 overregulation (ˌəʊvəˌrɛɡjʊˈleɪʃən) 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.
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This document is also one of the easiest documents to provide because it is usually only 1-2 pages and it does not change often. You need to ensure that you have proof that you provided it to the client (i.e. client signature and/or email to the client). Best practice is to give it to the client as soon as you can with first contact. This document is one of the basics that you cannot get wrong. The content of this Introduction Disclosure is also very important - it must be correct. One of my clients pointed out and highlighted to me the importance of - for instance - the fact that you need to display the contracted product providers on your introduction disclosure if you have any. Take a look below at the information that should be contained in this disclosure taken from the FAIS General Code of Conduct: INFORMATION ON PRODUCT SUPPLIERS 4. (1) A provider other than a direct marketer must at the earliest reasonable opportunity, and only where appropriate, furnish the client with full particulars of the following information about the relevant product supplier and, where such information is provided orally, must confirm such information within 30 days in writing: (a) Name, physical location, and postal and telephone contact details of the product supplier; (b) (i)the contractual relationship with the product supplier (if any), and whether the provider has contractual relationships with other product suppliers; (ii)names and contact details of the relevant compliance and complaints departments of the product supplier. (c)the existence of any conditions or restrictions imposed by the product supplier with regard to the types of financial products or services that may be provided or rendered by the provider; and (d)where applicable, the fact that the provider - (i)directly or indirectly holds more than 10% of the relevant product supplier’s shares, or has any equivalent substantial financial interest in the product supplier; (ii)during the preceding 12 month period received more than 30% of total remuneration, including commission, from the product supplier, and the provider must convey any changes thereafter in regard to such information at the earliest opportunity to the client. (2) A product supplier which is an authorised financial services provider, and which has entered into an intermediary contract or similar contractual relationship with another provider (not being a representative) for the purpose of rendering a financial service in respect of its financial products, must within a reasonable time after being requested to do so by such other provider, provide such other provider with sufficient particulars to enable the provider to comply with the disclosure requirements of this Code relating to the furnishing of details of the product supplier and the product in question. (3) A provider must, where the relevant licence, terms of employment or mandate enables such provider to provide clients with financial services in respect of a choice of product suppliers, exercise judgment objectively in the interest of the client concerned. (4) A provider may not, in dealing with a client, compare different financial products, product suppliers, providers or representatives, unless the differing characteristics of each are made clear, and may not make inaccurate, unfair or unsubstantiated criticisms of any financial product, product supplier, provider or representative. INFORMATION ON PROVIDERS 5. Where a provider other than a direct marketer renders a financial service to a client, the provider must at the earliest reasonable opportunity furnish the client with full particulars of the following information and, where such information is provided orally, must confirm such information within 30 days in writing: (a)Full business and trade names, registration number (if any), postal and physical addresses, telephone and, where applicable, cellular phone number, and internet and e-mail addresses, in respect of the relevant business carried on, as well as the names and contact details of appropriate contact persons or offices; (b)concise details of the legal and contractual status of the provider, including details as regards the relevant product supplier (or, in the case of a representative, as regards the relevant provider and product supplier), to be provided in a manner which can reasonably be expected to make it clear to the client which entity accepts responsibility for the actions of the provider or representative in the rendering of the financial service involved and the extent to which the client will have to accept such responsibility; (c)names and contact details of the relevant compliance department or, in the case of a representative, such detail concerning the provider to which the representative is contracted; (d)details of the financial services which the provider is authorised to provide in terms of the relevant licence and of any conditions or restrictions applicable thereto; (e)whether the provider holds guarantees or professional indemnity or fidelity insurance cover or not. (f)whether a representative of a provider is rendering services under supervision as defined in the Determination of Fit and Proper Requirements; and (g)the existence of a specific exemption that the Registrar may have granted to the provider with regard to any matter covered by the Act. CONTACTING OF CLIENT
6. A provider must- (a)in making contact arrangements, and in all communications and dealings with a client, act honourably, professionally and with due regard to the convenience of the client; and (b)at the commencement of any contact, visit or call initiated by the provider, explain the purpose thereof and at the earliest opportunity, provide the information referred to in section 5.  You might have been wondering what happens if you do not complete your CPD hours by the end of a cycle. To give you context, we'll look at basic and ongoing competency requirements.
