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FSB REGULATORY EXAMINATION PREPARATION
Section 3:
First Level Regulatory Examination:
FSPs (sole proprietors) and Key
Individuals in Category III
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Table of Contents Heading Page number
Task list 5
Glossary 6
CHAPTER 1:
CATEGORY III BUSINESS MODEL 7
1.1 Introduction 8
1.2 Characteristics of Category III FSP‘s 9
1.3 Separation of client‘s assets 14
1.4 Roles and responsibilities of various parties 15
1.5 Relevant contracts 23
Summary 24
Self-Assessment Questions 25
Self-Assessment Answers 27
CHAPTER 2:
INDEPENDENT NOMINEE COMPANIES 29
2.1 Purpose of independent nominee 30
2.2 Duties of independent nominee 34
Summary 36
Self-Assessment Questions 37
Self-Assessment Answers 40
CHAPTER 3:
MANAGE AND OVERSEE CLIENT MANDATES 43
3.1 Use of client mandates 44
3.2 Client mandates 44
Summary 47
Self-Assessment Questions 48
Self-Assessment Answers 50
CHAPTER 4:
DISCLOSURES 53
4.1 Manage and oversee disclosures 54
Summary 63
Self-Assessment Questions 63
Self-Assessment Answers 66
CHAPTER 5:
CONFLICTS OF INTEREST 69
5.1 Conflicts of interest 70
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Summary 78
Self-Assessment Questions 78
Self-Assessment Answers 81
CHAPTER 6:
MANAGE AND OVERSEE TYPICAL DAILY TRANSACTIONS 85
6.1 Daily transactions 86
Summary 92
Self-Assessment Questions 92
Self-Assessment Answers 95
CHAPTER 7:
UNDERSTAND THE LEGAL ENVIRONMENT OF CATEGORY III FSP‘s 99
7.1 Financial soundness 100
7.2 Fidelity cover 101
7.3 Netting of transactions 103
7.4 Conducting business with other authorised FSP‘s 103
7.5 Continual compliance 104
7.6 Civil remedies available to the Registrar 104
Summary 106
Self-Assessment Questions 107
Self-Assessment Answers 109
CHAPTER 8:
RECORD-KEEPING REQUIREMENTS 111
8.1 Apply record-keeping requirements 112
8.2 Security, confidentiality and access to records 118
8.3 Additional record-keeping requirements 118
Summary 119
Self-Assessment Questions 119
Self-Assessment Answers 122
CHAPTER 9:
REPORTING TO CLIENTS 125
9.1 Requirements when reporting to clients 126
Summary 127
Self-Assessment Questions 128
Self-Assessment Answers 129
CHAPTER 10:
MISCELLANEOUS 131
10.1 Licensing requirements for intermediaries 132
10.2 Rebates 133
Summary 134
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Self-Assessment Questions 135
Self-Assessment Answers 137
Tasks
The material provided in this guide is based on the following tasks, as published
in Board Notice 105 of 2008 as amended by Board Notice 60 of 2010.
1 Apply the Category III FSP business model.
2 Understand the role of the independent nominee.
3 Manage and oversee client mandates.
4 Manage/oversee typical daily transactions.
5 Manage and oversee disclosures.
6 Understand the legal environment of the Category III FSP.
7 Apply the record-keeping requirements.
8 Comply with requirements when reporting to clients.
9 Apply knowledge of the accounting and unit reconciliations.
10 Apply knowledge of how intermediaries must be licenced before they can
do business.
11 Deal with rebates.
Please note that any reference to:
masculine gender implies also the feminine.
singular indicates also the plural, and vice-versa.
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Glossary of terms
Administrative Code: The Code of Conduct for Administrative Financial
Services Providers of 2003, (issued as Chapter I of Board Notice 79 of
2003).
BN: a Board Notice issued by the Registrar, each Board Notice having an
issue number and year of issue.
Codes of Conduct: the General Codes of Conduct plus the Codes of
Conduct for Administrative and Discretionary FSP‘s of 2003, (Board
Notice 79 of 2003).
CISCA: the Collective Investment Schemes Control Act of 2002, (―Act 45
of 2002).
FAIS: the Financial Advisory and Intermediary Services Act of 2002, (Act
37 of 2002).
FICA: the Financial Intelligence Centre Act of 2001, (Act 38 of 2001).
Financial Product: a financial product as defined in Section 1 of FAIS.
FSP: an Authorised Financial Services Provider as defined in Section 1 of
FAIS.
General Code: General Code of Conduct for Authorised Financial
Services Providers and Representatives of 2003, (Board Notice 80 of
2003).
Long-term Insurance Act: the Long-term Insurance Act of 1998, (Act 52
of 1998).
Long-term Insurer: a registered Long-term Insurance Company as
defined in Section 1 of the Long-term Insurance Act.
Registrar: unless otherwise indicated, means the Registrar of Financial
Services Providers as defined in Section 1 of FAIS.
Short-term Insurance Act: the Short-term Insurance Act of 1998, (Act
53 of 1998).
Short-term Insurer: a registered Short-term Insurance Company as
defined in Section 1 of the Short-term Insurance Act.
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Chapter
1
Category III FSP Business Model
This chapter covers the following criteria:
KNOWLEDGE CRITERIA:
Describe the characteristics of a Category III FSP and how that differentiates it from other
product providers such as insurers and unit trusts.
Describe the reason for separation of client assets from Category III FSP‘s Assets.
Explain the role of various parties.
Explain the concept of bulking and pooling of assets into a single account with an investment
provider.
Explain the relevant contractual agreements that need to be in place with the relevant other
party.
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Purpose
In this chapter we attempt to clarify the nature and role of Administrative FSP‘s. In
so doing we consider advice versus intermediary services, the Administrative Code
and concepts such as bulking and the types of financial products that Administrative
FSP‘s can administer.
1.1 INTRODUCTION
The Financial Advisory and Intermediary Services Act of 2002, Act 37 of 2002
(―FAIS‖) intermittently refers to different categories of financial services that may
be rendered to clients. One of these financial services providers (―FSP‘s‖) is the
Category III FSP or, as they are also known, Administrative FSP‘s. These FSP‘s,
previously known as ―LISP‘s‖ or ―Linked Investment Services Providers‖ (terms
still used in the financial services arena today) are well known in the financial
services arena and provide clients with wholesale access to products such as
collective investment schemes and long-term insurance products.
Many clients are oblivious to the existence and purpose of Administrative FSP‘s
and in order to understand the characteristics of these FSP‘s it is necessary to
consider the provisions of FAIS and subordinate legislation thereto. These pieces
of legislation create the legal entities referred to as FSP‘s and further distinguish
different categories of FSP‘s.
Section 1 of FAIS defines a financial service as:
―any service contemplated in paragraph (a), (b) or (c) of the definition of
‗financial services provider‘, including any category of such services.‖
Further references to categories of financial services can be found throughout
FAIS. Section 8(4)(a)(ii) of FAIS authorises the Registrar of FSP‘s (―the
Registrar‖) to approve FSP licenses and to impose conditions and restrictions on
the exercise of authority in respect of such licenses based on, inter alia, the
―category of financial services which the applicant could appropriately render or
wishes to render‖, and ―the category of financial services providers in which the
applicant will be classified in relation to the fit and proper requirements…‖.
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It is sufficient for the purpose of our introduction to emphasise that FAIS
distinguishes between various categories of financial services. Little clarity is,
however, provided in FAIS as to the characteristics of the respective categories.
Further information and parameters are provided in several pieces of subordinate
legislation, i.e. Regulations, Codes of Conduct, etc.
The focus of this book is to concentrate on Category III FSP‘s with a view to
providing a framework in terms of which preparation for the Regulatory Exams 3,
Level 1 can be explored. In order to avoid confusion we shall refer to these
Categories of FSP‘s as Administrative FSP‘s or Category III FSP‘s. This terminology
will be used interchangeably throughout this book, particularly where applicable
legislation and or references are quoted.
1.2 CHARACTERISTICS OF CATEGORY III FSP‘S
1.2.1 Advice versus intermediary services
As stated above, FSP‘s may, in terms of FAIS, render different categories of
financial services. Whilst the Regulations to FAIS (―the Regulations‖) promulgated
on 13 June 2003 provide us with a slightly better context relating to
Administrative FSP‘s, we are still none the wiser as to the post FAIS nature of
these Administrative FSP‘s. In order to better understand the nature of the
entities we are dealing with, it is necessary to work through some definitions.
These definitions collectively provide us with the characteristics of these
Administrative FSP‘s.
Section 1 of FAIS defines a ―financial services provider‖ as any person who, as a
regular feature of their business:
1. furnishes advice; or
2. furnishes advice and renders intermediary services; or
3. renders an intermediary service.
Advice is defined in FAIS as any recommendation, guidance or proposal of a
financial nature furnished, by any means or medium, to any client or group of
clients:
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a) in respect of the purchase of any financial product; or
b) in respect of the investment in any financial product; or
c) on the conclusion of any other transaction, including a loan or cession,
aimed at the incurring of any liability or the acquisition of any right or
benefit in respect of any financial product; or
d) on the variation of any term or condition applying to a financial product,
on the replacement of any such product, or on the termination of any
purchase of or investment in any such product, and irrespective of
whether or not such advice –
i. is furnished in the course of or is incidental to financial planning in
connection with the affairs of the client; or
ii. results in any such purchase, investment, transaction, variation,
replacement or termination, as the case may be, being effected.
It is clear from the definition, together with the specific exclusions, that ―advice‖
refers to any influence exerted by an FSP or representative over a client in
relation to that client‘s financial situation.
In contradistinction to providing advice, is the rendering of intermediary services
by an FSP to a client in respect of a financial product. In this instance the FSP
does not render advice but performs a function without providing the client with
advice. Section 1 of FAIS defines intermediary services as any act, other than the
furnishing of advice, performed by an FSP for or on behalf of the client or the
product supplier:
a) the result of which is that the client may enter into, offers to enter into or
enters into any transaction in respect of a financial product with a product
supplier; or
b) with a view to –
i. buying, selling or otherwise dealing in (whether on a discretionary
or non-discretionary basis), managing, administering, keeping in
safe custody, maintaining or servicing a financial product
purchased by a client from a product supplier or in which the
client has invested;
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ii. collecting or accounting for premiums or other moneys payable by
the client to a product supplier in respect of a financial product; or
iii. receiving, submitting or processing the claims of a client against a
product supplier.
Intermediary services does not include:
a) the rendering by a bank or mutual bank of a service contemplated in
paragraph (b)(ii) of the definition of "intermediary service" where the
bank or mutual bank acts merely as a conduit between a client and
another product supplier;
b) an intermediary service rendered by a product supplier –
i. who is authorised under a particular law to conduct business as a
financial institution; and
ii. where the rendering of such service is regulated by or under such
law;
c) any other service exempted from the provisions of this Act by the
Registrar, after consultation with the Advisory Committee, by notice in the
Gazette.
In practice it is often challenging to assess whether one is providing advice or
rendering intermediary services. This distinction, however, informs the category of
license an FSP has to hold and the concomitant competency, operational ability
and solvency requirements. It is therefore important for the FSP to properly
identify its functions to ensure that it does not render financial services for which
it is not licensed and thereby incurring liability.
1.2.2 Administrative FSP‘s
Section 1 of the Codes for Administrative and Discretionary FSP‘s defines an
Administrative FSP as follows:
―‘Administrative FSP‘ means an FSP, other than a discretionary FSP –
a) that renders intermediary services in respect of financial products referred
to in paragraphs (a), (b), (c) (excluding any short-term insurance
contract or policy referred to therein), (d) and (e), read with paragraphs
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(h), (i) and (j) of the definition of ―financial product‖ in section 1(1) of the
Act, on the instructions of a client or another FSP and through the method
of bulking; and
b) acting for that purpose specifically in accordance with the provisions of
this Code, read with the Act, the General Code (where applicable), and
any other applicable law;‖
You will note that an FSP only qualifies as an FSP when it engages in ―bulking‖.
Bulking is defined in Chapter 1 of the Codes for Administrative and Discretionary
FSP‘s applicable to Administrative FSP‘s (―the Administrative Code‖) as follows:
―‘bulking‘ means the aggregation by an Administrative FSP of –
a) clients‘ funds when buying or investing in financial products on behalf of
clients, and the subsequent allocation of such financial products to each
client separately in the records of the FSP;
b) the financial products belonging to clients when selling such financial
products on their behalf, and the subsequent allocation of the proceeds of
such sale to each client separately in the records of the FSP;‖
Bulking therefore refers to aggregation of several clients‘ funds and the
investment thereof into underlying investments for the benefit of those clients. In
theory the cumulative buying power provides additional benefits to each individual
client.
The administration of a client‘s investments (―broadly referring to both long-term
insurance policies and other investments such as investments in Collective
Investment Schemes‖) by an Administrative FSP, constitutes the rendering of
intermediary services. Here the Administrative FSP acts in terms of a mandate
granted by a client to the FSP to administer the client‘s investments. The
Administrative FSP does not exercise any discretion over the client‘s investments
and, subject to certain product-specific restrictions, is dependent on the specific
client instructions. The client is therefore required to provide specific or individual
consent prior to each transaction. This is the distinguishing factor between an
Administrative FSP, on the one hand, and a Discretionary FSP, on the other hand,
in that the Discretionary FSP exercises its authority without the client‘s
specific/individual consent to each transaction and exercises a greater ―discretion‖
over the client‘s investments. The primary distinguishing factor between Category
III and Category I FSP‘s is that Category III FSP‘s do not provide advice whilst
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Category I FSP‘s provide advice (as defined in FAIS) to clients in respect of their
financial products.
The financial products in respect of which Administrative FSP‘s may render
financial services as listed in the definition (and Section 1 of FAIS) are:
a) securities and instruments, including –
i. shares in a company other than a "share block company" as
defined in the Share Blocks Control Act, 1980 (Act No. 59 of
1980);
ii. debentures and securitised debt;
iii. any money-market instrument;
iv. any warrant, certificate, and other instrument acknowledging,
conferring or creating rights to subscribe to, acquire, dispose of,
or convert securities and instruments referred to in subparagraphs
(i), (ii) and (iii);
v. any "securities" as defined in Section 1 of the Securities Services
Act, 2002;
b) a participatory interest in one or more collective investment schemes;
c) a long-term or a short-term insurance contract or policy, referred to in the
Long-term Insurance Act, 1998 (Act No. 52 of 1998), and the Short-term
Insurance Act, 1998 (Act No. 53 of 1998), respectively;
d) a benefit provided by –
i. a pension fund organisation, as defined in Section 1(1) of the
Pension Funds Act, 1956 (Act No. 24 of 1956), to the members of
the organisation by virtue of membership; or
ii. a friendly society referred to in the Friendly Societies Act, 1956
(Act No. 25 of 1956), to the members of the society by virtue of
membership;
e) a foreign currency denominated investment instrument, including a
foreign currency deposit;
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f) a deposit as defined in Section 1(1) of the Banks Act, 1990 (Act No. 94 of
1990);
g) a health service benefit provided by a medical scheme.
Read with:
h) any other product similar in nature to any financial product referred to in
paragraphs (a) to (g), inclusive, declared by the Registrar, after
consultation with the Advisory Committee, by notice in the Gazette, to be
a financial product for the purposes of this Act;
i) any combined product containing one or more of the financial products
referred to in paragraphs (a) to (h), inclusive;
j) any financial product issued by any foreign product supplier and marketed
in the Republic and which in nature and character is essentially similar or
corresponding to a financial product referred to in paragraphs (a) to (1),
inclusive.
1.3 SEPARATION OF CLIENT‘S ASSETS
Section 15 of FAIS prescribes that the Registrar must publish a Code of Conduct
applicable to all categories of FSP‘s. In addition to this Code of Conduct, Section
15 further authorises the Registrar to publish different Codes of Conduct for the
various Categories of FSP‘s. Section 16 of FAIS requires the Registrar, when
publishing these Codes of Conduct to ensure that these Codes contain, inter alia,
a provision relating to the ―proper safe-keeping, separation and protection of
funds and transaction documentation of clients‖.
Pursuant to the above sections, the Registrar published the General Code of
Conduct on 8 August 2003 (―the General Code‖) that is applicable to all FSP‘s and
representatives. Section 10 of the General Code prescribes that an FSP, other
than an FSP who receives, holds or in any other manner deals with premiums
payable under a short-term reinsurance policy or who is subject to Section 45 of
the Short-term Insurance Act (Act 53 of 1998), who holds financial products or
funds on behalf of a client, must account for such products and funds properly and
promptly. According to this section of the General Code, the FSP must, when it
receives funds from a client without the intervention of a bank, issue a receipt to
© INSETA– Section 3 10b 15
the client. The FSP or its duly appointed third party agent must take all
reasonable steps to ensure that the funds are adequately protected.
In addition to the aforesaid, the FSP or its duly appointed agent must open a bank
account with a bank designated solely to hold clients‘ funds. The FSP or agent, as
the case may be, must within one (1) business day of receipt of the funds deposit
all funds held on behalf of the client(s) into this bank account. The FSP must pay
all bank charges in relation to the bank account except those associated with the
deposit and withdrawal of the funds from the bank account. The FSP must also
ensure that all interest is paid to the client or the owner of the funds.
The FSP must ensure that:
the funds are dealt with strictly according to the mandate provided by the
client to the FSP;
all client funds are readily discernable or identifiable from the FSP‘s
private assets; and
subject to any statutory or contractual provisions that the client has ready access
to the funds, less any allowable deductions, i.e. agreed to by the client and/or
imposed by law.
1.4 ROLES AND RESPONSIBILITIES OF VARIOUS PARTIES
It is important, when considering the context of Administrative FSP‘s, to briefly
consider the different parties and/or legal entities that interact or potentially
interact with these Administrative FSP‘s. These parties and/or legal entities
include:
1.4.1 Registrars
Different pieces of legislation create the various Registrars that regulate FSP‘s,
representatives and the respective product suppliers with whom an Administrative
FSP could interact. These Registrars are:
i. the Registrar of Financial Services Providers. This Registrar is created by
Section 2 of FAIS. Its function is to regulate the conduct of FSP‘s
(including Administrative FSP‘s) and representatives, in the provision of
advice and the rendering of intermediary services.
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ii. the Registrar of Long-term Insurers. This Registrar is created by Section 2
of the Long-term Insurance Act of 1998, (Act 52 of 1998). Its function is
to regulate the conduct of Long-term Insurers in the provision of long-
term insurance policies to members of the public.
iii. the Registrar of Short-term Insurers. This Registrar is created by Section
2 of the Short-term Insurance Act of 1998, (Act 53 of 1998). Its function
is to regulate the conduct of Short-term Insurers in the provision of short-
term insurance policies to members of the public.
iv. the Registrar of Pension Funds. This Registrar is created by Section 3 of
the Pension Funds Act of 1956, (Act 24 of 1956). Its function is to
regulate the conduct of pension fund organisations in their provision of
benefits to members of the public.
v. the Registrar for Collective Investment Schemes. This Registrar is created
by Section 7 of the CISCA. Its function is to regulate collective investment
schemes in the provision of investment vehicles to members of the public.
It is important to note that the above pieces of legislation appoint the executive
officer and deputy executive officers of the Financial Services Board (―FSB‖) to be
Registrars and deputy Registrars of the respective areas detailed above.
1.4.2 Independent nominees
The independent nominee‘s function is to hold assets on behalf of clients of long-
term insurers, short-term insurers or pension funds, or, Administrative and/or
Discretionary FSP‘s who wish to hold assets on behalf of long-term insurers,
short-term insurers, pension funds or hold clients‘ securities in the Strate
environment, or any other independent nominee that wishes to hold securities in
terms of Section 36(2) of the Securities Services Act, 2004 (Act No 36 of 2004) in
order to ring-fence these assets against potential claims against these product
suppliers.
