A red light for blanket exemptions

01 August 2007 Gareth Stokes

Members of Parliament (specifically those on the finance portfolio committee) have their sights set on the Financial Advisory and Intermediary Services (FAIS) Act. This according to a report published in Business Report on Tuesday, 2 August 2007. Indications are that MPs want to make changes to the Act to prevent blanket exemptions being applied to the licensing of financial services providers in the future.

Individuals who are employed in the financial services industry are all too familiar with the stipulations contained in the FAIS Act. It was promulgated to "regulate the rendering of certain financial advisory and intermediary services to clients; to repeal or amend certain laws; and to provide for matters incidental thereto" The Act is supposed to protect financial product consumers and ensure that the advice and services provided by financial services providers is fit and proper.

The Act acknowledges the role of the Financial Services Board (FSB) in licensing financial services providers and policing the financial services environment. It also set guidelines for the establishment of a FAIS Ombud to preside over various complaints which might stem from contraventions of the Act's provisions.

In the aftermath of the Leaderguard scandal

The financial portfolio committee's interest in the Act was sparked by the Leaderguard scandal, which cost South African investors in the region of R300 million. Leaderguard was one of approximately 6, 000 financial services providers which operated under a blanket license exemption granted by the FSB in September 2004. Under this exemption, companies were allowed to render financial services to the industry while the FSB tackled the backlog in the licence registration process.

The Leaderguard license application was vetted by the Forex Intermediary Association (FIA). Unfortunately it later emerged that Chris de la Guerre, the FIA chief executive, was also involved with Leaderguard.

How the license was granted becomes a bit of a moot point considering the events which followed. The fact is Leaderguard relied heavily on its 'FSB approved' status to market its products to financial intermediaries. And many of the intermediaries concerned viewed this approval as the 'all clear' to recommend the product to their clients. We have spoken to a number of individuals who believe that companies with FSP licences are above board, and that the financial products and services they supply will require minimal further investigation.

It is probably short sighted to try and apportion blame for the financial fiasco that followed. While there were a number of shortcoming on the regulatory front, there were equally as many errors on the part of financial intermediaries who recommended Leaderguard products to their clients. Most FAIS Ombud rulings subsequent to the Leaderguard liquidation have (correctly in our view) focussed on the 'fit and proper' advise requirement of the Act and have thus been made against the intermediaries who sold the product. Regardless of who is to blame for the failure of Leaderguard Securities and its associated companies, the real losers are the some 3, 600 South African investors who had invested R300 million with the company when LS went under in March 2005.

Shutting the gate after the livestock has bolted

As for the decision to make amendments to the legislation to strip the regulators of their blanket exemption powers This may be a case of closing the stable door after the horse has bolted. The regulation of the industry is now well established and the licensing process seems to be on track.

In this regard, the FSB's latest press release dated 30 July 2007 reveals that "steady progress is [being made] in the finalisation of applications received from Financial Services Providers (FSPs) for authorisation." The release confirms that to date the FSB has finalised 16, 332 applications and declined 1, 312.

There seems no reason why the FSB should be unable to stay on top of license applications and ensure these are processed speedily without any unnecessary delay.

Editor's thoughts:
The way we understand it, the blanket license exemption policy was implemented by the Financial Services Board to accommodate the deluge of licence applications which were anticipated at the September 2004 deadline. Is there any sense in modifying the FAIS Act when similar exemptions are unlikely to be required? Send your comments to

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