As you already know, non-compliance with the normal fit and proper requirements (RE exams, qualifications, experience and class of business training) within their specified timeframes, causes that a representative must be removed from the register. This means the rep can no longer render financial services until he/she is fully compliant with the basic competency requirements. Product Specific Training and more importantly, CPD, is part of ongoing competency. Thus, even if you comply with the basic competency requirements and you do not comply with ongoing competency, you are also not allowed to render financial services until you are compliant. CONSEQUENCES The essence is this: if a representative or KI does not complete his/her full CPD hours by the end of a cycle, he/she must be removed from the rep register no later than the 31st of May. If he/she is only removed on the 1st of June (or later) due to non-compliance, the FSP has an obligation to debar the representative or KI. The rep can only be re-registered or the debarment can only be uplifted once he/she has obtained all the necessary hours. Product Specific Training, also part of ongoing competency, is required for new products and changes in existing products that you are selling. Some industries/products might require more frequent refresher training than others (i.e. the health industry might be yearly, where insurance and investments might be every second or third year). The frequency will further depend on the different product providers. If, for example, an untied agent has contracts with 4 different product providers, he/she must keep record of all training attended for each product provider. RECORD KEEPING The question arising is: How does the FSP keep record of each representative's training? There is no specific format at this stage in which you are required to prove attendance for Product Specific Training. However, it does not excuse an FSP from keeping record of it. There are many different ways in which an FSP can keep these records that might come in formats like hard copy, email or electronic certificates. One has to be able to prove attendance and what the representative learned from the session. The context of the course is of the utmost importance. Do not count on product providers to keep these records on your behalf, it is your responsibility as an FSP and as the first line of defense. We have specific solutions for our clients so contact us if you have any questions. Why is compliance with ongoing competency requirements important? It is especially important when complaints are raised against representatives by clients who are dissatisfied with the advice received. If a representative was not updated with the latest changes in his/her industry and, as a result, provided advice that can/have caused damage to a client's financial well being, the representative will have difficulty in proving the correctness of the advice. Debarments are lenghty and costly processes. It can cause difficulty with an FSP's staff turnover which, in turn, can cause a gap in servicing clients. Complaints are time-consuming and can cause your FSP reputational damage. Be vigilant in your compliance so your business can flourish.  Compliance ReportsIn a recent FSCA email newsletter the FSCA informed the industry that they have not completed their work on the new format of compliance reports (I am liberally paraphrasing) and as a result there will be no compliance reports for 2019 but instead there will be a General Information Request. Some are speculating that this is a result of the increased workload and resulting lack of resources in the FSCA with all the new changes. I am guessing that this might very well be the case, because, to everyone's chagrin, we have seen turnaround times with license applications and profile changes increase exponentially as of late. Although the format of the format of this information request is unknown, it is expected that it will compare the information on the FSCA's systems and that of the FSP to ensure that they are correct when the new COFI Act comes into play. Things like bank accounts, reps, KI's, contact numbers and business addresses - to name a few. It is important to note that all FSP's must submit the information when it is requested, even those FSP's that do not have to submit compliance reports (like the funeral services providers). RE Exam Prep GuidesThe FSCA also sent the latest RE Exam Prep Guides for RE 1 and 5 that you can download here or on our client portal. The RE Exam Preparation Guides have undergone many changes recently and there are many versions floating around. Make sure you and your staff are using the right set of guides!
For a FAIS Rep to be supervised she needs to meet certain requirements and the FSP and KI comply with certain parameters. Here we shortly sum up the items that need to be covered. We also look into what needs to be covered in the Supervision Agreement as new regulations have been issued that impacts that content. Summary of Supervision Requirements
More information on the content of the Supervision Contract The agreement must:
For full information on these processes please see the relevant board notice here or contact us for more information.
According to FAIS regulation a KI or Rep in an FSP needs to comply with the CPD (continuous professional development) requirements. CPD cycles starts on 1 June to 31 May of every year. Every FSP must keep a register of who has done what and it must have a Policy that talks to its planning on training and CPD. Class of business training does count towards CPD hours but not Product Specific Training and RE exams (all not to be confused with CPD). If you need more info on these items please refer to this blog post or contact us. What must it cover?