1.4.3 Management Company
The term ―Management Company‖ is prevalent in the CISCA environment. CISCA
does not however define a Management Company. CISCA defines a ―Manager‖ as
a person authorised by the Registrar to administer a collective investment
scheme. When one considers the definition of a ―deed‖ (also contained in CISCA)
the picture becomes a bit clearer. A deed is defined as:
© INSETA– Section 3 10b 17
―the agreement between a manager and a trustee or custodian, or the document
of incorporation whereby a collective investment scheme is established and in
terms of which it is administered, and includes the deed of a management
company which immediately prior to the commencement of this Act was a
management company in terms of any law repealed by this Act‖
It is therefore clear that reference to ―Management Company‖ or ―Manco‖ is
historic terminology and refers to a manager as defined in CISCA. In essence the
manager is responsible for the administration of the collective investment scheme
as more fully detailed in Section 4 of CISCA.
In essence the manager must:
avoid any conflict between the interests of the manager and the interests
of an investor;
disclose the interests of its directors and management to the investors;
maintain adequate financial resources to meet its commitments and to
manage the risks to which its collective investment scheme is exposed;
organise and control the collective investment scheme in a responsible
manner;
keep proper records;
employ adequately trained staff and ensure that they are properly
supervised;
have well-defined compliance procedures;
maintain an open and cooperative relationship with the office of the
registrar and must promptly inform that office about anything that might
reasonably be expected to be disclosed to such office; and
promote investor education, either directly or through initiatives
undertaken by an association.
1.4.4 Trustee or custodian
Trustee or Custodian is once again a reference prevalent in the CISCA
environment. Section 68 of CISCA prescribes the criteria in terms whereof
18 © INSETA– Section 3 10b
trustees or custodians are appointed and the termination of such appointment. A
manager must appoint either a trustee or a custodian for its collective investment
scheme depending on the structure of the collective investment scheme, e.g.
whether it is a unit trust or a management company.
Section 70 of CISCA prescribes that a trustee or custodian must –
a) ensure that the basis on which the sale, issue, repurchase or cancellation,
as the case may be, of participatory interests effected by or on behalf of a
collective investment scheme is carried out in accordance with this Act
and the deed.
b) ensure that the selling or repurchase price of participatory interests is
calculated in accordance with this Act and the deed.
c) carry out the instructions of the manager unless they are inconsistent
with this Act or the deed.
d) verify that in transactions involving the assets of a collective investment
scheme, any consideration is remitted to it within time limits, which are
acceptable market practice in the context of a particular transaction.
e) verify that the income accruals of a portfolio are applied in accordance
with this Act and the deed.
f) enquire into and prepare a report on the administration of the collective
investment scheme by the manager during each annual accounting
period, in which it must be stated whether the collective investment
scheme has been administered in accordance with –
i. the limitations imposed on the investment and borrowing powers
of the manager by this Act; and
ii. the provisions of this Act and the deed.
g) if the manager does not comply with the limitations and provisions
referred to in paragraph (f)(i) or (ii), state the reason for the non-
compliance and outline the steps taken by the manager to rectify the
situation.
© INSETA– Section 3 10b 19
h) send the report referred to in paragraph (f) to the Registrar and to the
manager in good time to enable the manager to include a copy of the
report in its annual report.
i) ensure that –
i. there is a legal separation of assets held under custody and that
the legal entitlement of investors to such assets is assured.
ii. appropriate internal control systems are maintained and that
records clearly identify the nature and value of all assets under
custody, the ownership of each asset and the place where
documents of title pertaining to each asset are kept.
A trustee or custodian must report to the manager any irregularity or undesirable
practice of which it is aware, concerning the collective investment scheme,
whether declared in terms of Section 21 or not, and if steps to rectify the
irregularity or practice in question are not taken to the satisfaction of the trustee
or custodian, it must as soon as possible report such irregularity or undesirable
practice to the Registrar.
The trustee or custodian must satisfy itself that every income statement, balance
sheet or other return prepared by the manager in terms of Section 90, fairly
represents the assets and liabilities, as well as the income and distribution of
income, of every portfolio of the collective investment scheme administered by
the manager.
At the request of the trustee or custodian, every director or employee of the
manager must submit to the trustee or custodian any book or document or
information relating to the administration by the manager of its collective
investment scheme which is in his or her possession or at his or her disposal, and
which the trustee or custodian may consider necessary to perform its functions. A
person may not interfere with the performance by a trustee or custodian of its
functions. (6) A trustee or custodian of a collective investment scheme that fails
to perform any of its duties referred to in this section, is guilty of an offence.
Finally, Section 72 of CISCA prescribes that the trustee or custodian must
indemnify the manager and investors against any loss or damage suffered in
respect of money or other assets in the custody of the trustee or custodian and
which loss or damage is caused by a wilful or negligent act or omission by the
trustee or custodian.
20 © INSETA– Section 3 10b
1.4.5 Asset Manager
In searching the relevant legislation such as CISCA and the Security Services Act,
one does not detect a formal definition of the ―Asset Manager‖ or ―Asset
Managing‖. Wikipedia defines investment management as follows:
―Investment management is the professional management of various securities
(shares, bonds and other securities) and assets (e.g., real estate), to meet
specified investment goals for the benefit of the investors. Investors may be
institutions (insurance companies, pension funds, corporations, etc.) or private
investors (both directly via investment contracts and more commonly via collective
investment schemes, e.g. mutual funds or exchange-traded funds).
The term asset management is often used to refer to the investment management
of collective investments, (not necessarily) whilst the more generic fund
management may refer to all forms of institutional investment as well as
investment management for private investors. Investment managers who
specialise in advisory or discretionary management on behalf of (normally
wealthy) private investors may often refer to their services as wealth
management or portfolio management often within the context of so-called
‗private banking‘.
The provision of 'investment management services' includes elements of financial
statement analysis, asset selection, stock selection, plan implementation and
ongoing monitoring of investments. Investment management is a large and
important global industry in its own right responsible for care taking of trillions of
dollars, euro, pounds and yen. Coming under the remit of financial services many
of the world's largest companies are at least in part investment managers and
employ millions of staff and create billions in revenue.‖
(http://en.wikipedia.org/wiki/Investment_manager)
In essence, the manager may elect to outsource the investment or asset
management function to an external asset or investment manager. The trustee or
custodian would still be responsible for ensuring that the manager and asset
manager remain within the parameters of the Investment Policy contained in the
Supplemental Deed.
1.4.6 Long and short-term insurance companies
These entities perform a similar function to a Collective Investment Scheme in
that they supply the financial products so that the FSP or representatives (on
behalf of the FSP), as the case may be, may make it available to members of the
© INSETA– Section 3 10b 21
public or other investors. Long-term Insurance Companies are governed by the
Long-term Insurance Act 52 of 1998 and the Short-term Insurance Companies are
governed by the Short-term Insurance Act 53 of 1998, together with various
subordinate legislation.
1.4.7 Pension funds
Contrary to popular opinion, pension funds, provident funds and retirement
annuity funds are established in terms of the Income Tax Act of 1962, (Act 58 of
1962), instead of the Pension Funds Act. These entities also play a similar role to
Long and Short-term Insurers, in that they supply retirement financial products so
that FSP‘s and representatives may (subject to the Rules of the Fund) make them
available to members of the public.
These entities may themselves appoint an administrative FSP to provide
intermediary services in terms of a mandate.
1.4.8 Third party FSP‘s
The identification of third Party FSP‘s have become more important since the
addition of Subsection (3) to Section 7 of FAIS. Subsection 7(3) reads as
follows:
―(3) An authorized financial services provider or representative may only
conduct financial services related business with a person rendering financial
services if that person has, where lawfully required, been issued with a license
for the rendering of such financial services and the conditions and restrictions of
that license authorizes the rendering of those financial services, or is a
representative as contemplated in this Act.‖
As Category III FSP‘s will conduct business with other persons who render
financial services, it is important to ensure that those third Party FSP‘s possess
the necessary licenses, failing which these Category III FSP‘s will attract liability.
The key issue in 7(3) is to understand what it means to render financial
services. Section 1 of FAIS states that:
―‘financial service‘ means any service contemplated in paragraph (a), (b) or (c)
of the definition of ‗financial services provider‘, including any category of such
services;
The definition of financial services provider is also defined in Section 1 of FAIS
as follows:
22 © INSETA– Section 3 10b
―‘financial services provider‘ means any person, other than a representative,
who as a regular feature of the business of such person –
a) furnishes advice; or
b) furnishes advice and renders any intermediary service; or
c) renders an intermediary service;‖
The enquiry into whether the person is rendering financial services as a regular
feature of that person‘s business is a factual one, and all FSP‘s should be wary
of conducting business with any person who renders financial services without
the relevant licenses.
1.4.9 Financial advisers vs. brokers
FAIS does not contain formal definitions of financial advisers or brokers. In
essence, a broker performs an integral role in bringing the product from the
supplier to the market, i.e. a broker is a distribution agent or channel. The same
theory holds true in the financial services industry. With the advent of FAIS, the
industry experienced a fundamental reconstruction. FAIS requires that
appropriate advice be provided by a representative or independent intermediary
when providing a financial product to client(s). This requirement has resulted in
many brokers (who were primarily focussed on selling a financial product to a
client) shifting their roles to that of financial advisers. These financial advisers
are now required to hold the minimum fit and proper requirements (honesty,
integrity, competency and operational ability). Once again Section 7(3) plays an
important role when FSP‘s deal with independent intermediaries as the FSP‘s
now have to ensure that these independent intermediaries possess their own
FSP licenses for the category of financial products that they seek to provide to
the market.
1.4.10 Clients
Clients can be broadly categorised into institutional and retail clients. Whilst
many layers may exist in an investment context, these persons are typically the
―end-user(s)‖ of the financial product or service. Section 1 of FAIS defines client
as follows:
―‘client‘ means a specific person or group of persons, excluding the general public,
who is or may become the subject to whom a financial service is rendered
© INSETA– Section 3 10b 23
intentionally, or is the successor in title of such person or the beneficiary of such
service;
1.5 RELEVANT AGREEMENTS
Part III of the General Code requires an FSP, other than a direct marketer, to at
the earliest reasonable opportunity, and only where appropriate, furnish the client
with full particulars of the following information about the relevant product
supplier
a) ―Name, physical location, and postal and telephone contact details of the
product supplier;
b) the contractual relationship with the product supplier (if any), and
whether the provider has contractual relationships with other product
suppliers;...
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;...‖
Where such information is provided orally, the FSP must confirm the information
in writing within thirty (30) days.
It is therefore clear that the FSP is required to contract with relevant product
suppliers when distributing that product supplier‘s financial product. In addition to
the aforesaid, Section 13(1)(b)(ii) stipulates that the FSP who appoints a
representative must appoint such representative in terms of an employment
contract or other mandatory agreement.
In terms of Section 5 of the Administrative Code, the Administrative FSP is also
required to have a signed mandate with each client, prior to providing the
financial services. This mandate is a contract.
Other contracts with third party services providers such as IT Services are
required to be in place to ensure that these systems are adequately supported,
thereby managing the risk for the Administrative FSP.
An Administrative FSP may only render intermediary services as an administrative
FSP where it has contracted with an independent nominee duly approved by the
Registrar for FSP‘s and representatives. Board Notice 63 of 2007 requires the
24 © INSETA– Section 3 10b
administrative FSP to enter into an agreement with the Independent nominee.
The content of this agreement is prescribed in Board Notice 63 of 2007.
Where another FSP through the use of an Administrative FSP intends providing
the client with a personalised range of financial products that FSP may enter into
an agreement with the Administrative FSP.
Summary
In this chapter you should have gained a better understanding of the nature of an
Administrative FSP. In so doing we considered the following:
1. The distinction between advice and intermediary services;
2. Clarification that Administrative FSP‘s render intermediary services and
not advice;
3. The duties of an Administrative FSP and how it renders intermediary
services to clients, based strictly on the instructions given to it by the
client;
4. The distinction between Administrative FSP‘s and other FSP‘s;
5. The different role players in the Administrative FSP‘s context;
6. The need for relevant contracts.
© INSETA– Section 3 10b 25
Self-Assessment Questions
1. The distinction between an Administrative FSP and a Discretionary FSP
is that:
a) the Administrative FSP administers financial products for
clients, while the Discretionary FSP exercises discretion over
clients‘ products
b) the Administrative FSP provides advice while the Discretionary
FSP does not
c) the Discretionary FSP provides advice while the Administrative
FSP does not
d) none of the above
2. An Administrative FSP must engage in:
a) providing advice
b) selling financial products
c) administrative services
d) bulking
in order to qualify as an Administrative FSP.
3. A LISP is a/an:
a) Administrative FSP
b) Discretionary FSP
c) Product Provider
d) Collective Investment Scheme
4. Administrative FSPs provide:
a) advice and intermediary services
b) advice and financial products
c) intermediary services
d) intermediary Services and financial products
5. The financial product that an Administrative FSP may not provide
services in respect of is:
a) participatory interests in Collective Investment Schemes
b) shares in share block companies
c) property Unit Trusts
d) long-term insurance products
26 © INSETA– Section 3 10b
6. Section 15 of FAIS requires the Registrar to:
a) publish Codes of Conduct
b) ensure that the Codes of Conduct contain provisions relating to
the ―proper safe-keeping, separation and protection of funds‖
c) ensure that the FSP has proper risk management plans in place
d) none of the above
7. Section 10 of the General Code requires an FSP to:
a) hold or otherwise deal with premiums payable under the Short-
term Insurance Act
b) provide Short-term Insurance policy documents to the client
c) provide a summary of the main terms and conditions that
regulate the Short-term Insurance contract
d) none of the above
8. The Role of the Trustee or Custodian in South African Law is to:
a) ensure that the manager holds the assets in safe custody
b) ensure that the manager holds the clients‘ assets in a nominee
company
c) to hold clients‘ assets in safe custody
d) none of the above
9. The Asset Manager:
a) Is the manager as defined in section 1 of the Collective
Investment Schemes Control Act
b) Is the entity responsible for or appointed by the manager to
manage the investments in the portfolio
c) manages the fixed property in the portfolio
d) none of the above
10. The Registrar for Financial Services Providers and Representatives deals
with FAIS-related complaints through the office of the:
a) Ombudsman for Long-term Insurance
b) Ombudsman for Short-term Insurance
c) FAIS Ombud
d) None of the above
© INSETA– Section 3 10b 27
Self-Assessment Answers
1. The distinction between an Administrative FSP and a Discretionary FSP
is that:
a) the Administrative FSP administers financial products for
clients, while the Discretionary FSP exercises discretion over
clients‘ products
b) the Administrative FSP provides advice while the Discretionary
FSP does not
c) the Discretionary FSP provides advice while the Administrative
FSP does not
d) none of the above
2. An Administrative FSP must engage in:
a) providing advice
b) selling financial products
c) administrative services
d) bulking
in order to qualify as an Administrative FSP.
3. A LISP is a/an:
a) Administrative FSP
b) Discretionary FSP
c) Product Provider
d) Collective Investment Scheme
4. Administrative FSPs provide:
a) advice and intermediary services
b) advice and financial products
c) intermediary services
d) intermediary Services and financial products
5. The financial product that an Administrative FSP may not provide
services in respect of is:
a) participatory interests in Collective Investment Schemes
b) shares in share block companies
c) property Unit Trusts
d) long-term insurance products
28 © INSETA– Section 3 10b
6. Section 15 of FAIS requires the Registrar to:
a) publish Codes of Conduct
b) ensure that the Codes of Conduct contain provisions relating to
the ―proper safe-keeping, separation and protection of funds‖
c) ensure that the FSP has proper risk management plans in place
d) none of the above
7. Section 10 of the General Code requires an FSP to:
a) hold or otherwise deal with premiums payable under the Short-
term Insurance Act
b) provide Short-term Insurance policy documents to the client
c) provide a summary of the main terms and conditions that
regulate the Short-term Insurance contract
d) none of the above
8. The Role of the Trustee or Custodian in South African Law is to:
a) ensure that the manager holds the assets in safe custody
b) ensure that the manager holds the clients‘ assets in a nominee
company
c) to hold clients‘ assets in safe custody
d) none of the above
9. The Asset Manager:
a) Is the manager as defined in section 1 of the Collective
Investment Schemes Control Act
b) Is the entity responsible for or appointed by the manager to
manage the investments in the portfolio
c) manages the fixed property in the portfolio
d) none of the above
10. The Registrar for Financial Services Providers and Representatives deals
with FAIS-related complaints through the office of the:
a) Ombudsman for Long-term Insurance
b) Ombudsman for Short-term Insurance
c) FAIS Ombud
d) None of the above
© INSETA– Section 3 10b 29
Chapter
2
Independent nominee companies
This chapter covers the following criteria:
KNOWLEDGE CRITERIA:
Explain the duties that the nominee company is responsible for.
Explain the purpose of the nominee company.
Describe the obligations and requirements regarding the use of nominee companies.
30 © INSETA– Section 3 10b
Purpose
In terms of FAIS and subordinate legislation thereto, an Administrative FSP may
only act in that capacity if approved by the Registrar.
The subordinate legislation goes further to prescribe that approval can only be
granted by the Registrar if the applicant (being the proposed Administrative FSP)
has an independent nominee.
The purpose of this section is to look at the qualifying criteria that have to be
satisfied in order for an FSP to have its nominee approved.
2.1 PURPOSE OF INDEPENDENT NOMINEE
2.1.1 Nature and function
In terms of Chapter V of the Regulations to FAIS (―the Regulations‖) the concept
of a post-FAIS Independent Nominee Company (―the Nominee‖) was introduced
for Administrative FSP‘s. Section 6 of the Regulations prescribes that:
1) the functions of the nominee of an Administrative FSP must be limited to
its object and to such other functions as may be necessary to achieve the
said object. The object of a nominee is to hold assets on behalf of
investors so that any risks associated with the Administrative FSP are
withheld from those assets. In essence, it is a ring-fencing mechanism
that allows for the protection of investors‘ assets in the event of the
Administrative FSP falling into financial difficulties.
2) an Administrative FSP must, prior to obtaining authorisation, apply to the
Registrar for approval of its nominee. Hence the Administrative FSP may
not exist without its duly approved nominee.
3) the Memorandum and Articles of Association of the nominee company
must preclude it from incurring any liabilities other than those to persons
on whose behalf it holds assets and, if any other liabilities are incurred in
the name of the nominee company, the Administrative FSP shall be liable
to meet them.
© INSETA– Section 3 10b 31
The nominee must enter into an agreement with the Administrative FSP in terms
of which the provider must pay all expenses for and incidental to its formation,
activities, management and liquidation, unless the Memorandum and Articles of
Association of the nominee already provide for such an obligation.
The Registrar published Board Notice 63 of 2007 (―BN63‖) on 25 May 2007. BN63
prescribes the requirements imposed by the FSB for nominees to operate in South
Africa in respect of:
1. the Registrar of Pension Funds;
2. the Registrar of Long-term Insurance;
3. the Registrar of Short-term Insurance;
4. the Registrar of Security Services Act; and
5. the Registrar of Financial Services Providers.
Section 1 of BN63 reiterates the principles laid down in the Regulations in that
nominees who wish to register or hold any assets of long-term insurers, short-
term insurers or pension funds, the independent nominee of an Administrative
and Discretionary FSP‘s who wishes to hold assets on behalf of long-term insurers,
short-term insurers, pension funds or hold clients‘ securities in the Strate
environment, or any other independent nominee that wishes to hold securities in
terms of Section 36(2) of the Securities Services Act, 2004 (Act No 36 of 2004)
require the prior written approval of the Registrar of Long-term insurance, the
Registrar of Short-term Insurance, the Registrar of Pension Funds, the Registrar
of Financial Services Providers or the Registrar of Securities Services, as the case
may be.
