The implications of the FAIS Act

By JMR Software
Johannesburg, 29 May 2003

The new Financial Advisers and Intermediary Services (FAIS) Act, passed towards the end of 2002, is a major advance in the regulation of SA`s financial planning industry. The Financial Planning Institute (FPI), SA`s largest independent body of financial advisers, has welcomed it, saying it hopes the Act will remove unscrupulous advisers who have given the industry a bad name in the past, and will lead to a permanently high standard of advice for consumers.

In this question and answer session, JMR Software, a specialist in compliance applications, asks Sakkie van der Merwe, FPI Executive Director, some key questions on the implications of the Act.

What does the Act mean for advisers?

The Act will require financial advisers to apply for a licence to operate, in an attempt to ensure that only people who are "fit and proper" are allowed to practice. The Act also prescribes minimum standards, and if breached, the adviser could be sanctioned and even lose his licence. A registrar of financial service providers needs to be appointed to oversee the latter.

By when will advisers need to apply for a licence?

The Financial Services Board (FSB) first needs to publish the application form, both for advisers and also for financial service providers. Licensing will be subject to conditions, which have not yet been properly determined. An Advisory Committee has been appointed and independent regulatory bodies will assist the FSB in handling the applications for licences for advisers as well as financial service providers. The Advisory Committee will consult widely throughout the industry in order to come up with sub-legislation and regulations in this regard.

Will any advisers be disqualified?

As a result of the new regulations, about 20% of SA`s approximately 30 000 advisers will be disqualified. This has angered some advisers, but it`s not necessarily a bad thing if they`re not prepared to adhere to certain standards.

What are the key implications of the FAIS Act for intermediaries?

1. Obtaining a licence by fulfilling "fit and proper`` requirements.

The requirements are described in terms of honesty and integrity, necessary qualifications, competency, operational ability and financial soundness.

Where a financial services provider (FSP) applies for a licence, all key individuals managing its activities must comply with the requirements.

The FSP must ensure the competencies of its representatives with an updated register of these individual competencies.

The FSP accepts responsibility for its representative`s doings within the scope of a service contract.

Not all licences will be identical, as the Registrar may issue a licence subject to conditions or restrictions.

2. Appoint a compliance officer.

The FAIS says any FSP with more than one key individual, or one or more representatives, must appoint a compliance officer. A director, member, auditor or one of two other office bearers of the FSP may act in this capacity.

The Registrar must approve the compliance of the officer who must be considered "fit and proper" and possess certain qualifications and experience. He must submit various reports to the Registrar.

The FSP must also prove that it has set up and is maintaining compliance procedures. The Act requires that the compliance function is independent and the officer is not in a position where there may be a conflict of interest. This is, however, difficult when the officer is employed by the company.

A sole operator is still required to set up a compliance procedure and submit the required reports to the Registrar.

3. Keep records for at least five years.

FAIS requires FSPs to keep a wide range of records for a minimum of five years. This ranges from known premature cancellations to the basis on which any advice was given. It also includes advice given to people who never actually became clients.

The FSP may outsource the actual record keeping, but must present them to the Registrar within seven days of request.

4. Institute monthly accounting records and annual financial statements.

A FSP must keep monthly updated accounting records and submit audited financial statements to the Registrar within six months after year-end.

5. Institute a process to attend to complaints.

A FSP must ensure that it has a thorough process for attending to complaints, including staff training on the process, and that detailed records are kept.

How will offenders be punished?

An Ombudsman will deal with these complaints.

Failure to adhere to the FAIS Act could see violators fined up to R1 million, and/or 10 years imprisonment for the CEO.

What does the Act mean for consumers?

The FAIS Act is designed not only to raise the standard of the industry, but also to protect consumers from unprincipled advisers. The definitions of "advice" and "intermediary service" are very wide, and this provides a great deal of consumer protection.

Advice includes any recommendation, guidance or proposal of a financial nature, to any client or group of clients, regarding most types of transactions around financial products. Even advice given that has not led to a transaction is included.

Intermediary service includes any other act other than giving advice that results in a transaction between client and a financial product and/ or product supplier.

The overall legislation will have the following implications for consumers:

1. A higher overall standard of financial advice as advisers need to be licensed.

2. More protection for consumers. The Act makes it hard for intermediaries to sell unsuitable products, and consumers will have recourse if any advice is inappropriate.

3. Consumers will have greater assurance that they`re dealing with professional advisers who are regulated. Consumers should ensure advisers are licensed before accepting advice.

Will the Act protect consumers fully?

No. Despite these protections consumers should still ensure they ask the right questions and don`t rely too heavily on the fact that advisers are licensed, as the standards required for a licence are not particularly high.

Consumers should make sure they`re aware of how their rights are protected by the Act, and how they can take recourse against advisers if necessary.

How will the Act affect the FPI?

As the leading independent professional body of financial planners in SA, the FPI already has more stringent self-regulation in place than FAIS requires, and thus, there is unlikely to be any fallout from the FPI`s current members. The FPI is 22 years old with a membership of 7 500 which it plans to grow to substantially in the years to come. The FPI will help ensure that all its members gain a licence in terms of the Act.

The FPI believes in raising the standard of financial advice given in the industry and therefore strongly supports the FAIS Act, as it encourages the honesty, integrity, education and gaining of experience of advisers. Continued education not taken up in the draft of "fit and proper" rules, is yet another standard set by the FPI for its members. The FPI believes it will continue to set the standard as an independent body of advisers, seeking to raise the level of service given to consumers.

What changes must companies make in order to comply with the act and will it be expensive?

Office automation is advised to ensure proper records are kept in an orderly and efficient manner, as required by the Act.

Each and every financial service provider will have to appoint a responsible compliance officer to monitor and report and the company`s compliance, or lack of, with the Act. The financial service provider will need to ensure that all the advisers employed by him meet the requirements of "fit and proper" on an ongoing basis. Also, procedures need to be maintained that will ensure that the company complies with the requirements of the Act.

In conclusion?

The FPI believes the FAIS Act is a major step forward for the consolidation and continued growth of the financial planning industry in SA. The FPI hopes it will spur advisers on to greater professionalism, and in turn provide greater consumer satisfaction.


Editorial contacts

Leon Theron
Motswedi JMR
(011) 484 5070