FAIS: Fit and Proper Requirements- the developments and the implications
By J-J Pan and Masego Mosetlhi
The financial service industry is prone to periods of instability and the past year has seen a period of extreme instability in the financial service industry around the world. The effects have been far-reaching and expensive for financial services providers in terms of losses suffered. In view of this and a need to bolster consumer confidence, regulators around the world have begun to implement stricter regulations in order to stabilise the industry and spread a much needed degree of assurance. This trend has not escaped South Africa.
The introduction of the Financial and Intermediary Services Act, 2002 (“FAIS”) codified the then existing legislation that regulated the conduct of financial service providers (“FSP”) in South Africa. The primary objective of legislation such as FAIS is to achieve a high degree of economic efficiency and consumer protection by a financial service provider. As a result of the introduction of FAIS, individuals in key positions are now held accountable for their actions including providing incorrect information or for their lack of training and experience. In 2006, the Advisory Committee of Financial Services Provider identified the need to review the fit and proper requirements set out in FAIS. Although there have been changes to the requirements (honesty and integrity, supervision, operational ability and financial soundness), requirements for the determination for qualifying criteria, qualifications and education requirements have been added.
Section 8 of FAIS is applicable to FSPs (sole proprietors or juristic entities, who furnish advice and / or render intermediary services) and key individuals, who are responsible for managing or overseeing the activities of an entity, trust or partnership in as far as they relate to the rendering of any financial service. According to section 8 of FAIS, authorisation of financial service providers or categories of providers is subject to the satisfaction of the Registrar of FSPs that the applicant complies with the fit and proper requirements. It is important to note that such fit and proper standards apply to individuals of the FSP and the FSPs themselves. Representatives, who are employed by authorised FSPs and render a financial service for and on behalf of such FSP, must comply with section 13 of FAIS which sets out the qualifications of representatives and the duties of FSPs.
Prior to the new requirements coming into force, financial service providers’, key individuals’ and representatives’ minimum level of competence was examined on a once off basis and not on a continuous basis. However, in terms of Board Notice 106 of 2008 (“Board Notice”), an FSP (who is a sole proprietor), a key individual and / or representative must meet the continuous professional development requirements. Accordingly, they must obtain a number of prescribed credits (fifteen to sixty notional hours) over a three year period. Activities such as formal studies, workshops, conferences and seminars may be used to make up such credits. It is however very important to ensure that any continuous professional development activity undertaken is approved by the Financial Services Board prior to it being undertaken. In this regard the three year cycle will start upon completion of the highest level of regulatory examinations applicable to the relevant individual. Regulatory examinations have also been introduced in terms of the Board Notice. These examinations consist of two levels:
||Level 1 is a legislative examination addressing the legal obligations that are imposed on a sole proprietor, key individual and representative. This includes FAIS, Code of Conduct and Anti-Money laundering requirements.
|| Level 2 addresses product specific knowledge.
The purpose of the examination requirement is to ensure that any person who acts as a key individual or representative is able to provide the relevant and necessary information to consumers.
As from 1 January 2010 the requirement for educational credits with regards to qualifications has been increased for new entrants. All sole proprietors and key individuals must meet the qualification requirements when they apply to the Registrar for authorisation as an authorised FSP or approval as a key individual. Qualification requirements differ according to the category in which the FSP falls. Category I refers to all other persons other than persons referred to in Categories II, IIA, III and IV. Category II refers to persons who are authorised as discretionary FSPs whereas persons who are authorised as hedge fund FSPs fall under Category IIA. Category III refers to persons who are authorised as administrative FSPs and persons who require licences as Assistance Business FSP falls under Category IV.
The entry level qualification for a FSP (who is a sole proprietor) and key individuals in respect of Category I and IV is Matric and a fully recognised qualification as determined by the Registrar by notice in the Gazette. However, a representative of the same category can be appointed even if they meet entry level requirements, provided that they work under supervision of an authorised FSP being a natural person or a representative or key individual of the provider who meets the relevant requirements set out in Board Notice 104 of 2008, until meeting the qualification requirements. A FSP (who is a sole proprietor) and key individual must meet the entry level requirement of a Bachelors degree or equivalent qualification from the recognised qualification list for Categories II, IIA and III.
The Advisory Committee on Financial Service Providers acknowledges the particular challenges the financial industry is faced with and thus has put in place measures to ensure that FSPs employ individuals who are sufficiently qualified to perform their duties. Entry and standard requirements such as the fit and proper requirements not only encourage the employment of fit and proper individuals but also encourage the maintenance of acceptable ethical standards. Such regulation enhances public confidence in the employees and the quality of services that are being offered.
In addition to the requirements of employees of FSPs to be fit and proper, similarly minimum entry standards exist for financial institutions. The difficulty consumers face when attempting to make a proper judgement about the integrity and competence of a financial institution is alleviated by the introduction of these requirements. The requirements for a firm’s operational abilities have been expanded to include more detailed requirements. In terms of the Board Notice, FSPs (either sole proprietors or juristic entities) and key individuals must have and be able to maintain the operational ability to fulfil the responsibilities imposed by FAIS and to ensure that the relevant internal control structures, procedures and controls are in place. The aim of the requirement is to ensure accurate, complete and timeous processing of data and information reporting and the assurance of data integrity. Furthermore it enhances shareholder control over a firm’s managers and is a cost-effective way of regulation in as far as it relates to legal claims made against the firm.
It is clear that in the current economic environment, regulators will look to set rigorous minimum standards that will be imposed on FSPs. However, the existence of such entry requirements could have adverse effects such as the creation of de facto trade restrictions and barriers to entry. Nevertheless these restrictions and barriers created by regulations such as the new fit and proper regime prescribes, may provide the much needed comfort demanded by consumers.