As stated above, the executive officer and deputy executive officer of the FSB are
appointed as these Registrars and therefore any approval will be administered by
the FSB. It is important to note that BN63 prescribes specific requirements for
those nominees wanting to hold assets on behalf of investors in the Strate
environment. BN 63 prescribes further requirements that independent nominees
have to satisfy in order to operate in the capacity as independent nominees in
South Africa.
32 © INSETA– Section 3 10b
2.1.2 Independent nominee requirements (BN63)
A nominee must –
1. be a registered company under the Companies Act, 1973, (Act No 61 of
1973);
2. be wholly owned by a holding company. In practice this holding company
is most often the Administrative FSP, although the requirements are not
prescriptive in this regard, provided that the holding company qualifies
with the criteria stipulated in BN63 (as detailed in 1-8 below). What is
required is that it be wholly-owned by a holding company and not have
natural persons as shareholders;
3. have adequate insurance against loss through fire, theft and other
disasters in place for trust assets held by the independent nominee as
well as fidelity guarantee cover. (It is the responsibility of the holding
company to put this in place); and
conclude a written agreement with each pension fund, short-term insurer, and
long-term insurer whose assets it will hold and the agreement should comply with
the minimum requirements as required by the Registrar concerned.
2.1.3 Holding company requirements
As stated above, the independent nominee may not have a natural person as a
shareholder. The nominee must be wholly owned by –
1. a Long-term or Short-term insurer as defined in Section 1 of the Long-
term Insurance Act, 1998 (Act No 52 of 1998) and Section 1 of the Short-
term Insurance Act, 1998 (Act No 53 of 1998) respectively; or
2. an authorised user in terms of the Securities Services Act, 2004 (Act No
36 of 2004); or
3. a Bank or a Bank Controlling Company as defined in Section 1 of the
Banks Act, 1990 (Act No 94 of 1990); or
4. an Administrative or a Discretionary FSP as approved in terms of Section
7 of FAIS; or
© INSETA– Section 3 10b 33
5. an administrator registered in terms of Section 13B of the Pension Funds
Act, 1956 (Act No 24 of 1956) where the exclusive object of its nominee
is the holding of pension fund assets; or
6. a participant of a central securities depository licensed in terms of the
Securities Services Act, 2004 (Act No 36 of 2004); or
7. a central securities depository licensed in terms of the Securities Services
Act, 2004 (Act No 36 of 2004); or
8. an exchange licensed in terms of the Securities Services Act, 2004 (Act
No 36 of 2004).
The holding company must also, to the satisfaction of the Registrar concerned,
demonstrate that it –
a) is fit and proper to own an independent nominee for purposes of taking
title of assets on behalf of long-term insurers, short-term insurers,
pension funds or others and hold such assets in trust and in safe custody
on their behalf;
b) has a culture and operational structure which evidence a commitment to
effective control by executive management and the board of directors
over all aspects of the business of the independent nominee and that
demonstrates a zero tolerance to management override of controls;
c) has evidence of a commitment to the employment and retention of
adequate numbers of suitably qualified personnel of integrity and the
ongoing education of staff in relevant disciplines;
d) has evidence of a documented system of internal controls which ensures
that its independent nominee is effectively run, that the assets of clients
are safeguarded and segregated and the records of the independent
nominee accurately reflect the information which they purport to present;
e) has evidence of appropriately-documented procedures to exclude
unauthorised access to critical systems, the thorough testing of all new
proprietary systems and the continuity of operations of all critical
applications of its independent nominee, including disaster recovery and a
business continuity plan;
34 © INSETA– Section 3 10b
f) has adequate and prospective financial resources represented by a
minimum of R3 million equity capital which shall be maintained at all
times; and
g) has an appropriately-documented system of risk management to provide
substantial assurance of continuity of the business of its independent
nominee for the foreseeable future.
Where the holding company has outsourced the control over the operation of the
nominee register to another company, that outsourced company must, to the
satisfaction of the Registrar, demonstrate that it has met the requirements listed
in (a) to (g) above. Where the maintenance of the register has been outsourced,
the independent nominee has the obligation to advise the clients of the
outsourcing arrangement.
2.2 DUTIES OF THE INDEPENDENT NOMINEE
2.2.1 Independent nominee Definition (BN63)
The Securities Services Act, 2004 (Act No 36 of 2004), defines a nominee to mean
―a person that acts as the registered holder of securities or has an interest in
securities on behalf of other persons‖.
In all instances detailed in this publication, a nominee refers to any entity that
holds assets in its own name on behalf of the beneficial owner (i.e. the Nominee
is not the beneficial owner of these assets). The main duties of the independent
nominee are therefore to hold the assets on behalf of the beneficial owners and
to protect the assets from claims by creditors of the FSP.
2.2.2 Ongoing obligations
Approved independent nominees shall annually submit to the FSB:
i. audited financial statements; and
ii. an audit report within six (6) months of the financial year-end of the
company, setting forth whether any assets held on behalf of any other
person in safe custody are in possession of the nominee and properly
accounted for.
© INSETA– Section 3 10b 35
Should the nominee fail to submit the above and, before the expiry of that period,
also not apply in writing for an extension of time within which to submit the
statements, the FSB may withdraw its approval with immediate effect on the
conditions as prescribed by the Registrar concerned.
A declaration by the holding company of the independent nominee in the format
as prescribed in Clause 12 of BB 63 must accompany the annual financial
statements of the independent nominee.
The FSB retains the right to withdraw an approval at any time should the
independent nominee, its holding company or the company to which the control
over the nominee register has been outsourced fail to comply with the FSB and
Strate requirements.
Members of the JSE, BESA, Participants and their independent nominees need
only to comply with Clause 7 of the requirements imposed by the FSB for
independent nominees to operate in South Africa if they hold securities on behalf
of either pension funds or long and short-term insurers.
2.2.3 Account and unit reconciliation‘s
Section 10(2) of the Regulations requires the independent nominee, within three
(3) months after the financial year end of the Administrative FSP for which it acts,
to satisfy itself and submit a written statement to the registrar that:
a) the Administrative FSP has adequate procedures in place for ensuring that
proper reconciliation, of the number of investments held in its name and
reflected in the client records of the Administrative FSP, and the number
of investments reflected in the records of the collective investment
scheme or company, takes place on an ongoing basis;
b) such procedures are followed by the Administrative FSP;
c) procedures are implemented by the independent nominee in order to
ensure that the duties stipulated in this regulation are carried out on a
continuous basis;
d) it summarises the nature of the errors and or difficulties that impacted on
the ability of the Administrative FSP to conduct its business in accordance
with these Regulations during the year under review; and
36 © INSETA– Section 3 10b
e) it highlights the co-operation or lack thereof extended by the
Administrative FSP to the independent nominee during the year under
review.
In practice this reconciliation occurs in the client registry which details the
―holdings‖ of each client in relation to the financial products invested in by the
Administrative FSP, i.e. this is where the Administrative FSP keeps a record of the
value of the client‘s investment placed via the Administrative FSP into the
underlying financial product.
Summary
In this chapter we dealt with the relevance and importance of the nominee in the
Administrative FSP‘s context.
In this and the previous chapter we explained that the FSP could not act in the
capacity as an Administrative FSP unless prior approval is granted by the
Registrar.
We also explored that the Registrar would not grant approval for the
Administrative FSP to conduct business unless it had a duly approved independent
nominee.
We considered the definition and requirements of nominees as contained in BN63
and the Regulations to FAIS.
We also considered the duties and obligations of the nominee.
© INSETA– Section 3 10b 37
Self-Assessment Questions
1. The object of the Independent Nominee Company is to:
a) pay the expenses of the Administrative FSP
b) pay the expenses of the Discretionary FSP
c) hold client assets in safe custody
d) provide clients and members of the public with financial
products
2. An Independent Nominee of an Administrative FSP must:
a) within 1 year of holding clients‘ assets, obtain approval from the
Registrar
b) within 6 months of approval by the Registrar, hold clients‘ assets
c) obtain approval to hold assets on behalf of the Administrative
FSP annually
d) obtain the Registrar‘s approval prior to acting as an independent
nominee for an Administrative FSP
3. The memorandum and articles of association of the independent
nominee must specify that:
a) its shares shall only be sold to members of the public through a
recognised exchange
b) its shares may only be owned by juristic persons
c) its shares may only be sold at a premium
d) only preference shares may be sold by the independent nominee
to members of the public
4. Independent Nominees who wish to hold assets on behalf of Long-term
Insurance Companies must obtain prior approval from:
a) The Long-term Insurance Registrar
b) The Registrar for Financial Services Providers and
Representatives
c) The Registrar for Securities
d) None of the above
38 © INSETA– Section 3 10b
5. The holding company of the Independent Nominee must:
a) undertake to provide all the employees required by the
independent nominee to operate
b) undertake to pay all expenses of the Independent Nominee
c) undertake to indemnify the Independent Nominee against all
claims relating to fraud or negligence of their staff
d) none of the above
6. The Independent Nominee company must be:
a) wholly-owned by a Long-term or Short-term insurance company
b) jointly-owned by the Long-term and Short-term Insurance
Company
c) wholly-owned by the JSE
d) none of the above
7. The Independent Nominee company must be:
a) a registered company in terms of the Companies Act
b) a Collective Investment Scheme
c) authorised by the Registrar of Pension Funds to act as an
Independent Nominee
d) none of the above
8. The holding company of the Independent Nominee must:
a) be fit and proper to own an Independent Nominee
b) have a cultural and operational structure that shows
commitment to effective control by executive management and
the board of directors over all aspects of the Independent
Nominee
c) have evidence of commitment to the employment and retention
of adequately trained staff
d) all of the above
9. An approved nominee shall:
a) submit abridged financial statements to the Registrar half-yearly
b) submit financial statements to the Registrar half-yearly
c) submit abridged financial statements to the Registrar annually
d) submit financial statements to the Registrar annually
© INSETA– Section 3 10b 39
10. An approved nominee shall submit audit reports:
a) to the Registrar every six months
b) to the Registrar each year
c) to the Registrar within six months of the financial year-end
d) to the Registrar within nine months of the financial year-end
40 © INSETA– Section 3 10b
Self-Assessment Answers
1. The object of the Independent Nominee Company is to:
a) pay the expenses of the Administrative FSP
b) pay the expenses of the Discretionary FSP
c) hold client assets in safe custody
d) provide clients and members of the public with financial
products
2. An Independent Nominee of an Administrative FSP must:
a) within 1 year of holding clients‘ assets, obtain approval from the
Registrar
b) within 6 months of approval by the Registrar, hold clients‘ assets
c) obtain approval to hold assets on behalf of the Administrative
FSP annually
d) obtain the Registrar‘s approval prior to acting as an independent
nominee for an Administrative FSP
3. The memorandum and articles of association of the independent
nominee must specify that:
a) its shares shall only be sold to members of the public through a
recognised exchange
b) its shares may only be owned by juristic persons
c) its shares may only be sold at a premium
d) only preference shares may be sold by the independent nominee
to members of the public
4. Independent Nominees who wish to hold assets on behalf of Long-term
Insurance Companies must obtain prior approval from:
a) The Long-term Insurance Registrar
b) The Registrar for Financial Services Providers and
Representatives
c) The Registrar for Securities
d) None of the above
© INSETA– Section 3 10b 41
5. The holding company of the Independent Nominee must:
a) undertake to provide all the employees required by the
independent nominee to operate
b) undertake to pay all expenses of the Independent Nominee
c) undertake to indemnify the Independent Nominee against all
claims relating to fraud or negligence of their staff
d) none of the above
6. The Independent Nominee company must be:
a) wholly-owned by a Long-term or Short-term insurance company
b) jointly-owned by the Long-term and Short-term Insurance
Company
c) wholly-owned by the JSE
d) none of the above
7. The Independent Nominee company must be:
a) a registered company in terms of the Companies Act
b) a Collective Investment Scheme
c) authorised by the Registrar of Pension Funds to act as an
Independent Nominee
d) none of the above
8. The holding company of the Independent Nominee must:
a) be fit and proper to own an Independent Nominee
b) have a cultural and operational structure that shows
commitment to effective control by executive management and
the board of directors over all aspects of the Independent
Nominee
c) have evidence of commitment to the employment and retention
of adequately trained staff
d) all of the above
9. An approved nominee shall:
a) submit abridged financial statements to the Registrar half-yearly
b) submit financial statements to the Registrar half-yearly
c) submit abridged financial statements to the Registrar annually
d) submit financial statements to the Registrar annually
42 © INSETA– Section 3 10b
10. An approved nominee shall submit audit reports:
a) to the Registrar every six months
b) to the Registrar each year
c) to the Registrar within six months of the financial year-end
d) to the Registrar within nine months of the financial year-end
© INSETA– Section 3 10b 43
Chapter
3
Manage and oversee client mandates
This chapter covers the following criteria:
KNOWLEDGE CRITERIA:
Explain why the Category III FSP must use mandates that have been approved by the FSB.
Explain why a mandate cannot be used if it is not approved by the FSB.
Explain why a mandate cannot be used if it is not signed by the client or his duly authorised
representative.
Explain why such a mandate must adhere to the requirements in the Discretionary Code of
Conduct.
Explain what the requirements are for mandates.
44 © INSETA– Section 3 10b
Purpose
The client mandate is of fundamental importance to the Administrative FSP.
In terms of prevailing legislation the FSP may not render intermediary services
without obtaining a client mandate in the manner and form as prescribed by these
pieces of legislation.
This chapter will focus on these aspects.
3.1 USE OF CLIENT MANDATES
3.1.1 Introduction
Section 5.1 of Chapter II of the Administrative Code prescribes that the
Administrative FSP (Category III FSP‘s) must obtain a signed mandate from the
client prior to rendering any financial services. The Discretionary FSP must at all
times adhere to the client‘s mandate and it is therefore important that the FSP
manages compliance with the mandate through the use of compliance resources,
adequately trained employees and systems. Consequently, an Administrative FSP
is prohibited from rendering any financial services to a client unless it receives a
mandate signed by the client. It is therefore important to consider this mandate in
greater detail.
3.2 CLIENT MANDATES
3.2.1 Specimen mandate
Section 5(4) of the Administrative Code stipulates that the Administrative FSP‘s
mandate must be approved by the Registrar prior to being put into use. After
approval for the mandate (―specimen mandate‖) has been obtained from the
Registrar, Section 5(4) of the Administrative Code further prohibits the
Administrative FSP, from substantially amending and using the specimen mandate
unless it has once again submitted the specimen mandate to the Registrar for
approval and obtaining the aforesaid approval. A specimen mandate is
© INSETA– Section 3 10b 45
substantially amended where any of the prescribed content previously approved
by the Registrar is changed.
Section 5(2) of the Administrative Code prescribes the following minimum criteria
for the specimen mandate:
a) State whether the client will deal with the Administrative FSP through
another person or in a personal capacity.
b) If the client will deal with the Administrative FSP through another person:
i. state the name of the person.
ii. state whether that person is an authorised FSP.
iii. state whether that FSP is appointed with full or limited discretion
and where the discretion is limited, indicate those limits.
iv. authorise the Administrative FSP to accept from that FSP
instructions given on behalf of the client.
c) Record the names, telephone and fax numbers, and postal and e-mail
addresses of the client and the other FSP.
d) Indicate that the financial products will be registered in the name of the
independent nominee of the Administrative FSP.
e) Provide in bold font an indication of the time period involved with regard
to the following administrative processes:
i. The cut-off times within which an instruction must be received by
the Administrative FSP to enable it to render an intermediary
service on that particular day;
ii. Once an instruction has been received, the maximum number of
working days it will take to render that intermediary service and an
indication of the day that will determine the price that the client
eventually receives.
iii. The maximum number of working days that it will take to process a
switch or withdrawal instruction and an indication of the day that
will determine the price that the client eventually receives.
46 © INSETA– Section 3 10b
f) Stipulate separately in respect of the Administrative FSP and the other
FSP (if any), the total fees and benefits to be received by each in respect
of a client‘s financial products, whether by way of a deduction from the
financial product or not, including:
i. the initial fees or costs.
ii. ongoing fees or costs.
iii. any other benefit, fees or costs, whether in cash or kind.
iv. costs (if any) to have the financial products registered in the name
of the client or in the name of the nominee company of another
Administrative FSP at the request of the client or at termination.
v. any fees or costs that will be levied on additional investment in or
purchase of the same financial product.
g) The signatures of the client, as well as the other FSP, where applicable.
In addition to paragraph 5.2, paragraph 5.3 stipulates that an Administrative FSP
may, subject to the approval of the Registrar, provide the said information either
in the mandate or in a combination of the mandate and the Administrative FSP‘s
written terms or guides of business.
Upon termination by the client, or the client‘s duly authorised agent, of the
mandate with the Administrative FSP, the Administrative FSP, depending on the
nature of the financial product involved must:
a) return the client‘s cash (if any) to the other FSP or client, as the case
may be;
b) provide the other FSP or client, as the case may be, with a detailed final
statement of account; and
c) issue an instruction to the independent nominee to either return the
client‘s assets or documents of title in the name of the client to the other
FSP or client, as the case may be, or to sell the relevant financial
products and pay the realised amount to the other FSP or client; or
issue an instruction to the independent nominee to transfer the financial products
into the name of an independent nominee of an Administrative FSP specified by
the client: Provided that the written instruction in this regard is signed personally
© INSETA– Section 3 10b 47
by the client and is accompanied by written confirmation from the client that the
client had received full disclosure of the relevant implications and costs and of
incentives due to the other FSP as a result of the transfer.
Summary
In this chapter we considered the relevant legislation compelling the
Administrative FSP to obtain a mandate from the client prior to rendering any
intermediary services.
We noted that the client mandate has to be signed by the client and we noted the
source legislation for that requirement.
We considered the criteria that the specimen mandate has to contain and the
source legislation of these requirements.
48 © INSETA– Section 3 10b
Self-Assessment Questions
1. An Administrative FSP must:
a) on instruction from another FSP, render intermediary services
b) on instruction from the client, render intermediary services
c) on written instruction obtained from the client, render
intermediary services
d) none of the above
2. The mandate provided by the client to the Administrative FSP must state
whether:
a) the client will deal with the Administrative FSP through another
person
b) the client will deal with the Administrative FSP directly
c) the client authorises the Administrative FSP to exercise a
discretion over the clients‘ investments
d) none of the above
3. The mandate must indicate:
a) whether the Independent Nominee has been approved by the
Registrar
b) that the Independent Nominee does not have the same
registered address as the Administrative FSP
c) whether the financial products will be registered in the name of
the Independent Nominee of the Administrative FSP
d) all of the above
4. The mandate must separately stipulate:
a) the initial fees or costs
b) the ongoing fees or costs
c) any fees or costs that will be levied on additional investments in
or purchases of the same financial product
d) all of the above
5. The mandate must stipulate in bold font:
a) the physical address of the Administrative FSP
b) the telephone and fax numbers of the Administrative FSP
c) the cut-off times within which an instruction must be received
by the Administrative FSP to enable it to render an intermediary
service on that particular day
d) all of the above
© INSETA– Section 3 10b 49
6. Upon termination of the mandate the Administrative FSP must:
a) return the cash to the client, or such other FSP, as may be
nominated by the client
b) provide the client or other FSP, as the case may be, with a
detailed statement of account
c) issue an instruction to the Independent Nominee to either return
the client‘s assets or documents of title in the name of the client
to the other FSP, or sell the relevant financial products and pay
the realised amount to the other FSP or the client
d) all of the above
50 © INSETA– Section 3 10b
Self-Assessment Answers
1. An Administrative FSP must:
a) on instruction from another FSP, render intermediary services
b) on instruction from the client, render intermediary services
c) on written instruction obtained from the client, render
intermediary services
d) none of the above
2. The mandate provided by the client to the Administrative FSP must state
whether:
a) the client will deal with the Administrative FSP through another
person
b) the client will deal with the Administrative FSP directly
c) the client authorises the Administrative FSP to exercise a
discretion over the clients‘ investments
d) none of the above
3. The mandate must indicate:
a) whether the Independent Nominee has been approved by the
Registrar
b) that the Independent Nominee does not have the same
registered address as the Administrative FSP
c) whether the financial products will be registered in the name of
the Independent Nominee of the Administrative FSP
d) all of the above
4. The mandate must separately stipulate:
a) the initial fees or costs
b) the ongoing fees or costs
c) any fees or costs that will be levied on additional investments in
or purchases of the same financial product
d) all of the above
5. The mandate must stipulate in bold font:
a) the physical address of the Administrative FSP
b) the telephone and fax numbers of the Administrative FSP
c) the cut-off times within which an instruction must be received
by the Administrative FSP to enable it to render an intermediary
service on that particular day
d) all of the above
© INSETA– Section 3 10b 51
6. Upon termination of the mandate the Administrative FSP must:
a) return the cash to the client, or such other FSP, as may be
nominated by the client
b) provide the client or other FSP, as the case may be, with a
detailed statement of account
c) issue an instruction to the Independent Nominee to either return
the client‘s assets or documents of title in the name of the client
to the other FSP, or sell the relevant financial products and pay
the realised amount to the other FSP or the client
d) all of the above
© INSETA– Section 3 10b 53
Chapter
4
Disclosures
This chapter covers the following criteria:
KNOWLEDGE CRITERIA:
Explain and ensure transparency and manage disclosures.
