according to the risk that they pose with regards to being used for money laundering or to channel the proceeds of any crime. Certain customers and businesses are a lower risk than others and some are a higher risk. Some of the aspects that one can look at to determine the risk a client poses are:
Enchanced Due Diligence
by: Horizon Compliance team