CPD can only be provided by accredited CPD providers and can cover a broad range of subjects that you can choose from which must:
How much hours do I need? An FSP, key individual and representative authorised, approved or appointed to render or manage or oversee the rendering of financial services in respect of
Thus, it is important to know what class of business is and how many hours you need to complete based on this. Where can I do this? There are many providers that offer this (some of them good and others...we'll...not so much). We are also busy getting our online CPD training accredited, however, in the meantime here are some options you can approach for CPD training: Exemptions
Contact us if you need more information or advice on this topic. 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. Other Brokers/Advisers/Intermediaries 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! From the 1st of April 2018 (I'm sure you are quire tired of this date by now) the FSCA has changed the debarment process and rules a bit. In the past an FSP could debar the person themselves or could refer it to the FSB (now FSCA) to investigate and debar the person. The debarment was done under section 14A of the Act if the FSB did the conducted the investigation and debarment but that section is new removed by the Financial Sector Regulation Act 9 of 2017. This means that the responsibility rests with the FSP to debar any Key Individual or Representative that:
The FSCA might only double check the reasons for debarment after it is done by the FSP. It is interesting to note that an FSP can do this if the person was a representative of the FSP at the time that the reasons for debarment occurred. Thus, it would seem, one can debar a person even if the person has left the FSP. This might open a can of worms where scores are to be settled and revenge is exacted but this may further be clarified once a guidance document is published. At the time of writing this there is no guidance document on the process but it will be published in the near future as the FSCA stated on their website. The new forms for submitting the debarment to the FSCA can be found here. For the full procedure according to the FAIS ACT you can read the extract from the amended FAIS Act below: (1) (a) An authorised financial services provider must debar a person from rendering financial services who is or was, as the case may be- (i) a representative of the financial services provider; or (ii) a key individual of such representative, if the financial services provider is satisfied on the basis of available facts and information that the person- (iii) does not meet, or no longer complies with, the requirements referred to in section 13(2)(a); or (iv) has contravened or failed to comply with any provision of this Act in a material manner; (b) The reasons for a debarment in terms of paragraph (a) must have occurred and become known to the financial services provider while the person was a representative of the provider. (2) (a) Before effecting a debarment in terms of subsection (1), the provider must ensure that the debarment process is lawful, reasonable and procedurally fair. (b) If a provider is unable to locate a person in order to deliver a document or information under subsection (3), after taking all reasonable steps to do so, including dissemination through electronic means where possible, delivering the document or information to the person’s last known e-mail or physical business or residential address will be sufficient. (3) A financial services provider must- (a) before debarring a person- (i) give adequate notice in writing to the person stating its intention to debar the person, the grounds and reasons for the debarment, and any terms attached to the debarment, including, in relation to unconcluded business, any measures stipulated for the protection of the interests of clients; (ii) provide the person with a copy of the financial services provider’s written policy and procedure governing the debarment process; and (iii) give the person a reasonable opportunity to make a submission in response; (b) consider any response provided in terms of paragraph (a)(iii), and then take a decision in terms of subsection (1); and (c) immediately notify the person in writing of- (i) the financial services provider’s decision; (ii) the persons’ rights in terms of Chapter 15 of the Financial Sector Regulation Act; and (iii) any formal requirements in respect of proceedings for the reconsideration of the decision by the Tribunal. (4) Where the debarment has been effected as contemplated in subsection (1), the financial services provider must- (a) immediately withdraw any authority which may still exist for the person to act on behalf of the financial services provider; (b) where applicable, remove the name of the debarred person from the register referred to in section 13(3); (c) immediately take steps to ensure that the debarment does not prejudice the interest of clients of the debarred person, and that any unconcluded business of the debarred person is properly attended to; (d) in the form and manner determined by the Authority, notify the Authority within five days of the debarment; and (e) provide the Authority with the grounds and reasons for the debarment in the format that the Authority may require within 15 days of the debarment. (5) A debarment in terms of subsection (1) that is undertaken in respect of a person who no longer is a representative of the financial services provider must be commenced not longer than six months from the date that the person ceased to be a representative of the financial services provider. (6) For the purposes of debarring a person as contemplated in subsection (1), the financial services provider must have regard to information regarding the conduct of the person that is furnished by the Authority, the Ombud or any other interested person. (7) The Authority may, for the purposes of record keeping, require any information, including the information referred to in subsection (4)(d) and (e), to enable the Authority to maintain and continuously update a central register of all persons debarred in terms of subsection (1), and that register must be published on the web site of the Authority, or by means of any other appropriate public media. (8) A debarment effected in terms of this section must be dealt with by the Authority as contemplated by this section. (9) A person debarred in terms of subsection (1) may not render financial services or act as a representative or key individual of a representative of any financial services provider, unless the person has complied with the requirements referred to in section 13(1)(b)(ii) for the reappointment of a debarred person as a representative or key individual of a representative. 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. Supervision Now A person can currently render services under supervision if they do not meet the following Fit and Proper Requirements:
Transitional Provisions 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:Please note, we do not endorse, have a relationship or guarantee the quality of learning with any of these providers. We are merely pointing you in a direction where you might find something that fits your needs to comply with the training requirements. Takeaway 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 TrainingProduct 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 TrainingClass 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. Transitional ProvisionsFor 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):
Constant changeIt 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.
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by: Horizon Compliance teamCompliance Experts Archives
October 2020
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