54 © INSETA– Section 3 10b
Purpose
This chapter covers the minimum disclosures required by FAIS and subordinate
legislation thereto.
This chapter deals with the minimum content, timing, manner and frequency of the
disclosures that are required to be made by Administrative FSP‘s.
4.1 MANAGE AND OVERSEE DISCLOSURES
4.1.1 The importance of disclosures
The intent behind these disclosures is to put the client in a position to be able
make an informed decision relating to a financial product. It also provides the
client with valuable information that enables the client to communicate effectively
with the product supplier, the FSP or representative. While recent conflicts of
interest amendments require certain disclosures to be made, these disclosures are
dealt with in the next chapter. The mandatory disclosures specified in the General
Code of Conduct for FSP‘s and representatives (―the General Code‖) broadly touch
on three key areas in the rendering of financial services to the client.
These key areas are:
The product supplier
The product provider
Information about financial services
4.1.2 Requirements regarding the disclosures and impact on FSP‘s
As stated above, the Registrar has, through the General Code, instituted several
standard disclosures that provide the client with a measure of transparency. Some
of these disclosures have been extremely successful whilst others have to a larger
extent not provided the desired results. The basic principles that underpin these
disclosures made by the FSP to the client are that they:
© INSETA– Section 3 10b 55
1. are factually correct;
2. are made in plain language so as to avoid uncertainty or confusion and
not be misleading;
3. are adequate and appropriate in the circumstances of the particular
financial service being rendered, taking into account the client‘s factually
established or reasonably assumed level of knowledge;
4. are provided timeously so as to afford the client reasonably sufficient
time to make a decision about the proposed transaction;
5. may, subject to further provisions, be made orally, and at the client‘s
request, be confirmed in writing within a reasonable time after the
request;
6. must, where provided in writing or by means of standard forms or
format, be in clear and readable print size, spacing and format;
7. must, as regards all amounts, sums, values, charges, fees, remuneration
or monetary obligations payable to the product supplier or the FSP, be
reflected in specific monetary terms, provided that where such amount,
sum, value, charge, fee, remuneration or monetary obligation is not
reasonably pre-determinable, its basis of calculation must be adequately
described; and
8. need not be duplicated or repeated to the same client unless material or
significant changes affecting that client occurs, or the relevant financial
service renders it necessary, in which case a disclosure of changes to the
client must be made without delay.
In addition to the above principles, the General Code (Chapters III and IV) also
contains specific disclosures pertaining to the product suppliers and the FSP.
These disclosures are designed to provide the client with relevant information
relating, inter alia, to the identity, physical location and contact details of the
compliance and complaints departments of the product supplier and FSP. It
further requires the FSP to disclose its contractual relationship with the product
supplier(s), restrictions that the FSP may have in respect of any financial
products, whether the FSP holds more than 10% of the product supplier‘s shares,
and whether during the preceding twelve-month (12-month) period the FSP
56 © INSETA– Section 3 10b
received more than 30% of its total remuneration from one product supplier. The
FSP must also advise the client should any of the above information change.
Additional information that the FSP must disclose about itself is the concise details
of the contractual status of the FSP.
Applying these broad principles, the FSP has to disclose information about itself,
the product supplier and the financial service being rendered.
4.1.3 Disclosures relating to the product supplier
An FSP, other than a direct marketer, must make the following disclosures about
the product supplier:
a) The name, physical location, postal and telephone contact details of the
product supplier;
b) The contractual relationship with the product supplier (if any), and
whether the provider has contractual relationships with other product
suppliers;
c) Names and contact details of the relevant compliance and complaints
departments of the product supplier;
d) 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
e) 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 twelve-month (12-month) period, received
more than 30% of total remuneration, including commission, from
the product supplier.
The FSP must convey any changes thereafter regarding such information at the
earliest opportunity.
© INSETA– Section 3 10b 57
4.1.4 Disclosures relating to the FSP
An FSP who is not a direct marketer and who renders financial services to a client
must at the earliest reasonable opportunity disclose to that client the full
particulars of the following:
a) Full business and trade names, registration number (if any), postal and
physical addresses, telephone and, where applicable, cellular phone
number, and Internet and email 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 FSP 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 FSP to which the
representative is contracted;
d) Details of the financial services which the FSP is authorised to provide in
terms of the relevant license and of any conditions or restrictions
applicable thereto;
e) Whether the FSP holds guarantee 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 FSP with regard to any matter covered by FAIS.
58 © INSETA– Section 3 10b
Where these disclosures are made orally to the client, they must be confirmed in
writing within thirty (30) days. Once again we encounter rules intended to create
a measure of transparency so that the client is made aware of the FSP with whom
s/he/it is contracting. The client can therefore make an informed decision prior to
entering into a contract with the FSP.
4.1.5 Disclosure requirements relating to the financial service being rendered
The General Code requires the FSP to disclose an ―appropriate general explanation
of the nature and material terms of the relevant contract or transaction‖ in order
to enable the client to make an informed decision. The General Code further
requires the FSP, whenever reasonable and appropriate, to provide the client with
material illustrations, projections or forecasts in the FSP‘s possession.
Specific disclosures to be made at the earliest reasonable opportunity are:
i. name, class or type of financial product concerned;
ii. nature and extent of benefits to be provided, including details of the
manner in which such benefits are derived or calculated and the manner
in which they will accrue or be paid;
iii. where the financial product is marketed or positioned as an investment or
as having an investment component –
a. concise details of the manner in which the value of the investment
is determined, including concise details of any underlying assets
or other financial instruments;
b. separate disclosure (and not mere disclosure of an all inclusive fee
or charge) or any charges and fees to be levied against the
product, including –
A. the amount and frequency thereof;
B. the identity of the recipient;
C. the services or other purpose for which each fee or charge
is levied;
© INSETA– Section 3 10b 59
D. where any charges or fees are to be levied in respect of
investment performance, details of the frequency,
performance measurement period (including any part of
the period prior to the client‘s particular investment) and
performance benchmarks or other criteria applicable to
such charges or fees; and
E. where the specific structure of the product entails other
underlying financial products, disclosure must be made in
such a manner as to enable the client to determine the
net investment amount ultimately invested for the benefit
of the client; and
c. on request, information concerning the past investment
performance of the product over periods and at intervals which
are reasonable with regard to the type of product involved,
including a warning that past performances are not necessarily
indicative of future performances;
d. any rebate arrangements and thereafter on a regular basis (but
not less frequently than annually): Provided that where the rebate
arrangement is initially disclosed in percentage terms, an example
using actual monetary amounts must be given and disclosure in
specific monetary terms must be made at the earliest reasonable
opportunity thereafter: Provided further that for the purposes of
this subparagraph, ―rebate‖ means a discount on the
administration, management or any other fee that is passed
through to the client, whether by reduced fees, the purchase of
additional investments or direct payment, and that the term
―rebate‖ must be used in the disclosure concerned, to describe
any arrangement complying with this definition, and disclosure
must include an explanation of the arrangement in line with this
definition.
e. any platform fee arrangements, which may be disclosed by
informing the client that a platform fee of up to a stated
percentage may be paid by the product supplier to the
Administrative FSP concerned, rather than disclosing the actual
monetary amount: Provided that for the purposes of this
subparagraph ―platform fee‖ means a payment by a product
supplier to an Administrative FSP for the administration and/or
distribution and/or marketing cost savings represented by the
60 © INSETA– Section 3 10b
distribution opportunity presented by the administrative platform,
and may be structured as a stipulated monetary amount or a
volume-based percentage of assets held on the platform, and that
the term ―platform fee‖ must be used in the disclosure concerned,
to describe any arrangement complying with this definition, and
the disclosure must include an explanation of the arrangement in
line with this definition.
iv. the nature and extent of monetary obligations assumed by the client, directly
or indirectly, in favour of the product supplier, including the manner of
payment or discharge thereof, the frequency thereof, the consequences of
non-compliance and, subject to paragraph (xiv), any anticipated or contractual
escalations, increases or additions;
v. the nature and extent of monetary obligations assumed by the client, directly
or indirectly, in favour of the FSP, including the manner of payment or
discharge thereof, the frequency thereof, and consequences of non-
compliance;
vi. the nature, extent and frequency of any incentive, remuneration,
consideration, commission, fee or brokerages (―valuable consideration‖), which
will become payable to the FSP, directly or indirectly, by any product supplier
or any person other than the client, or for which the FSP may become eligible,
as a result of rendering the financial service, as well as the identity of the
product supplier or other person providing or offering the valuable
consideration: Provided that where the maximum amount or rate of such
valuable consideration is prescribed by any law the FSP may (subject to clause
3(1)(a)(vii) of the General Code) elect to disclose either the actual amount
applicable or such prescribed maximum amount or rate;
vii. concise details of any special terms or conditions, exclusions of liability,
waiting periods, loadings, penalties, excesses, restrictions or circumstances in
which benefits will not be provided;
viii. any guaranteed minimum benefits or other guarantees;
ix. to what extent the product is readily realisable or the funds concerned are
accessible;
x. any restrictions on or the penalties for early termination of or withdrawal from
the product, or other effects, if any, of such termination or withdrawal;
© INSETA– Section 3 10b 61
xi. material tax considerations;
xii. whether cooling off rights are offered and, if so, procedures for the exercise of
such rights;
xiii. any material investment or other risks associated with the product, including
any risk of loss of any capital amount(s) invested due to market fluctuations;
and
xiv. in the case of an insurance product in respect of which provision is made for
increase of premiums, the amount of the increase premium for the first five
(5) years and thereafter on a five-year (5-year) basis but not exceeding
twenty (20) years.
The FSP must also fully inform the client regarding the completion or submission
of any transaction requirement:
i. that all material facts must be accurately and properly disclosed, and that
the accuracy and completeness of all answers, statements or other
information provided by or on behalf of the client, are the client‘s own
responsibility;
ii. that if the FSP completes or submits any transaction requirement on
behalf of the client, the client should be satisfied as to the accuracy and
completeness of the details;
iii. of the possible consequences of the misrepresentation or non-disclosure
of a material fact or the inclusion of incorrect information; and
iv. that the client must on request be supplied with a copy, written or printed
record of any transaction requirement within a reasonable time.
The FSP must at the request of the client provide the client with a statement of
account in respect of the financial services rendered by the FSP to the client.
Where an FSP advises the client or is rendering ongoing financial services to the
client, that FSP must on a regular basis (but not less frequently than annually)
provide the client with a written statement identifying such products where they
are still in existence, and providing brief current details (where applicable), of:
62 © INSETA– Section 3 10b
a) any ongoing monetary obligations of the client in respect of such
products;
b) the main benefits provided by the products;
c) where any product was marketed or positioned as an investment or as
having an investment component, the value of the investment and the
amount of such value which is accessible to the client; and
d) any ongoing incentives, consideration, commission, fee or brokerage
payable to the provider in respect of such products;
provided that such a statement need not be provided where the client is aware, or
ought reasonably to be aware, that the FSP concerned does not render or has
ceased rendering ongoing financial services in respect of the client or the products
concerned.
You will note that the criteria of this disclosure are geared towards transparency
to enable the client to make as informed a decision as possible. Prior to the
promulgation of FAIS few clients understood the nature of the financial product
they were purchasing.
Summary
In this chapter we looked at the minimum disclosures that must be made by the
Administrative FSP in terms of the General Code and the Administrative Code.
These disclosures may be made verbally but must then be followed up with
confirmatory correspondence within thirty (30) days.
The principles underpinning these disclosures are that the client can make
informed decisions, can communicate with the product supplier, the FSP and also
know what intermediary services are being contracted for.
© INSETA– Section 3 10b 63
Self-Assessment Questions
1. Any disclosures made by the Administrative FSP must be:
a) factually correct
b) made in plain language
c) adequate and appropriate in the circumstances
d) all of the above
2. The three main categories of disclosures that the FSP must make relate
to:
a) the product supplier
b) the product provider
c) the type of financial service to be provided
d) all of the above
3. These disclosures must, as regards all amounts, sums, values, charges,
fees, remuneration or monetary obligations payable by the client to the
product supplier or FSP, be disclosed in:
a) words and figures
b) percentages of assets under management
c) specific monetary terms (provided that where this is not
possible, the basis for the calculation is adequately described)
d) all of the above
4. An Administrative FSP must disclose whether it has:
a) received more than 20% of its remuneration from one product
supplier in the previous 12 months
b) received more than 30% of its remuneration from one product
supplier in the previous 12 months
c) received more than 40% of its remuneration from one product
supplier in the previous 12 months
d) none of the above
5. An Administrative FSP must disclose whether it:
a) holds more than 2.5% of the product supplier‘s shares
b) holds more than 5% of the product supplier‘s shares
c) holds more than 10% of the product supplier‘s shares
d) holds more than 15% of the product supplier‘s shares
64 © INSETA– Section 3 10b
6. An Administrative FSP who is not a direct marketer must make the
following disclosures about the product supplier:
a) the complaints procedure to be followed when complaining
about a product supplier
b) the full names of the board of directors of the product supplier
c) the names and contact details of the relevant compliance and
complaints departments of the product supplier
d) all of the above
7. An FSP who is not a direct marketer must disclose (to the client)
whether the representative of the FSP is rendering services under
supervision:
a) at the earliest reasonable opportunity
b) within 10 days prior to the conclusion of the contract
c) at quotation stage
d) within 30 days of conclusion of the contract
8. Where the Administrative FSP makes disclosures orally, the
Administrative FSP must confirm these disclosures in writing within:
a) 10 days
b) 20 days
c) 30 days
d) 45 days
9. The Administrative FSP must also disclose:
a) the name, class or type of financial product concerned
b) on request, information concerning the past investment
performance of the product over periods and at intervals which
are reasonable with regard to the type of product involved
(including a warning that past performances are not necessarily
indicative of future performances)
c) concise detail about the manner in which the value of the
investment is determined, including concise details of any
underlying assets or other financial instruments
d) all of the above
© INSETA– Section 3 10b 65
10. Where an Administrative FSP discloses fees it must ensure that it
discloses a platform fee. A platform fee in this context means:
a) a payment by a product supplier to an Administrative FSP for
the administration and/or distribution and/or marketing cost
savings represented by the distribution opportunity presented
by the administrative platform. It may be structured as a
stipulated monetary amount or a volume-based percentage of
assets held on the platform.
b) an investment vehicle asset management fee payable by the
manager to the underlying asset manager
c) a payment by an Administrative FSP to a representative of the
Administrative FSP for providing distribution services as a part
of an established distribution force
d) all of the above
66 © INSETA– Section 3 10b
Self-Assessment Answers
1. Any disclosures made by the Administrative FSP must be:
a) factually correct
b) made in plain language
c) adequate and appropriate in the circumstances
d) all of the above
2. The three main categories of disclosures that the FSP must make relate
to:
a) the product supplier
b) the product provider
c) the type of financial service to be provided
d) all of the above
3. These disclosures must, as regards all amounts, sums, values, charges,
fees, remuneration or monetary obligations payable by the client to the
product supplier or FSP, be disclosed in:
a) words and figures
b) percentages of assets under management
c) specific monetary terms (provided that where this is not
possible, the basis for the calculation is adequately described)
d) all of the above
4. An Administrative FSP must disclose whether it has:
a) received more than 20% of its remuneration from one product
supplier in the previous 12 months
b) received more than 30% of its remuneration from one product
supplier in the previous 12 months
c) received more than 40% of its remuneration from one product
supplier in the previous 12 months
d) none of the above
5. An Administrative FSP must disclose whether it:
a) holds more than 2.5% of the product supplier‘s shares
b) holds more than 5% of the product supplier‘s shares
c) holds more than 10% of the product supplier‘s shares
d) holds more than 15% of the product supplier‘s shares
© INSETA– Section 3 10b 67
6. An Administrative FSP who is not a direct marketer must make the
following disclosures about the product supplier:
a) the complaints procedure to be followed when complaining
about a product supplier
b) the full names of the board of directors of the product supplier
c) the names and contact details of the relevant compliance and
complaints departments of the product supplier
d) all of the above
7. An FSP who is not a direct marketer must disclose (to the client)
whether the representative of the FSP is rendering services under
supervision:
a) at the earliest reasonable opportunity
b) within 10 days prior to the conclusion of the contract
c) at quotation stage
d) within 30 days of conclusion of the contract
8. Where the Administrative FSP makes disclosures orally, the
Administrative FSP must confirm these disclosures in writing within:
a) 10 days
b) 20 days
c) 30 days
d) 45 days
9. The Administrative FSP must also disclose:
a) the name, class or type of financial product concerned
b) on request, information concerning the past investment
performance of the product over periods and at intervals which
are reasonable with regard to the type of product involved
(including a warning that past performances are not necessarily
indicative of future performances)
c) concise detail about the manner in which the value of the
investment is determined, including concise details of any
underlying assets or other financial instruments
d) all of the above
68 © INSETA– Section 3 10b
10. Where an Administrative FSP discloses fees it must ensure that it
discloses a platform fee. A platform fee in this context means:
a) a payment by a product supplier to an Administrative FSP for
the administration and/or distribution and/or marketing cost
savings represented by the distribution opportunity presented
by the administrative platform. It may be structured as a
stipulated monetary amount or a volume-based percentage of
assets held on the platform.
b) an investment vehicle asset management fee payable by the
manager to the underlying asset manager
c) a payment by an Administrative FSP to a representative of the
Administrative FSP for providing distribution services as a part
of an established distribution force
d) all of the above
© INSETA– Section 3 10b 69
Chapter
5
Conflicts of interest
This chapter covers the following criteria:
KNOWLEDGE CRITERIA:
Ensure transparency and manage conflicts of interest.
70 © INSETA– Section 3 10b
Purpose
FSP‘s interact with various parties on a daily basis. These parties include the
relevant parties described in Chapter 1 above. In an attempt to ensure that the
client‘s best interests are always advanced - above that of the FSP and/or product
supplier, the Registrar has now published an amendment to the General Code
placing the responsibility on the FSP to avoid, and where avoidance is not possible,
mitigate, and where mitigation is not possible, disclose any interest that conflicts
with the client‘s interests and that potentially detracts from the FSP or
representative providing the best, as well as impartial advice.
5.1 CONFLICTS OF INTEREST
5.1.1 Conflicts of interest
The Registrar recently published amendments to the General Code in Board Notice
58 of 2010 (―BN58‖) introducing stricter regulation in respect of conflicts of
interest. Whilst these amendments have received considerable attention from the
financial services industry, conflicts of interest is not a new concept.
In 2001 The Financial Institutions (Protection of Funds) Act (Act 28 of 2001) was
promulgated and prescribes that where individuals who are employed with
financial institutions deal or hold financial institution‘s or trust property then they
act in a fiduciary capacity in relation to those assets. In essence, the Financial
Institutions Act requires those individuals to declare their personal interests and
to ensure that they do not directly or indirectly benefit at the expense of the other
financial institution or principal.
Similarly, in the retirement fund environment, Pension Fund Circular 130
incorporated many of these principles. PF 130 was not, however, couched in
peremptory (obligatory) language and merely made recommendations relating to
good governance, the disclosure and avoidance of conflicts of interest. PF 130 has
now been repealed and its principles have been incorporated into a Pension Fund
Directive compelling Retirement Fund Trustees to disclose and avoid, where
possible, any conflicts of interest.
© INSETA– Section 3 10b 71
BN58 further advances these conflicts of interest principles. The difference
between the amendments to the General Code brought about by BN58 and the
Financial Institutions (Protection of Funds) Act, is that the latter Act laid down
general principles to which the affected individuals were compelled to comply.
This type of regulation is commonly referred as ―principles-based‖ regulation.
Contrary to principled-based regulation, the General Code (introduced by BN58)
now contains specific rules that affected individuals must comply with.
A conflict of interest is now defined in the General Code as any situation in which
an FSP or a representative has an actual or potential interest that may, in the
rendering of a financial service to a client:
a) influence the objective performance of his, her or its obligations to that
client, or
b) prevent a provider or representative from rendering an unbiased and fair
financial service to that client, or from acting in the interest of that client,
including but not limited to –
i. a financial interest;
ii. an ownership interest;
iii. any relationship with a third party.
The recent conflict of interest amendments have a wide range of implications for
FSP‘s and representatives. The core conflict of interest principles introduced into
the General Code compels the FSP to by 19 July 2010:
1. avoid any possible conflicts of interests.
2. where it is not possible to avoid the conflicts of interest, mitigate the
negative effects of the conflict of interest on the client.
3. at the earliest possible opportunity, disclose any conflicts of interest to the
client, including –
i. the measures taken by the FSP in accordance with the FSP‘s
Conflicts of Interest Management Policy to avoid or mitigate the
conflict;
72 © INSETA– Section 3 10b
ii. any ownership interest or financial interest, other than an
immaterial financial interest, that the FSP or representative may be
or become eligible for;
iii. the nature of the relationship or arrangement with a third party that
gives rise to a conflict of interest, in sufficient detail to a client to
enable that client to understand the exact nature of the relationship
or arrangement and the conflict of interest.
4. inform the client of the conflict of interest management policy and how it
may be accessed.
With effect from 19 October 2010 FSP‘s and representatives may only receive or
offer from or to a third party the following:
1. commission in terms of the Long-term Insurance Act, (Act 58 of 1998) or
the Short-term Insurance Act of 1998, (Act 53 of 1998);
2. commission in terms of the Medical Schemes Act, (Act 53 of 1998);
3. fees in terms of the Long-term Insurance Act, Short-term Insurance Act
or the Medical Schemes Act, provided that those fees are reasonably
commensurate to the service being rendered;
4. fees for rendering financial services in respect of which commission or
fees referred to in 1, 2 and 3 above are not paid and:
a) are specifically agreed to by the client in writing; and
b) may be stopped at the discretion of that client;
5. fees or remuneration for the rendering of a service to a third party, which
are reasonably commensurate to the service being rendered;
6. subject to any other law, an immaterial financial interest; and
7. a financial interest, not referred to under 1 to 6 above, for which a
consideration, fair value or remuneration that is reasonably
commensurate to the value of the financial interest, is paid by that FSP or
representative, i.e. paying or receiving a market-related price for the
financial interest received or provided.
© INSETA– Section 3 10b 73
Where the FSP is also the product supplier of the financial product, the points 1 to
7 do not apply to that FSP. In this instance the amendment states that, with
effect from 19 April 2011, an FSP may not offer a financial interest to a
representative of that FSP for giving preference to:
1. the quantity of business secured by a representative for that FSP, to the
exclusion of the quality of service rendered to clients;
2. a specific product supplier, where a representative may recommend more
than one product supplier to a client; or
3. a specific product supplier, where a representative may recommend more
than one product of that product supplier to a client.
In essence, the FSP‘s who are also product suppliers have twelve (12) months in
which to amend their remuneration systems and benefits in respect of their
representatives. This does not mean that an FSP who is also a product provider is
totally untouched by the amendment for the next twelve (12) months. It still has
to ensure, when dealing with third parties, such as independent FSP‘s, that it
complies with the other provisions of the amendment, considering these
provisions in isolation create the impression that an FSP can easily comply with it.
However, when considering the definitions relevant to this provision, a totally
different scenario becomes evident. The FSP and representative will experience a
substantial amount of difficulty in complying with these new requirements. It is
therefore necessary to consider some of the relevant definitions that are key to
unlocking the true implications of these amendments.
Section 1 of the General Code defines the following:
―Associate‖:
a) in relation to a natural person means –
i. a person who is recognised in law or the tents of religion as a
spouse, life partner or civil union partner of that person;
ii. a child of that person, including a stepchild, adopted child and a
child born out of wedlock;
iii. a parent or stepparent of that person;
74 © INSETA– Section 3 10b
iv. a person in respect of which that person is recognised in law or
appointed by a court as the person legally responsible for managing
the affairs of or meeting the daily care needs of the first mentioned
person;
v. a person who is the spouse, life partner or civil union partner of a
person referred to in subparagraphs (ii) to (iv);
vi. a person who is in a commercial partnership with that person;
b) in relation to a juristic person:
i. which is a company, means any subsidiary or holding company of
that company, or other subsidiary of that holding company and any
other company of which that holding company is a subsidiary;
ii. which is a close corporation registered under the Close Corporations
Act of 1984 (Act 69 of 1984), means any member thereof as defined
in section 1;
iii. which is not a company or a close corporation as referred to in (b)(i)
or (ii), means another juristic person which would have been a
subsidiary or holding company of the first mentioned juristic person
–
a) had such first-mentioned juristic person been a company; or
b) in the case where that other juristic person, too, is not a
company, had both the first-mentioned juristic person and
that other juristic person been a company;
iv. means any person in accordance with whose directions or
instructions the board of directors of, or, in the case where such
juristic person is not a company, the governing body of such juristic
person is accustomed to act;
c) in relation to any person –
i. means any juristic person of which the board of directors, or, in the
case where such juristic person is not a company, of which the
governing body is accustomed to act in accordance with the
directions or instructions of the person first-mentioned in this
paragraph;
© INSETA– Section 3 10b 75
ii. includes any trust controlled or administered by that person.
Section 3(A)(3) of the General Code prohibits an FSP or a representative from
circumventing the conflict of interest provisions through the use of an associate.
You will note from the above definition that ―associate‖ is intended to be a ―catch
all‖ definition attempting to cover all types of legal entities and all permutations of
relationships.
―‘Financial interest‘ means any cash, cash equivalent, voucher, gift, service,
advantage, benefit, discount, domestic or foreign travel, hospitality,
accommodation, sponsorship, other incentive or valuable consideration, other
than –
a) an ownership interest;
b) training, that is not exclusively available to a selected group of providers
or representatives, on –
i. products and legal matters relating to those products;
ii. general financial and industry information;
iii. specialised technological systems of a third party necessary for
the rendering of financial service; but excluding travel and
accommodation associated with that training;‖
Once again the Registrar‘s intention to create a ―catch all‖ situation is evident in
this definition. In essence, the receipt or offer by an FSP or representative to a
third party of the above financial interests is prohibited unless it falls within the
categories listed in (i), (ii) and (iii) above, i.e. product-related training, general
financial information, etc.
―‘Immaterial financial interest‘ means any financial interest with a determinable
monetary value, the aggregate of which does not exceed R1 000 in any calendar
year from the same third party in that calendar year received by –
a) an FSP who is a sole proprietor;
b) a representative for that representative‘s direct benefit;
76 © INSETA– Section 3 10b
c) an FSP, who for its benefit or that of some or all of its representatives,
aggregates the immaterial financial interest paid to its representatives.‖
In essence, an FSP (who is a sole proprietor) and a representative (for his own
benefit) may only in one calendar year receive an immaterial financial interest
from a third party. An immaterial financial interest‘s value is limited to R1 000. An
FSP (whether or not a sole proprietor) may elect to aggregate the immaterial
financial interests paid in one year to its representatives by a third party but then
the total value (being all the amounts added together) may not exceed R1 000.
The latter rule means that an FSP who employs twenty (20) representatives, may
receive R1 000 instead of R20 000 in one (1) calendar year from a third party.
―Third party‖ means –
a) a product supplier;
b) another FSP;
c) an associate of a product supplier or a provider;
d) a distribution channel;
e) any person who in terms of an agreement or arrangement with a person
referred to in (a) to (d) provides a financial interest to a provider or its
representatives.
The amendments promulgated by BN58 create an unequivocal and intricate set of
rules that FSP‘s and representatives are compelled to comply with. Unfortunately
they also bring with them a host of unintended consequences that will, in time, be
tested against the Registrar‘s intent.
Finally, on this score, the amendments require that an FSP must, by no later than
19 April 2011, adopt, maintain and implement a Conflicts of Interest Management
Policy (―Policy‖). This Policy must contain the following:
i. Provide for the management of conflicts of interest, and provide:
a) mechanisms for the identification of conflicts of interest;
b) measures for the avoidance of conflicts of interest, and where
avoidance is not possible, the reasons therefore and the measures
for the mitigation of such conflicts of interest;
© INSETA– Section 3 10b 77
c) measures for the disclosure of conflicts of interest;
d) processes, procedures and internal controls to facilitate
compliance with the policy; and
e) consequences of non-compliance with the policy by the FSP‘s
employees and representatives; and
ii. specify the type of and basis on which representatives will qualify for a
financial interest that the FSP will offer a representative and motivate how
that financial interest complies with Section 3A(1)(b) of BN58;
iii. include a list of all the FSP‘s associates;
iv. include the names of any third parties in which the FSP holds an
ownership interest;
v. include the names of any third parties that hold an ownership interest in
the FSP; and
vi. include the nature and extent of the ownership interest referred to in (iv)
and (v) above.
The policy must be adopted by the FSP who is sole proprietor, the Board of
Directors of an FSP where the FSP is a company or close corporation, and, where
not an incorporated entity, the governing body of the FSP (e.g. a trust).
The FSP must ensure that all employees, representatives and associates are made
aware of the conflicts of policy. Compliance with the policy must be included in the
compliance-monitoring process. The policy must be reviewed on an annual basis.
The compliance officer is also compelled to include in his/her/its Compliance
Report, that it must include the following:
1. Implementation of the policy;
2. Monitoring and compliance with the policy; and
3. Accessibility to the policy.
Students are urged to read the entire Board Notice to gain a comprehensive
understanding of these requirements.
78 © INSETA– Section 3 10b
Summary
The purpose of the Conflicts of Interests amendments to the General Code is to
prevent the FSP or representative from putting clients‘ interests second to their
own.
A perception exists that the Conflicts of Interests were only introduced with these
recent amendments. This perception is incorrect. The General Code has had
Conflict of Interest provisions for quite some time. These provisions have now
been amended to provide wider application and more harsh penalties.
Self-Assessment Questions
1. A conflict of interest is defined as any situation which an Administrative
FSP or representative may have that would:
a) influence the subjective performance of his, her or its
obligations to that client
b) prevent an FSP or representative from rendering an unbiased
and fair financial service to that client, or from acting in the
interest of that client
c) none of the above
d) a) and b)
2. The Conflicts of Interest amendments to the General Code have
staggered implementation dates. These dates are:
a) 19 July 2010, 19 October 2010 and 19 January 2010 and
19 April 2011
b) 19 April 2010, 19 July 2010, 19 October 2010 and
19 January 2010 and 19 April 2011
c) 19 October 2010 and 19 January 2010 and 19 April 2011,
19 July 2011
d) none of the above
© INSETA– Section 3 10b 79
3. By the 19th of July 2010, the Administrative FSP must:
a) avoid conflicts of interest
b) mitigate the negative effects that conflicts of interest which
could not be avoided could have on the client
c) disclose all conflicts of interest to the client
d) all of the above
4. Disclosures relating to the conflicts of interest include:
a) any ownership interest that the representative may have in the
Administrative FSP that exceeds 10% of the Administrative
FSP‘s equity
b) where the representative earns more than 30% of his/her
income from the Administrative FSP
c) measures taken by the Administrative FSP in accordance with
the Administrative FSP‘s Conflicts of Interest Management Policy
to avoid or mitigate the conflict
d) all of the above
5. An immaterial financial interest is:
a) any financial interest given to a representative or FSP that does
not exceed R300
b) any financial interest given to or received by a representative or
FSP that does not exceed R1 000 in any calendar year
c) any financial interest given to or received by a representative or
FSP that does not exceed R1 000 in any financial year
d) any financial interest given to or received by a representative or
FSP that does not exceed the aggregated amount of
R1 000 per representative of an Administrative FSP
6. An Administrative FSP or representative may only receive or offer from
or to a third party the items listed in the General Code with effect from:
a) 19 October 2010
b) 19 January 2011
c) 19 April 2011
d) none of the above
80 © INSETA– Section 3 10b
7. An Administrative FSP who is also a product provider has to:
a) comply with the conflicts of interest provisions immediately
b) comply with the conflicts of interest provisions by 19 July 2010
c) comply with the conflicts of interest provision by 19 April 2011
d) none of the above
8. An associate of an FSP includes:
a) in relation to a natural person - a child or spouse of that
person
b) in relation to a juristic person - a holding company or subsidiary,
or a subsidiary of the holding company or subsidiary
c) in relation to a closed corporation - a member of that closed
corporation
d) all of the above
9. An Administrative FSP must develop and adopt a Conflicts of Interest
Management Policy by no later than:
a) 19 July 2010
b) 19 October 2010
c) 19 January 2011
d) 19 April 2011
10. The Conflicts of Interest Management Policy must be published by the
Administrative FSP on/in its:
a) brochures and transaction forms
b) reception area so that it is visible to all visitors
c) appropriate media; and ensure that it is readily available to
members of the public
d) none of the above
© INSETA– Section 3 10b 81
Self-Assessment Answers
1. A conflict of interest is defined as any situation which an Administrative
FSP or representative may have that would:
a) influence the subjective performance of his, her or its
obligations to that client
b) prevent an FSP or representative from rendering an unbiased
and fair financial service to that client, or from acting in the
interest of that client
c) none of the above
d) a) and b)
2. The Conflicts of Interest amendments to the General Code have
staggered implementation dates. These dates are:
a) 19 July 2010, 19 October 2010 and 19 January 2010 and
19 April 2011
b) 19 April 2010, 19 July 2010, 19 October 2010 and
19 January 2010 and 19 April 2011
c) 19 October 2010 and 19 January 2010 and 19 April 2011,
19 July 2011
d) none of the above
3. By the 19th of July 2010, the Administrative FSP must:
a) avoid conflicts of interest
b) mitigate the negative effects that conflicts of interest which
could not be avoided could have on the client
c) disclose all conflicts of interest to the client
d) all of the above
4. Disclosures relating to the conflicts of interest include:
a) any ownership interest that the representative may have in the
Administrative FSP that exceeds 10% of the Administrative
FSP‘s equity
b) where the representative earns more than 30% of his/her
income from the Administrative FSP
c) measures taken by the Administrative FSP in accordance with
the Administrative FSP‘s Conflicts of Interest Management Policy
to avoid or mitigate the conflict
82 © INSETA– Section 3 10b
d) all of the above
5. An immaterial financial interest is:
a) any financial interest given to a representative or FSP that does
not exceed R300
b) any financial interest given to or received by a representative or
FSP that does not exceed R1 000 in any calendar year
c) any financial interest given to or received by a representative or
FSP that does not exceed R1 000 in any financial year
d) any financial interest given to or received by a representative or
FSP that does not exceed the aggregated amount of
R1 000 per representative of an Administrative FSP
6. An Administrative FSP or representative may only receive or offer from
or to a third party the items listed in the General Code with effect from:
a) 19 October 2010
b) 19 January 2011
c) 19 April 2011
d) none of the above
7. An Administrative FSP who is also a product provider has to:
a) comply with the conflicts of interest provisions immediately
b) comply with the conflicts of interest provisions by 19 July 2010
c) comply with the conflicts of interest provision by 19 April 2011
d) none of the above
8. An associate of an FSP includes:
a) in relation to a natural person - a child or spouse of that
person
b) in relation to a juristic person - a holding company or subsidiary,
or a subsidiary of the holding company or subsidiary
c) in relation to a closed corporation - a member of that closed
corporation
d) all of the above
9. An Administrative FSP must develop and adopt a Conflicts of Interest
Management Policy by no later than:
a) 19 July 2010
b) 19 October 2010
c) 19 January 2011
d) 19 April 2011
© INSETA– Section 3 10b 83
10. The Conflicts of Interest Management Policy must be published by the
Administrative FSP on/in its:
a) brochures and transaction forms
b) reception area so that it is visible to all visitors
c) appropriate media; and ensure that it is readily available to
members of the public
d) none of the above
© INSETA– Section 3 10b 85
Chapter
6
Manage and oversee typical daily transactions
This chapter covers the following criteria:
KNOWLEDGE CRITERIA:
Explain how different products have different turnaround times that should be adhered to.
Describe how there should be adequate controls in place to manage risk.
Explain how Category III FSP‘s are only allowed to take in one day‘s interest.
86 © INSETA– Section 3 10b
Purpose
This chapter focuses on the daily (business-as-usual) items as well as the risk
management requirements that should be in place in order to mitigate these risks.
6.1 DAILY TRANSACTIONS
6.1.1 Introduction
As Administrative FSP‘s administer their clients‘ investments in various underlying
securities, it is extremely important that these Administrative FSP‘s understand
the relevant legislation and product rules relating to each underlying investment.
Various securities have different rules relating to whether they may be redeemed
or how they may be taxed, i.e. either as income or capital. In order to avoid
prejudice to clients, Administrative FSP‘s must not only understand the nature and
rules of the financial products in which the client is invested but also have
systems, procedures and sufficient resources available to manage transactions in
respect of these financial products, and meet their specific requirements on a
daily basis.
In particular the Administrative Code requires the Administrative FSP to:
1. in relation to the financial products offered by it, ensure that it has
appropriate forms available to enable the client or the other FSP to
conduct business with it. These forms include application, instruction,
transfer, switch, withdrawal or additional investment forms;
2. ensure that –
a) within fourteen (14) days of receipt of a notice from a product
supplier, of an increase in costs, notify the client or the other FSP
(if any) in writing of such increase, who in turn must inform the
client in writing within fourteen (14) days;
b) if the Administrative FSP wishes to increase costs unrelated to
the costs referred to above, give the client or such other FSP
three (3) months prior written notice of the effective date of such
© INSETA– Section 3 10b 87
increase in costs, who in turn must notify the clients of the other
FSP in writing within fourteen (14) days;
3. where a client notifies the Administrative FSP in writing that the client has
terminated the client‘s relationship with a particular FSP (e.g. a Category
I FSP) and wishes to continue with the relationship with the
Administrative FSP through another FSP, that a notification be sent by the
Administrative FSP to the FSP whose mandate is being terminated.
4. where telephonic or electronic instructions are received by the
Administrative FSP from the client without written confirmation, provided
that appropriate controls and personal identification procedures have
been put in place:
a) ensure security of information and transactions;
b) record and store such telephonic or electronic instructions for a
period of five (5) years from the date when the instruction was
received.
5. where another FSP intends to provide a client with its own personalised
range of financial products, through the Administrative FSP, ensure that
the other FSP and the Administrative FSP first enter into a written
agreement that provides for termination of their agreement by either
party on not less than thirty (30) days written notice.
6. enter into an appropriate written agreement with each product supplier
from or to whom it buys or sells financial products on behalf of clients,
which agreement records their particular arrangements and makes
provision for termination of the agreement by either party on written
notice of not less than thirty (30) days.
7. ensure, in relation to new investments placed with an Administrative FSP,
that no interest shall be payable to a client until the expiry of the first
completed day after receipt of the funds. After the expiry of the first
completed day, interest earned shall be payable to the client.
8. ensure that no interest shall be payable to clients in relation to funds held
in bulk during the execution of a switching instruction, provided that the
Administrative FSP adheres to the time standards which are stipulated as
part of the service levels to clients. In the event of non-adherence, the
88 © INSETA– Section 3 10b
client shall be entitled to interest for the period in excess of the stipulated
time period.
9. where an Administrative FSP has made a mistake in executing an
instruction or allocating client funds, ensure that the client is placed in
the position that the client would have been in had the Administrative FSP
not made the mistake. In this event, the client shall only be entitled to
compensation to the extent that the client is placed in said position. The
Administrative FSP shall not be required to pay interest to the client in
addition to restoration.
Where an Administrative FSP effects payment of an investment to a client,
whether in whole or in part, no interest shall be payable to that client on funds
that are paid within the first complete day after the receipt of the funds from the
liquidation of the underlying investment by the Administrative FSP: Provided that
should the Administrative FSP issue a cheque for the amount received within the
abovementioned time period, the issuing of the cheque shall be deemed to be
payment and no interest liability shall accrue to the Administrative FSP in respect
of the time period between the issuing of the cheque and the actual payment of
the cheque by the drawee bank.
6.1.2 Risk management
Section 11 of the General Code requires an FSP to at all times have and
effectively employ the resources, procedures and appropriate technological
systems that can reasonably be expected to eliminate as far as reasonably
possible, the risk that clients, product suppliers and other FSP‘s or representatives
will suffer a financial loss through:
theft;
fraud;
other dishonest acts;
poor administration;
negligence;
professional misconduct; or
culpable omissions.
© INSETA– Section 3 10b 89
The General Code further requires an FSP, excluding a representative, to structure
the internal control procedures concerned as to provide reasonable assurance that
–
a) the relevant business can be conducted in an orderly and efficient
manner;
b) financial and other information used or provided by the FSP will be
reliable; and
all applicable laws are complied with.
6.1.3 Oversee and manage the compliance function
Section 17 of FAIS compels an FSP who has more than one key individual or who
has representatives, to appoint one or more compliance officers to monitor
compliance with FAIS by the FSP and the representative(s), particularly in
accordance with Subsection 17(3), and to take responsibility for the liaison with
the registrar.
The compliance officer may be a director, member, auditor, trustee, principal
officer, public officer or company secretary of the FSP, or any other person with
suitable qualifications and experience determined by the Minister by way of
government notice.
Where the appointment of the compliance officer is terminated, the compliance
officer must submit to the Registrar a statement of what the compliance officer
believes to be the reasons for the termination of his/her/its appointment.
If the compliance officer would, but for the termination, have had reason to
submit a written report of any irregularity or suspected irregularity in the conduct
of affairs by the FSP of which the compliance officer became aware in the
execution of his duties, that compliance officer must submit that report to the
Registrar even though his/her/its appointment has been terminated.
The compliance officer may only act in the capacity as compliance officer after
approval for such appointment has been granted by the Registrar. The FSP must
establish and maintain procedures to be followed by the FSP and any
representative in order to ensure compliance with FAIS. The compliance officer, or
90 © INSETA– Section 3 10b
where one has not been appointed, the FSP, must submit reports to the registrar
in the format and manner prescribed by the Registrar.
Section 35(1)(c) of FAIS empowers the Minister of Finance, after consulting the
Advisory Committee, by way of government notice, to make regulations relating
to, inter alia, the compliance arrangements, compliance monitoring systems and
the keeping of records. These regulations have been promulgated and reinforce
the proviso that the compliance officer may only act in the capacity of compliance
officer where such compliance officer has been approved by the Registrar. The
regulations stipulate that the Registrar will prescribe the format, supporting
requirements and manner of submission of the application for approval of the
compliance officer.
Further provisions contained in the regulations, are that the FSP must ensure that
the compliance function exists within the Risk Management Framework, that the
compliance function must be managed with due diligence, care and degree of
competency as may reasonably be expected from a person responsible for that
function. The compliance officer is further compelled to provide the FSP with
written progress reports in respect of the compliance monitoring and make
recommendations to the FSP relating to any aspect of the compliance monitoring
functions.
6.1.4 Requirements for approval of the compliance officer
As stated above, a person may only act as a compliance officer of an FSP where
that person has been approved by the Registrar. This approval is subject to the
compliance officer possessing personal qualities of honesty and integrity as well as
satisfying the prescribed competency requirements. In order to provide certainty,
the Registrar published Board Notice 48 of 2008 (―BN48‖), which details the
qualifications that a compliance officer must possess in order to act as a
compliance officer. Please note that these requirements are applicable to FSP‘s
who have more than one key individual or who have representative(s).
These qualifications are:
a) hold a legal or business diploma or degree at NQF level 6, and have at
least three (3) years' experience in a compliance or risk management
function in the financial services industry; or
b) have attained any specific financial services industry, or compliance-
related certificate, diploma or degree at NQF level 5 recognised by the
© INSETA– Section 3 10b 91
Registrar by notice in the Gazette as being appropriate for this purpose,
and have at least three (3) years' experience in a compliance or risk
management function in the financial services industry; or
c) be an accredited member of the Compliance Institute of South Africa, or
be a member of any other organisation recognised by the Registrar by
notice in the Gazette as being appropriate for this purpose and have at
least three (3) years' experience in the compliance or risk management
function in the financial services industry.
The Registrar also published transitional provisions that, inter alia, allow
compliance officers that have been approved by the Registrar on the date of
commencement of this Notice who do not meet these requirements to comply
with these educational requirements within three (3) years.
Board Notice 84 of 2003 (―BN84‖) prescribes the functions that a compliance
officer has to perform. These functions are:
1. to have adequate resources available to ensure proper compliance
monitoring of the FSP and any representative‘s activities, have and be
permitted direct access to and demonstrable support from the senior
management of the business and in respect of any representative;
2. to function adequately independently or objectively;
3. to function regarding the internal organisational structure of the business,
in a manner ensuring that no actual or potential conflicts of interests arise
as regards the duties and functions of other employees and, in particular,
the internal audit and control functions, and as regards the functions of
any representative;
4. to be able and enabled to keep written records of all activities undertaken
in the course of compliance monitoring, to provide the FSP concerned with
written reports on at least a quarterly basis on the course of, and
progress achieved with such monitoring duties, and to make
recommendations to the applicant as regards any aspect of the required
compliance or the monitoring functions; and
5. to liase directly with the registrar particularly as regards reporting.
It is evident from the above, that the compliance officer is required to act
independently and objectively in order to submit impartial reports to the
92 © INSETA– Section 3 10b
Registrar. In order to facilitate this requirement, BN84 prescribes that the
compliance officer must avoid all conflicts of interest regarding the execution of
their duties. Mechanisms such as the internal audit and control functions further
enable the compliance officer to avoid actual or potential conflicts of interest
regarding the duties and functions of other employees.
The compliance officer must demonstrate an understanding of the content of the
compliance report in order to be able to sign it off.
Summary
The purpose of this chapter was to focus attention on the treatment of daily
transactions.
Focus was also placed on the compliance function, the nature of the underlying
investments, notice periods, taxation, etc. Systems and resources should be made
available to deal with these underlying securities.
Self-Assessment Questions
1. An Administrative FSP must understand the respective tax and product
rules relating the underlying securities, as:
a) the Administrative FSP has to administer these investments on
behalf of clients
b) the Administrative FSP can engage in netting so as to make a
profit
c) the Administrative FSP can delay investments into the
underlying securities so that it can invest at the best possible
time
d) none of the above
2. An Administrative FSP must ensure that it has appropriate forms
available to enable:
a) the client to conduct business with it
b) the client to instruct another FSP to conduct business with the
Administrative FSP on the client‘s behalf
c) the client or another FSP to conduct business with the
Administrative FSP
© INSETA– Section 3 10b 93
d) a product supplier to instruct the Administrative FSP to remove
products from its platform
3. Where a product supplier increases its costs, the Administrative FSP
must:
a) notify the client in writing within 30 days
b) notify the client in writing within 14 days
c) notify the client in writing within 7 days
d) none of the above
4. Where an Administrative FSP wants to increase its costs, it must:
a) give the product supplier 14 days written notice of such increase
b) give the client 14 days written notice of such increase
c) give the product supplier 3 months written notice of such
increase
d) give the client 3 months written notice of such increase
5. An Administrative FSP must, where telephonic instructions are
received/accepted from a client,
a) record such telephonic or electronic instructions for a period of
three years from the date when the instruction was received
b) record such telephonic or electronic instructions for a period of
five years from the date when the instruction was received
c) record such telephonic or electronic instructions for a period of 7
years from the date when the instruction was received
d) record such telephonic or electronic instructions for a period of
10 years from the date when the instruction was received
6. An Administrative FSP must ensure that it enters into written
agreements with each product supplier from whom it buys or sells
financial products on behalf of clients, where:
a) the agreement can be terminated on 30 days written notice
b) the agreement can be terminated on 60 days written notice
c) the agreement can be terminated on 90 days written notice
d) the agreement can be terminated on 120 days written notice
7. An Administrative FSP must ensure that it has sufficient:
a) structure and internal control procedures in place to conduct
business in an orderly manner
b) computer systems to conduct business
c) service providers to conduct business
d) none of the above
94 © INSETA– Section 3 10b
8. An Administrative FSP who has more than one key individual must:
a) appoint ten representatives for each key individual
b) appoint two compliance officers for every twenty representatives
appointed
c) appoint a compliance officer
d) none of the above
9. A compliance officer can be a:
a) director, company secretary or trustee
b) auditor, member of a professional body or principal officer
c) public officer, company secretary of an FSP or principle officer
d) all of the above
10. Where a compliance officer becomes aware of an irregularity and
subsequently resigns or is dismissed, the compliance officer must:
a) report such irregularity to the Registrar as if the appointment as
compliance officer has not terminated
b) report such irregularity to the key person of the Administrative
FSP
c) report such irregularity to the key person of the Administrative
FSP and to the Registrar
d) agree to sign a confidentiality agreement with the
Administrative FSP
© INSETA– Section 3 10b 95
Self-Assessment Answers
1. An Administrative FSP must understand the respective tax and product
rules relating the underlying securities, as:
a) the Administrative FSP has to administer these investments on
behalf of clients
b) the Administrative FSP can engage in netting so as to make a
profit
c) the Administrative FSP can delay investments into the
underlying securities so that it can invest at the best possible
time
d) none of the above
2. An Administrative FSP must ensure that it has appropriate forms
available to enable:
a) the client to conduct business with it
b) the client to instruct another FSP to conduct business with the
Administrative FSP on the client‘s behalf
c) the client or another FSP to conduct business with the
Administrative FSP
d) a product supplier to instruct the Administrative FSP to remove
products from its platform
3. Where a product supplier increases its costs, the Administrative FSP
must:
a) notify the client in writing within 30 days
b) notify the client in writing within 14 days
c) notify the client in writing within 7 days
d) none of the above
4. Where an Administrative FSP wants to increase its costs, it must:
a) give the product supplier 14 days written notice of such increase
b) give the client 14 days written notice of such increase
c) give the product supplier 3 months written notice of such
increase
d) give the client 3 months written notice of such increase
96 © INSETA– Section 3 10b
5. An Administrative FSP must, where telephonic instructions are
received/accepted from a client,
a) record such telephonic or electronic instructions for a period of
three years from the date when the instruction was received
b) record such telephonic or electronic instructions for a period of
five years from the date when the instruction was received
c) record such telephonic or electronic instructions for a period of 7
years from the date when the instruction was received
d) record such telephonic or electronic instructions for a period of
10 years from the date when the instruction was received
6. An Administrative FSP must ensure that it enters into written
agreements with each product supplier from whom it buys or sells
financial products on behalf of clients, where:
a) the agreement can be terminated on 30 days written notice
b) the agreement can be terminated on 60 days written notice
c) the agreement can be terminated on 90 days written notice
d) the agreement can be terminated on 120 days written notice
7. An Administrative FSP must ensure that it has sufficient:
a) structure and internal control procedures in place to conduct
business in an orderly manner
b) computer systems to conduct business
c) service providers to conduct business
d) none of the above
8. An Administrative FSP who has more than one key individual must:
a) appoint ten representatives for each key individual
b) appoint two compliance officers for every twenty representatives
appointed
c) appoint a compliance officer
d) none of the above
9. A compliance officer can be a:
a) director, company secretary or trustee
b) auditor, member of a professional body or principal officer
c) public officer, company secretary of an FSP or principle officer
d) all of the above
© INSETA– Section 3 10b 97
10. Where a compliance officer becomes aware of an irregularity and
subsequently resigns or is dismissed, the compliance officer must:
a) report such irregularity to the Registrar as if the appointment as
compliance officer has not terminated
b) report such irregularity to the key person of the Administrative
FSP
c) report such irregularity to the key person of the Administrative
FSP and to the Registrar
d) agree to sign a confidentiality agreement with the
Administrative FSP
© INSETA– Section 3 10b 99
Chapter
7
Understand the legal environment of Category
III FSP‘s
This chapter covers the following criteria:
KNOWLEDGE CRITERIA:
Explain the liquidity requirements for Category III FSP‘s.
Explain the implications of the liquidity requirements.
Describe the fidelity cover requirements.
Explain the implications of the fidelity cover requirements.
Describe the applicable capital requirement for Category III FSP‘s.
Explain the implications of the capital requirements.
Explain why the Category III FSP is not allowed to engage in netting of transactions.
Explain how a Category III FSP must ensure that it only conducts business with another FSP
that has the appropriate categories/subcategories on its license, and that business must also
be conducted within the parameters of the client mandate.
Describe what the continual compliance with the license requirements and conditions are.
100 © INSETA– Section 3 10b
Purpose
A myriad of legal requirements pertaining to Administrative FSP‘s exist. In order to
address and to remain in compliance with these legal requirements, it is important
to grasp these principles.
These principles are not intended to be a closed list and the student should raise
any other principles relevant to this topic.
7.1 FINANCIAL SOUNDNESS
7.1.1 Introduction
Section 8 of FAIS requires the FSP to maintain the fit and proper requirements of
honesty and integrity, competency and operational ability, and financial
soundness. Financial soundness translates into two criteria, namely, Capital
Adequacy and Liquidity. Board Notice 106 of 2008 (―BN106‖) regulates these
requirements in respect of Category III FSP‘s. BN106 stipulates as general criteria
to be met by all FSP‘s that the FSP must not be an unrehabilitated insolvent or
under liquidation of provisional liquidation.
7.1.2 Category III FSP‘s
Section 9(5) of BN106 stipulates that Category III FSP‘s must maintain a specific
rand amount in reserve to meet their capital adequacy requirement. Category III
FSP‘s are required to ensure that their assets (excluding goodwill, other intangible
assets and investments in related parties) exceed the Category III FSP‘s liabilities
(excluding loans validly subordinated in favour of all other creditors) by at least
R3 million.
The Category III FSP is also required to maintain current assets that are equal to
or exceed current liabilities. This liquidity requirement is geared towards ensuring
that the Category III FSP can meet any short-term claims that may arise from
creditors. In addition to the aforesaid liquidity requirement, the Registrar expects
the Category III FSP to maintain liquid assets equal to or greater than 13/52
weeks of its annual expenditure.
© INSETA– Section 3 10b 101
7.1.3 Implications of liquidity requirements
On face value these liquidity requirements do not appear to present any
problems. However, when one considers the definition of liquid assets it does
raise the question of where the Category III FSP may invest its capital adequacy
and liquidity reserves. BN106 defines liquid assets as cash or cash equivalents
that can be liquidated within seven (7) days without realising a loss on liquidation.
Expenses and liabilities in either of these Categories of FSP‘s are probably
substantial. It becomes apparent that the ―seven (7) days without realising a loss
on liquidation‖ restriction, limits these FSP‘s investment avenues. Having these
substantial amounts of money in reserve, without being able to invest in
appropriate investments, results in substantial opportunity cost losses.
7.2 FIDELITY COVER
7.2.1 Introduction
Section 16(2)(e) of FAIS prescribes that the Registrar must issue a code of
conduct for categories of FSP‘s that, inter alia, contain provisions requiring FSP‘s
to, where appropriate, put in place or hold suitable guarantees, professional
indemnity or fidelity insurance cover, and mechanisms for adjustments of such
guarantees or cover by the Registrar.
Section 13 of the General Code requires an FSP, excluding a representative, to
and to the extent required by the Registrar, maintain in force suitable guarantees
or professional indemnity or fidelity insurance cover. Similarly, Section 8 of the
Administrative Code requires the FSP, where and to the extent required by the
Registrar, to hold and maintain suitable guarantees, professional indemnity or
fidelity insurance cover. The Administrative Code does not, however, provide any
further clarity on the minimum cover amounts and any terms and conditions to be
contained in such cover or guarantee.
On 25 March 2009 the Registrar in Board Notice 37 of 2009 (―BN37‖) prescribed
that a Category III FSP who receives or holds the client‘s financial products or
funds on the date of commencement of BN37 must, with effect from a date six (6)
months after that date, maintain in force in respect of clients:
102 © INSETA– Section 3 10b
1. suitable guarantees of a minimum amount of R5 million; or
2. suitable professional indemnity or fidelity insurance cover of a minimum
of R5 million.
This requirement was amended on 21 September 2009 by the Registrar in Board
Notice 123 of 2009 (―BN123‖). Other than in the case of a Category III FSP,
BN123 distinguishes between whether the FSP holds clients‘ financial products or
funds (money), on the one hand, and whether the FSP merely administers the
clients‘ financial products or funds (money) without receiving or holding same.
This distinction is not relevant in the case of an Administrative FSP (Category III
FSP) as the Administrative FSP is required to receive and hold (bulk) clients‘ funds
and thereafter administers the clients‘ funds according to the clients‘ instructions.
In terms of BN123 FSP‘s who existed at the time of the Registrar issuing this
Board Notice had a period of six (6) months in which to comply with the minimum
cover or guarantee requirements. New FSP‘s have a period of six (6) weeks in
which to obtain the relevant cover or guarantee.
A Category III FSP who receives or holds clients' financial products and/or assets
must maintain suitable guarantees of a minimum of R5 million, or, suitable
professional indemnity and fidelity insurance cover of not less than R5 million.
7.3 NETTING OF TRANSACTIONS
Section 1 of the Codes of Conduct of Administrative and Discretionary FSP‘s
defines ―netting‖ as the offsetting of offers to purchase and repurchase financial
products and where Administrative FSP‘s buy and sell financial products on behalf
of clients.
In essence, this is where an Administrative FSP is faced with at least two (2)
instructions from different clients, namely, an investment(s) instruction and a
disinvestment instruction(s) from the same underlying securities. These
instructions, in respect of the same underlying securities, allow the Administrative
FSP an opportunity to enter a book entry re-allocating the underlying securities
from the seller(s) to the purchaser(s), without actually disinvesting or investing
the respective investors‘ money. This practice is contrary to the provisions of
Section 10(1)(e) of the General Code. The General Code requires the
Administrative FSP to take reasonable steps to ensure that the client‘s financial
products or funds are dealt with strictly in accordance with the mandate given to
the FSP. Furthermore, should the Administrative FSP be entitled to conduct
© INSETA– Section 3 10b 103
―netting‖ the Administrative FSP will an opportunity to charge fees in respect of
the investment and disinvestment transactions, without these transactions
actually existing. For these reasons Section 3(2) of the Administrative Code
provides that the Administrative FSP may not directly or indirectly engage in
netting.
7.4 CONDUCTING BUSINESS WITH OTHER AUTHORISED FSP‘S
Section 7(3) of FAIS prescribes that an authorised FSP or representative may only
conduct financial services-related business with a person rendering financial
services, if that person has, where lawfully required, been issued with a license for
the rendering of such financial services and the conditions and restrictions of that
license authorises the rendering of those financial services, or is a representative
as contemplated in FAIS.
This means that the Category III FSP may only conduct business with FSP‘s or
representatives who have been licensed in the Category and sub-category of
financial services and financial products, respectively. A look-through principle is
applied by the Registrar in this regard. Failure by the Category III FSP to conduct
the necessary due diligence procedures will result in the Category III FSP
attracting liability for being in breach of FAIS. Practically, this means that the
Category III FSP must obtain a copy of the other FSP or representative‘s license
to ensure that they hold the necessary licenses or meet the minimum fit and
proper requirements. From a representative or a Category I FSP perspective, the
FSP or compliance officer will have to ensure that the representative or FSP, as
the case may be, meets the minimum category and sub-category criteria.
In addition to the aforesaid, Section 10(1)(e) of the General Code requires the
Administrative FSP to take reasonable steps to ensure that the client‘s financial
products or funds are dealt with strictly in accordance with the mandate given by
the client to the FSP. Compliance will conduct regular monitoring to ensure that
the relevant licenses are held. Compliance will also ensure on a sample-
monitoring basis that clients‘ mandates are being adhered to.
104 © INSETA– Section 3 10b
7.5 CONTINUAL COMPLIANCE
In terms of Section 9(1), the Registrar may, subject to FAIS, at any time, suspend
or withdraw any license (including the license of a licensee under provisional or
final suspension) if satisfied, on the basis of available facts and information, that
the licensee:
a) no longer meets the requirements contemplated in Section 8;
b) did not, when applying for the license, make a full disclosure of all
relevant information to the registrar, or furnished false or misleading
information;
has failed to comply with any other provision of this Act.
Please note that Subsection (a) requires continual satisfaction of the fit and
proper requirements stipulated in Section 8(1). This translates into a requirement
of continual compliance. In addition to the aforesaid, please note that Subsection
(c) does not specify a time. This means that the FSP could lose its license at any
stage where non-compliance with FAIS has occurred.
7.6 CIVIL REMEDIES AVAILABLE TO THE REGISTRAR
Section 33 of FAIS grants the Registrar the authority, when satisfied on the basis
of available facts and information, that a person has contravened any provision of
FAIS, or is likely to contravene or not to comply with FAIS, to apply to a court for
an order restraining such person from continuing to commit any such act or
omission or from committing it in future. The Registrar may also request the court
to order that person to take such remedial steps as the court deems necessary to
rectify the consequences of the act or omission, including consequences that
prejudiced or may prejudice any client.
The registrar may institute action in a court against any person who has
contravened or not complied with any provision of FAIS, for payment of:
© INSETA– Section 3 10b 105
a) an amount determined by the court as compensation for losses suffered
by any other person in consequence of such contravention or non-
compliance;
b) a penalty for punitive purposes in a sum determined in the discretion of
the court to a maximum of three (3) times the amount of any profit or
gain which accrued or may have accrued to the person involved, as a
direct result of any such act or omission;
c) interest; and
d) costs of suit on such scale as may be determined by the court.
Any amount recovered by the Registrar must be deposited by the Registrar
directly into a specially designated trust account, and thereupon:
a) the Registrar is, as a first charge against the trust account, entitled to
reimbursement of all expenses reasonably incurred in bringing
proceedings and in administering the distributions made to affected
persons.
b) the balance, if any (the "distributable balance"), must thereafter be
distributed by the Registrar to the affected persons.
c) any funds remaining after payment to affected persons will accrue to the
Registrar in the Registrar's official capacity.
The distributable balance must be distributed on a pro rata basis to all affected
persons who prove to the reasonable satisfaction of the Registrar that they are
affected persons: Provided that no money may be distributed to a person who has
contravened or failed to comply with any provision of this Act.
Any amount not claimed by an affected person within three (3) years from the
date of the first distribution of payments, accrues to the Registrar in the
Registrar's official capacity.
A court issuing any order under this section must order it to be published in the
Gazette and by such other appropriate public media announcement as the court
considers appropriate.
The Registrar may withdraw, abandon or compromise any civil proceedings
instituted under this section, but any agreement or compromise must be made an
order of court and the amount of any payment made in terms of any such
106 © INSETA– Section 3 10b
compromise must be published in the Gazette and by such other public media
announcement as the court considers appropriate.
Where civil proceedings have not been instituted, any agreement or settlement (if
any) may, on application to the court by the registrar after due notice to the other
party, be made an order of court and must be published in the Gazette and by
such other public media announcement as the court considers appropriate.
Summary
In this chapter we attempted to deal with the more prominent legal issues
pertaining to Administrative FSP‘s.
Under the topic ―Financial Soundness‖, we sought to distinguish the capital
adequacy requirements from the liquidity requirements, as contained in the Board
Notice.
We also provided information relating to the fidelity cover that is required to be in
place for Category III FSP‘s.
We dealt with the netting of transactions as prohibited by Administrative Code.
We briefly considered the requirements when dealing with other FSP‘s and
therefore also touched on the monitoring responsibility in respect of this action.
We discussed the need for continual compliance with FAIS and the impact that
non-compliance could have on the FSP‘s license.
Finally, we consider the civil remedies available to FSP‘s.
© INSETA– Section 3 10b 107
Self-Assessment Questions
1. Section 8 of FAIS requires an FSP to maintain:
a) sufficient risk management plans
b) sufficient financial soundness
c) systems
d) procedures
2. BN106 prescribes that the Administrative FSP must maintain:
a) capital adequacy of R3 million
b) capital adequacy of R3 million and liquidity of 13 weeks of
expenditure
c) capital adequacy of R3 million and liquidity of 13/52 weeks of
expenditure
d) capital adequacy of R3 million and liquidity of 13/52 weeks of
annual expenditure
3. The Administrative FSP must ensure, should it elect to invest the capital
adequacy reserve, that:
a) the investment matches the risk profile of the pool of investors
investing through the Administrative FSP
b) the investment is readily available within 7 days
c) the investment is readily available within 7 days and may not
realise a loss
d) the investment is readily available within 7 days and may not
realise a loss on liquidation
4. An Administrative FSP is required to have Fidelity cover or guarantees in
place in the sum of:
a) R3 000 000
b) R4 000 000
c) R5 000 000
d) R6 000 000
5. An Administrative FSP may not engage in:
a) bulking
b) netting
c) intermediary services
d) none of the above
108 © INSETA– Section 3 10b
6. Section 10(1)(e) of the General Code prescribes that the Administrative
FSP must:
a) ensure that the client is not prejudiced when dealing with client
assets
b) deal with client assets strictly in accordance with the client‘s
instructions
c) when engaging in netting, ensure that the records are audited
d) none of the above
7. Section 3(2) of the Administrative Code:
a) prescribes the conditions under which an Administrative FSP
may engage in netting
b) prescribes the due diligence procedures to be followed by the
Administrative FSP when engaging in netting
c) prohibits the Administrative FSP from engaging in netting
d) none of the above
8. An Administrative FSP need(s):
a) to satisfy the fit and proper requirements at all times
b) only satisfy the fit and proper requirements when applying for
the FSP license
c) to satisfy the fit and proper requirements at each annual review
d) to ensure that Registrar can access client documents
immediately.
9. In terms of section 33 of FAIS, the Registrar is empowered to:
a) investigate any suspected irregularity
b) demand access to all documents in the Administrative FSP‘s
possession or control
c) approach court on an urgent basis ordering the Administrative
FSP to do something or refrain from doing something
d) none of the above
10. The Registrar may request the Court to order the Administrative FSP to:
a) pay compensation to any person who suffered losses
b) pay a penalty for punitive purposes
c) pay interest
d) all of the above
© INSETA– Section 3 10b 109
Self-Assessment Answers
1. Section 8 of FAIS requires an FSP to maintain:
a) sufficient risk management plans
b) sufficient financial soundness
c) systems
d) procedures
2. BN106 prescribes that the Administrative FSP must maintain:
a) capital adequacy of R3 million
b) capital adequacy of R3 million and liquidity of 13 weeks of
expenditure
c) capital adequacy of R3 million and liquidity of 13/52 weeks of
expenditure
d) capital adequacy of R3 million and liquidity of 13/52 weeks of
annual expenditure
3. The Administrative FSP must ensure, should it elect to invest the capital
adequacy reserve, that:
a) the investment matches the risk profile of the pool of investors
investing through the Administrative FSP
b) the investment is readily available within 7 days
c) the investment is readily available within 7 days and may not
realise a loss
d) the investment is readily available within 7 days and may not
realise a loss on liquidation
4. An Administrative FSP is required to have Fidelity cover or guarantees in
place in the sum of:
a) R3 000 000
b) R4 000 000
c) R5 000 000
d) R6 000 000
5. An Administrative FSP may not engage in:
a) bulking
b) netting
c) intermediary services
d) none of the above
110 © INSETA– Section 3 10b
6. Section 10(1)(e) of the General Code prescribes that the Administrative
FSP must:
a) ensure that the client is not prejudiced when dealing with client
assets
b) deal with client assets strictly in accordance with the client‘s
instructions
c) when engaging in netting, ensure that the records are audited
d) none of the above
7. Section 3(2) of the Administrative Code:
a) prescribes the conditions under which an Administrative FSP
may engage in netting
b) prescribes the due diligence procedures to be followed by the
Administrative FSP when engaging in netting
c) prohibits the Administrative FSP from engaging in netting
d) none of the above
8. An Administrative FSP need(s):
a) to satisfy the fit and proper requirements at all times
b) only satisfy the fit and proper requirements when applying for
the FSP license
c) to satisfy the fit and proper requirements at each annual review
d) to ensure that Registrar can access client documents
immediately.
9. In terms of section 33 of FAIS, the Registrar is empowered to:
a) investigate any suspected irregularity
b) demand access to all documents in the Administrative FSP‘s
possession or control
c) approach court on an urgent basis ordering the Administrative
FSP to do something or refrain from doing something
d) none of the above
10. The Registrar may request the Court to order the Administrative FSP to:
a) pay compensation to any person who suffered losses
b) pay a penalty for punitive purposes
c) pay interest
d) all of the above
© INSETA– Section 3 10b 111
Chapter
8
Record-keeping requirements
This chapter covers the following criteria:
KNOWLEDGE CRITERIA:
Explain the period for which records must be kept.
Describe the requirements specifically applicable to telephone and/or electronic requirements.
112 © INSETA– Section 3 10b
Purpose
FAIS and its subordinate legislation have specific record-keeping requirements that
have to be satisfied by an Administrative FSP. In addition to these FAIS
requirements, other legislation such as FICA also prescribes record-keeping
requirements that FSP‘s have to satisfy.
This chapter deals with these requirements.
8.1 APPLY THE RECORD-KEEPING REQUIREMENTS
8.1.1 FAIS
Section 18 of FAIS requires an FSP, except to the extent exempted by the
Registrar, to maintain records for a minimum period of five (5) years regarding:
a) known premature cancellations of transactions or financial products by
clients of the provider;
b) complaints received together with an indication of whether or not any
such complaint has been resolved;
c) the continued compliance with the requirements referred to in Section 8
of FAIS;
d) cases of non-compliance with FAIS, and the reasons for such non-
compliance; and
e) the continued compliance by representatives with the requirements
referred to in Section 13(1) and (2) of FAIS.
Whilst it is commonly understood that the FSP must maintain records for five (5)
years, you will note that the Section 18 requirements do not relate to the
maintenance of ―advice‖ records. In addition to the FSP‘s responsibilities in terms
of Section 18, Section 9 of the General Code compels the FSP to keep a record of
advice provided to the client reflecting:
© INSETA– Section 3 10b 113
a) a brief summary of the information and material on which the advice was
based;
b) the financial product(s) that was/were considered;
c) the financial product(s) recommended with an explanation of why the
product(s) was/were selected, is or are likely to satisfy the client‘s needs
and objectives; and
provided that such record of advice is only required to be maintained where, to
the knowledge of the FSP, a transaction or contract in respect of a financial
product is concluded by or on behalf of the client, as a result of the advice
furnished to the client.
d) where the financial product(s) recommended is a replacement product –
i. the comparison of fees, charges, special terms and conditions,
exclusions of liability, waiting periods, loadings, penalties,
excesses, restrictions or circumstances in which benefits will not
be provided, between the terminated product and the
replacement product; and
ii. the reasons why the replacement product(s) was considered to be
more suitable to the client‘s needs than retaining or modifying the
terminated product.
A written copy of this record of advice must be provided to the client by the FSP
(who is not a direct marketer).
Section 3(2) of the General Code goes further to require an FSP to maintain
appropriate procedures and systems in place to:
i. record the verbal and written communications relating to the financial
service rendered to a client;
ii. store and retrieve these records and any other material documentation
relating to the client or financial service rendered to the client; and
iii. keep such client records and documentation safe from destruction.
In terms of this section the FSP must maintain these records for a period of five
(5) years after termination of the product or the rendering of the financial
services, whichever occurs last in time. FSP‘s are not required to keep these
records themselves but must ensure that these records can be produced to the
Registrar within seven (7) days of the Registrar‘s request. These records may be
114 © INSETA– Section 3 10b
kept in an electronic format which is accessible and readily reducible to written or
printed format.
Finally, Section 14 of the General Code requires an FSP that advertises a financial
service by telephone needs to do the following:
a) An electronic, voice-logged record of all communications must be
maintained. Where no financial service is rendered as a result of the
advertisement, such record need not be maintained for a period
exceeding forty-five (45) days.
b) A copy of all such records must be provided on request by the client or
the Registrar within seven (7) days of the request.
c) All the information required by Sections 4(1)(a) and (c) and 5(a) and (c)
shall not be required: Provided that the client is provided with basic
details (such as business name and telephone number or address) of the
FSP or relevant product supplier, and of their relevant compliance
departments: Provided further that, if the promotion results in the
rendering of a financial service, the full details required by those sections
are provided to the client in writing within thirty (30) days of the relevant
interaction with the client.
One of the functions of the compliance officer is to monitor the FSP‘s compliance
with the requirements to maintain records.
8.1.2 FICA
In conjunction with the sections of FAIS and Subordinate Legislation discussed
above, Section 22 of the Financial Intelligence Centre Act of 2001, (Act 38 of
2001) (―FICA‖) requires an accountable institution to maintain records of the
identity of clients for a period of five (5) years after the date of the establishment
or termination of the business relationship or last transaction, whichever occurs
last in time. The records to be kept in terms of FICA are:
a) the identity of the client;
b) if the client is acting on behalf of another person —
i. the identity of the person on whose behalf the client is acting; and
ii. the client‘s authority to act on behalf of that other person;
c) if another person is acting on behalf of the client —
© INSETA– Section 3 10b 115
i. the identity of that other person; and
ii. that other person‘s authority to act on behalf of the client;
d) the manner in which the identity of the persons referred to in paragraphs
(a), (b) and (c) was established;
e) the nature of that business relationship or transaction;
f) in the case of a transaction—
i. the amount involved; and
ii. the parties to that transaction;
g) all accounts that are involved in—
i. transactions concluded by that accountable institution in the course
of that business relationship; and
ii. that single transaction;
h) the name of the person who obtained the information referred to in
paragraphs (a), (b) and (c) on behalf of the accountable institution; and
i) any document or copy of a document obtained by the accountable
institution in order to verify a person‘s identity in terms of Section 21(1)
or (2) of FICA.
Section 24 of FICA allows an accountable institution to outsource its responsibility
to keep records to a third party, provided that the accountable institution has free
and easy access to these records. Should any such third party fail to properly
comply with the record-keeping requirements of Section 22, the accountable
institution shall be liable for that failure.
Where an accountable institution outsources its responsibility to keep records to a
third party, the accountable institution must provide the Financial Intelligence
Centre with the prescribed particulars regarding that third party.
The lists of accountable institutions are:
1. An attorney, as defined in the Attorneys Act, 1979 (Act 53 of 1979);
116 © INSETA– Section 3 10b
2. A board of executors or a trust company or any other person that invests,
keeps in safe custody, controls or administers trust property within the
meaning of the Trust Property Control Act, 1988 (Act 57 of 1988);
3. An estate agent as defined in the Estate Agents Act, 1976 (Act 112 of
1976);
4. A financial instrument trader as defined in the Financial Markets Control
Act, 1989 (Act 55 of 1989);
5. A management company registered in terms of the Unit Trusts Control
Act, 1981 (Act 54 of 1981);
6. A person who carries on the "business of a bank" as defined in the Banks
Act, 1990 (Act 94 of 1990);
7. A mutual bank as defined in the Mutual Banks Act, 1993 (Act 124 of
1993);
8. A person who carries on a "long-term insurance business" as defined in
the Long-Term Insurance Act, 1998 (Act 52 of 1998), including an
insurance broker and an agent of an insurer;
9. A person who carries on a business in respect of which a gambling license
is required to be issued by a provincial licensing authority;
10. A person who carries on the business of dealing in foreign exchange;
11. A person who carries on the business of lending money against the
security of securities;
12. A person who carries on the business of rendering investment advice or
investment broking services, including a public accountant as defined in
the Public Accountants and Auditors Act, 1991 (Act 80 of 1991), who
carries on such a business;
13. A person who issues, sells or redeems travellers‘ cheques, money orders
or similar instruments;
14. The Postbank referred to in Section 51 of the Postal Services Act, 1998
(Act 124 of 1998);
© INSETA– Section 3 10b 117
15. A member of a stock exchange licensed under the Stock Exchanges
Control Act, 1985 (Act 1 of 1985);
16. The Ithala Development Finance Corporation Limited;
17. A person who has been approved or who falls within a category of
persons approved by the Registrar of Stock Exchanges in terms of
Section 4 (1) (a) of the Stock Exchanges Control Act, 1985 (Act 1 of
1985);
18. A person who has been approved or who falls within a category of
persons approved by the Registrar of Financial Markets in terms of
Section 5 (1) (a) of the Financial Markets Control Act, 1989 (Act 55 of
1989);
19. A person who carries on the business of a money remitter.
Where the FSP is also a registered long-term insurer in terms of the Long-term
Insurance Act of 1998, (Act 52 of 1998), an additional requirement has to be
satisfied. In terms of Directive 148.A.i (LT) of 2007 a long-term insurer who
outsources its record-keeping responsibility to a third party must conduct regular
compliance reviews to ensure that the second accountable institutions are
properly keeping the prescribed records.
These records may be kept in electronic format. The industry standard is to store
and to retrieve these records electronically. The FSB, in its FAIS Newsletter
Volume 6 of June 2008, recommends that where hardcopy client records and files
are kept, that these files and records are to be backed up electronically. Section
25 of FICA goes further to encourage the keeping of records in electronic format,
as a certified extract of these electronic records are rendered admissible in terms
of this section as evidence in a court of law.
118 © INSETA– Section 3 10b
8.2 SECURITY, CONFIDENTIALITY AND ACCESS TO RECORDS
Section 3(3) of the General Code compels the FSP to keep all records relating to
the client, a product supplier in relation to the client or a supplier, confidential,
unless the client has provided the FSP with a written consent to disclose such
information. The Protection of Personal Information Bill contains substantially
more onerous requirements that have to be satisfied in this regard. As this Bill is
still to be promulgated we shall refrain from dealing with these provisions at this
stage.
8.3 ADDITIONAL RECORD-KEEPING REQUIREMENTS
Section 7 of the Administrative Code prescribes further record-keeping
responsibilities for Administrative FSP‘s. In terms of these additional
requirements, an Administrative FSP must:
1. specifically record the financial products owned by each client, clearly
maintaining the linkage between the client and each of the client‘s
financial product(s);
2. where the client is a pension fund as defined in the Pension Funds Act,
1956 (Act No. 24 of 1956), or another financial institution whose
members, policyholders or participants have the right to select the
financial products allocated to their accounts, maintain the link between
those members, policyholders or participants and the financial product(s)
selected by them if the Administrative FSP has undertaken to provide
such record-keeping service to the client, provided that the foregoing is
not to be construed so as to mean that ownership of such a financial
product vests in such a member, policyholder or participant, as ownership
remains with the said pension fund or other financial institution.
It is therefore evident that the Administrative FSP must at all times be able to
identify the financial products belonging to each client and be in a position to
exercise a type of look-through approach, where the Administrative FSP deals
with institutional clients such as pension funds or long-term insurance companies.
Please note the specific caveat, i.e. that whilst the underlying assets may be
identified as belonging to a specific client, ownership in those assets do not vest in
the client but in the institution with which the client invests.
© INSETA– Section 3 10b 119
Summary
In this chapter we dealt with the record-keeping requirements applicable to FSP‘s.
We started by looking at the record-keeping requirements specified in FAIS.
We then considered the additional requirements stipulated in the General Code.
We then considered the maintenance of confidentiality and access to records.
Finally, we considered the requirements stipulated in FICA.
Self-Assessment Questions
1. Section 18 of FAIS requires an FSP to retain records for a period of:
a) three years
b) five years
c) seven years
d) none of the above
2. The records that must be kept by FSP‘s relate to:
a) known premature cancellations or transactions or financial
products clients of the FSP
b) complaints received together with an indication of whether or
not any such complaint has been resolved
c) the continued compliance with the fit and proper requirements
d) all of the above
3. Section 9 of the General Code requires an FSP to:
a) maintain records of advice for a period of 3 years
b) maintain records of advice for a period of 5 years
c) maintain records of advice for a period of 7 years
d) none of the above
4. An Administrative FSP must maintain systems and procedures in place
to:
a) record all verbal and written communications relating to the
client‘s financial product
b) record all verbal and written communications relating to the
client‘s communications with the FSP
120 © INSETA– Section 3 10b
c) record all verbal and written communications relating to the
financial service rendered to the client
d) none of the above
5. An Administrative FSP who advertises its services by telephone must
maintain an electronic, voice-logged record of all communications for a
period of:
a) 45 days
b) 60 days
c) 90 days
d) none of the above
6. Where an Administrative FSP advertises its services by telephone, but
does not secure any business with a particular client, that Administrative
FSP must maintain an electronic or voice-logged record of all
communications for a period of:
a) 45 days
b) 60 days
c) 120 days
d) none of the above
7. FICA requires the Administrative FSP to maintain records for a period of:
a) 5 years after expiry of the 5 year period referred to in FAIS
b) 5 years running concurrently with the 5 year period referred to
in FAIS
c) 5 years after inception of the financial product
d) none of the above
8. Accountable institutions are:
a) grocery stores
b) stokvels
c) management companies of Collective Investment Schemes
d) schools
9. Directive 148.A.i (LT) allows a Long-term Insurance Company to:
a) hold records for a shorter period of time
b) rely on another accountable institution‘s FICA
c) rely on another accountable institution‘s FICA provided that
regular compliance reviews are conducted
d) none of the above
© INSETA– Section 3 10b 121
10. Where the client of the Administrative FSP is a pension fund the
Administrative FSP must also ensure that the:
a) underlying assets are allocated to each member even though it
is the Fund‘s assets
b) pension fund holds the FICA documents for an additional period
of 3 years
c) Administrative FSP reports to the Registrar of Pension Funds on
its record-keeping activities during the previous year
d) none of the above
122 © INSETA– Section 3 10b
Self-Assessment Answers
1. Section 18 of FAIS requires an FSP to retain records for a period of:
a) three years
b) five years
c) seven years
d) none of the above
2. The records that must be kept by FSP‘s relate to:
a) known premature cancellations or transactions or financial
products clients of the FSP
b) complaints received together with an indication of whether or
not any such complaint has been resolved
c) the continued compliance with the fit and proper requirements
d) all of the above
3. Section 9 of the General Code requires an FSP to:
a) maintain records of advice for a period of 3 years
b) maintain records of advice for a period of 5 years
c) maintain records of advice for a period of 7 years
d) none of the above
4. An Administrative FSP must maintain systems and procedures in place
to:
a) record all verbal and written communications relating to the
client‘s financial product
b) record all verbal and written communications relating to the
client‘s communications with the FSP
c) record all verbal and written communications relating to the
financial service rendered to the client
d) none of the above
5. An Administrative FSP who advertises its services by telephone must
maintain an electronic, voice-logged record of all communications for a
period of:
a) 45 days
b) 60 days
c) 90 days
d) none of the above
© INSETA– Section 3 10b 123
6. Where an Administrative FSP advertises its services by telephone, but
does not secure any business with a particular client, that Administrative
FSP must maintain an electronic or voice-logged record of all
communications for a period of:
a) 45 days
b) 60 days
c) 120 days
d) none of the above
7. FICA requires the Administrative FSP to maintain records for a period of:
a) 5 years after expiry of the 5 year period referred to in FAIS
b) 5 years running concurrently with the 5 year period referred to
in FAIS
c) 5 years after inception of the financial product
d) none of the above
8. Accountable institutions are:
a) grocery stores
b) stokvels
c) management companies of Collective Investment Schemes
d) schools
9. Directive 148.A.i (LT) allows a Long-term Insurance Company to:
a) hold records for a shorter period of time
b) rely on another accountable institution‘s FICA
c) rely on another accountable institution‘s FICA provided that
regular compliance reviews are conducted
d) none of the above
10. Where the client of the Administrative FSP is a pension fund the
Administrative FSP must also ensure that the:
a) underlying assets are allocated to each member even though it
is the Fund‘s assets
b) pension fund holds the FICA documents for an additional period
of 3 years
c) Administrative FSP reports to the Registrar of Pension Funds on
its record-keeping activities during the previous year
d) none of the above
© INSETA– Section 3 10b 125
Chapter
9
Reporting to clients
This chapter covers the following criteria:
KNOWLEDGE CRITERIA:
Explain why clients must receive written reports at quarterly intervals that provide them with
investment and related information.
126 © INSETA– Section 3 10b
Purpose
In this chapter we briefly look at the reporting obligations of an Administrative FSP.
FAIS and its subordinate legislation have specific reporting requirements that have
to be satisfied by Administrative FSP‘s. These requirements encompas reporting to
clients and reporting to the Registrar.
In this chapter we will only deal with client reporting.
9.1 REQUIREMENTS WHEN REPORTING TO CLIENTS
Section 10.1 of the Administrative Code requires the Administrative FSP to furnish
the client with a written report that complies with Subsection 10.2 of the
Administrative Code. This written report must be provided:
a) on request; and
b) at regular intervals, which may not exceed three (3) months at a time,
unless the client consents in writing not to receive the report because the
other FSP or client, as the case may be, is able to access the information
continuously, as made available by the Administrative FSP, through other
means such as the Internet or a facsimile service: Provided that
Administrative FSP may only furnish such a report on behalf of a client to
another FSP, on the written instruction of that client.
Section 10.2 requires the Administrative FSP to furnish the client or another FSP
on behalf of a client with a written report containing such information as is
reasonably necessary to enable the other FSP or client to:
a) produce a set of financial statements;
b) determine the composition of the financial products comprising the
investment and the changes therein over the period reported on; and
c) determine the market value of the financial products comprising the
investment and the changes therein over the period reported on.
© INSETA– Section 3 10b 127
In addition to the above, Section 10(3) requires an Administrative FSP, on request
by a client, to furnish the client with detailed information regarding:
a) all monies received by the Administrative FSP, from the other FSP or
client, as the case may be;
b) the financial products purchased with the monies referred to in paragraph
(a) and the price at and date on which purchased;
c) the financial products repurchased on the instructions of the other FSP or
client, as the case may be, in order to disinvest from a particular financial
product;
d) the payment of the proceeds to the other FSP or the client or the
Administrative FSP, as the case may be;
e) the financial products purchased with the proceeds and the price at and
date on which purchased;
f) the price at and date on which financial products referred to in paragraph
(e) were repurchased; and
g) all the financial products held on behalf of the client and the current
market value thereof, as at the date of the report.
Summary
The General Code prescribes that FSP‘s must provide their clients with written
reports.
These reports must be provided on a quarterly basis.
The content of the written reports is prescribed in the General Code and was
detailed in this chapter.
128 © INSETA– Section 3 10b
Self-Assessment Questions
1. An Administrative FSP must provide the client with:
a) reports on request
b) written reports on request
c) reports within 7 days of the their request
d) none of the above
2. The Administrative FSP must provide the client with written reports at
regular intervals, not exceeding:
a) 2 months
b) 4 months
c) 6 months
d) none of the above
3. The written reports provided by the Administrative FSP must have
sufficient information to enable the client to:
a) calculate the income tax deducted from the financial product by
the product supplier
b) calculate the capital gains tax deducted from the financial
product by the product supplier
c) produce a set of financial statements
d) none of the above
4. The Administrative FSP must also, on request of the client, provide the
client with information relating to:
a) all monies received by the Administrative FSP from the other
FSP or the client
b) the financial products repurchased on the instructions of the
other FSP or client
c) the payment of the proceeds to the other FSP or the client
d) all of the above
5. An Administrative FSP must provide the client with a:
a) summary of the taxes for which the client will be liable for,
should he or she elect to disinvest today
b) all the financial products held on behalf of the client and the
projected market value as at a specific date
c) all the financial products held on behalf of the client and the
current market value thereof
d) none of the above
© INSETA– Section 3 10b 129
Self-Assessment Answers
1. An Administrative FSP must provide the client with:
a) reports on request
b) written reports on request
c) reports within 7 days of the their request
d) none of the above
2. The Administrative FSP must provide the client with written reports at
regular intervals, not exceeding:
a) 2 months
b) 4 months
c) 6 months
d) none of the above
3. The written reports provided by the Administrative FSP must have
sufficient information to enable the client to:
a) calculate the income tax deducted from the financial product by
the product supplier
b) calculate the capital gains tax deducted from the financial
product by the product supplier
c) produce a set of financial statements
d) none of the above
4. The Administrative FSP must also, on request of the client, provide the
client with information relating to:
a) all monies received by the Administrative FSP from the other
FSP or the client
b) the financial products repurchased on the instructions of the
other FSP or client
c) the payment of the proceeds to the other FSP or the client
d) all of the above
5. An Administrative FSP must provide the client with a:
a) summary of the taxes for which the client will be liable for,
should he or she elect to disinvest today
b) all the financial products held on behalf of the client and the
projected market value as at a specific date
c) all the financial products held on behalf of the client and the
current market value thereof
d) none of the above
© INSETA– Section 3 10b 131
Chapter
10
Miscellaneous
This chapter covers the following criteria:
KNOWLEDGE CRITERIA:
Explain how intermediaries must be licensed before they can do business.
Explain how rebates work.
Explain all the related disclosures as they apply to rebates.
132 © INSETA– Section 3 10b
Purpose
In this chapter we consider the licensing requirements for intermediaries so that
Administrative FSP‘s can properly assess whether intermediaries hold the licenses in
the appropriate categories and/or subcategories prior to conducting business.
We also briefly consider the rebate system and the relevant disclosures that an
Administrative FSP has to make in this regard.
10.1 LICENSING REQUIREMENTS FOR INTERMEDIARIES
As stated above, Section 7 of FAIS stipulates that no person may act or offer to
act as a financial services provider unless licensed thereto by the Registrar.
Section 7(3) goes further to prohibit an FSP from conducting business with a
person who has not been issued by the Registrar with a license relevant to the
category of financial services being offered. Subsection (3) reads as follows:
―(3) An authorized financial services provider or representative may only
conduct financial services related business with a person rendering financial
services if that person has, where lawfully required, been issued with a license
for the rendering of such financial services and the conditions and restrictions of
that license authorizes the rendering of those financial services, or is a
representative as contemplated in this Act.‖
Subsequent sections (e.g. Section 8) go further to deal with the qualifying
criteria that have to be satisfied in order to become an FSP or representative
and further provide for the Registrar to be able to issue subordinate legislation
to further regulate the rendering of financial services. Prior to the promulgation
of FAIS very little regulation existed.
Section 8 of FAIS stipulates that an applicant may apply to be approved as an
authorised FSP in the manner and form prescribed by the Registrar and must
provide the Registrar with all supporting information in order to satisfy the
Registrar that the applicant is fit and proper to be approved as a key individual of
an FSP. Fit and proper requirements are then distilled into the following:
© INSETA– Section 3 10b 133
Personal character qualities of honesty and integrity
Competence and operational ability of the applicant to fulfil the
responsibilities imposed by FAIS; and
Financial soundness.
FAIS goes further to require that the key individuals of FSP‘s who are
partnerships, trusts, corporate or unincorporated bodies must also satisfy the
Registrar that they possess:
personal character qualities of honesty and integrity; and
competence and operational ability.
Several Board Notices were then published by the Registrar prescribing the
Registrar‘s requirements in order to consider an applicant fit and proper. BN106 of
2008 prescribes the required qualifications, experience and operational ability that
these FSP‘s must possess in order to conduct business in a particular category and
sub-category.
Essentially, the Administrative FSP may only conduct business with a person
rendering financial services where that person is an authorised FSP or
representative of an authorised FSP and where either of these two persons
possess the relevant authorisation by the Registrar to render financial services in
the particular category and/or sub-category. Failure by the Administrative FSP to
ensure that these persons are appropriately licensed will result in the
Administrative FSP incurring liability.
10.2 REBATES
The concept of a rebate is dealt with in both the General Code and the Code for
Discretionary FSP‘s. The General Code defines a rebate as:
―‘rebate‘ means a discount on the administration, management or any other fee
that is passed through to the client, whether by reduced fees, the purchase of
additional investments or direct payment…‖
In the Discretionary Code reference is made to rebates provided by product
suppliers or Administrative FSP‘s for the placing of business by the Discretionary
134 © INSETA– Section 3 10b
FSP with these entities. These extracts provide us with sufficient information to
ascertain what is meant by rebates.
A rebate is a reduction in fees which is effected through the levying of a standard
fee with a concomitant repayment of a percentage or portion of the initial fee back
to the client, i.e. all clients are charged the same fee and some of these clients
(depending on the nature of their relationship with the Administrative FSP or
product supplier) will receive a repayment of a portion of the fee from the
Administrative FSP or product supplier.
This practice is particularly prevalent in the Collective Investment Scheme
environment where collective investment schemes are required to charge all
participatory interest (unit) holders the same administration fee. In order to
award certain clients a reduction in fees, a rebate is effected in favour of selected
clients, resulting in either a repayment of the reduction (rand amount) or the
purchase of further participatory interests. The administration relating to these
rebates are sometimes extremely intensive.
The General Code further requires FSP‘s to disclose any rebate arrangements on
at least an annual basis. Where a rebate arrangement is initially disclosed in
percentage terms, an example using actual monetary amounts must be given and
disclosure in specific monetary terms must be made at the earliest reasonable
opportunity thereafter. The General Code further requires that the term "rebate"
must be used in the disclosure, to describe any rebate arrangement complying
with the definition of ―rebate‖, and the disclosure must include an explanation of
the arrangement in line with this definition.
Summary
In this chapter we briefly considered the licensing requirements for
intermediaries.
We also considered the rebates system and the disclosures that an Administrative
FSP has to make in this regard.
© INSETA– Section 3 10b 135
Self-Assessment Questions
1. Section 7(3) of FAIS prescribes that the Administrative FSP may not:
a) conduct financial services related business with another person
if that other person is a Category I FSP
b) conduct financial services related business with another person
if that other person is a Category II or IIA FSP
c) conduct financial services related business with another person
if that other person is licensed in the category or sub-category
to conduct such financial services related business
d) all of the above
2. An Administrative FSP may only conduct financial services related
business with another person where the other person is:
a) an FSP
b) a representative
c) a representative and an FSP
d) a FSP or a representative of an FSP
3. Rebate refers to:
a) a discount on the administration, management or any other fee
that is passed through to the client (whether by reduced fees,
the purchase of additional investments or a direct payment)
b) a discount on the administration or management fee that is
passed through by the product supplier to the Administrative
FSP for placing bulk business by the Administrative FSP with the
product supplier
c) a discount on the service fees provided by a manager to an
Administrative FSP
d) none of the above
4. A rebate may be effected through:
a) the physical repayment of the fee to the client
b) the purchase of additional underlying investments for the benefit
of the client
c) the reduction in fees charged against the financial product
d) all of the above
136 © INSETA– Section 3 10b
5. Rebate arrangements must be disclosed by the Administrative FSP on:
a) an annual basis
b) within 6 months of the financial year-end of the Administrative
FSP
c) within 3 months of the financial year-end of the Administrative
FSP
d) within 9 months of the financial year-end of the Administrative
FSP
6. Where an Administrative FSP discloses a rebate in percentage, the
Administrative FSP must:
a) provide the client with a statement of the rand amount at the
end of the financial year-end
b) provide the client with a statement of the rand amount at the
end of each 6 month period
c) provide the client with an example sounding in money and at
the earliest reasonable opportunity provide the client with the
specific monetary terms
d) none of the above
© INSETA– Section 3 10b 137
Self-Assessment Answers
1. Section 7(3) of FAIS prescribes that the Administrative FSP may not:
a) conduct financial services related business with another person
if that other person is a Category I FSP
b) conduct financial services related business with another person
if that other person is a Category II or IIA FSP
c) conduct financial services related business with another person
if that other person is licensed in the category or sub-category
to conduct such financial services related business
d) all of the above
2. An Administrative FSP may only conduct financial services related
business with another person where the other person is:
a) an FSP
b) a representative
c) a representative and an FSP
d) a FSP or a representative of an FSP
3. Rebate refers to:
a) a discount on the administration, management or any other fee
that is passed through to the client (whether by reduced fees,
the purchase of additional investments or a direct payment)
b) a discount on the administration or management fee that is
passed through by the product supplier to the Administrative
FSP for placing bulk business by the Administrative FSP with the
product supplier
c) a discount on the service fees provided by a manager to an
Administrative FSP
d) none of the above
4. A rebate may be effected through:
a) the physical repayment of the fee to the client
b) the purchase of additional underlying investments for the benefit
of the client
c) the reduction in fees charged against the financial product
d) all of the above
138 © INSETA– Section 3 10b
5. Rebate arrangements must be disclosed by the Administrative FSP on:
a) an annual basis
b) within 6 months of the financial year-end of the Administrative
FSP
c) within 3 months of the financial year-end of the Administrative
FSP
d) within 9 months of the financial year-end of the Administrative
FSP
6. Where an Administrative FSP discloses a rebate in percentage, the
Administrative FSP must:
a) provide the client with a statement of the rand amount at the
end of the financial year-end
b) provide the client with a statement of the rand amount at the
end of each 6 month period
c) provide the client with an example sounding in money and at
the earliest reasonable opportunity provide the client with the
specific monetary terms
d) none of the above