Asset managers: take careful note of new fit and proper requirements

Asset managers as financial services providers should consider it an priority to carefully peruse the new fit and proper requirements issued by the Financial Services Board.

The determination came into effect on 31 December 2008 and replaces the previous relevant determination.

It applies to asset managers as financial services providers (FSPs), regulated by the Financial Advisory and Intermediary Services Act, 37 of 2002 (FAIS). Asset managers fall within category II, as defined in the determination, which covers discretionary FSPs.

Under FAIS a person may not act or offer to act as an FSP unless he/she has been authorised by the Registrar of the FSB. In order to be authorised, an FSP must comply with the fit and proper requirements of:

•  Honesty and integrity;
•  Competence and operational ability; and
•  Financial soundness.

Where the applicant for authorisation is a partnership, a trust or a corporate or unincorporated body, it must, in addition, satisfy the Registrar that any of the applicant’s “key individuals” complies with the requirements of honesty and integrity, competence andoperational ability to fulfil the responsibilities imposed on the key individual by FAIS.

Key individual means any natural person responsible for managing or overseeing, either alone or together with others, the activities of the FSP. For asset managers, key individual refers to the person(s) responsible for managing or overseeing its affairs.

The new fit and proper requirements may be summarised thus:

Honesty and integrity. : The following factors constitute evidence that the key individual is not honest and has no integrity:

If within five years before the date of the application, the key individual has:

• been found guilty in any criminal proceedings or liable in any civil proceedings by a court of law of dishonesty, fraud, having acted unprofessionally, acted dishonourably or in breach of a fiduciary duty;

• been found guilty by any statutory professional body or voluntary professional body recognised by the FSB, of an act of dishonesty, negligence, incompetence or mismanagement, sufficiently serious to raise doubts about the honesty and integrity of the key individual;

• been denied membership of any professional body recognised by the FSB due to an act of dishonesty, negligence, incompetence or mismanagement, sufficiently serious to raise doubts about the honesty and integrity of the key individual;

• been found guilty by any regulatory or supervisory body (whether in South Africa or elsewhere), recognised by the FSB; or had his or her authorisation to carry on business refused, suspended or withdrawn by the regulatory body, due to an act of dishonesty, negligence, incompetence serious enough to raise doubts about the honesty and integrity of the key individual;

• had any licence granted to him or her by any regulatory body recognised by the FSB suspended or withdrawn by that regulatory body due to an act of dishonesty, negligence, incompetence or mismanagement, sufficiently serious to raise doubts about the honesty and integrity of the financial services provider; or

• if at any time before the application the key individual has been disqualified or prohibited by any court (whether in South Africa or elsewhere) from taking part in the management of any company or other statutorily created, recognised or regulated body irrespective whether such disqualification has since been lifted or not.

Competency requirements. The competency and experience requirements differ according to the category of the FSP. However all FSPs must comply with certain minimum experience requirements; have relevant qualifications; have successfully passed the relevant regulatory examinations; and comply with the continuous professional development (CPD) requirements.

Experience requirement. A key individual is required to have at least one year’s experience in the management and oversight of services similar to or corresponding to the financial services rendered by the asset manager. In addition, the key individual must have actually provided the financial services in the sub-category of services to be provided by the asset manager on the date of approval by the Registrar.

Qualifications. A key individual must, on appointment, have a recognised qualification determined by the Registrar. The required qualifications are set out in the Determination of Qualifying Criteria and Qualifications for Financial Services Providers, 2008.

Regulatory examinations. Where applicable, any key individual must take and successfully pass the regulatory examinations set by the Regulator. The examinations include a set of core questions dealing with legislation directly binding on asset managers, its key individuals and specific examinations relating to the category or sub-categories in which the investment manager is authorised to render financial services. Details of the regulatory examinations requirements are set out in the Determination of Examination Body Requirements, 2008.

CPD. A key individual is required to meet the CPD requirements applicable to the category and sub-categories for which he or she is appointed. CPD will require 15 to 60 notional hours of development over a three-year cycle. The key individual must record CPD activities with the Registrar’s office. CPD requirements are contained in the Determination of Continuous Professional Development Requirements for Financial Services Providers 2008.

Operational ability. An FSP is required to maintain the operational ability to fulfil the responsibilities imposed by FAIS. The operational abilities include a fixed business address; adequate access to communication facilities; adequate storage and filing systems for the safe-keeping of records, business communications and correspondence; and an account with a registered bank, including where required by FAIS, a separate bank account for client funds.

In addition, an FSP must put in place:

• Internal control structures, procedures and controls; and
• General administration processing, accounting transaction and risk control measurements.

The aim of the requirements is to ensure accurate, complete and timeous processing of data, information reporting and the assurance of data integrity.

An FSP must, if required by the Registrar, maintain suitable guarantees, professional indemnity insurance or fidelity insurance to cover the risk of losses due to fraud, dishonesty or negligence.

Financial soundness. An applicant must not be an unrehabilitated insolvent or under liquidation or in provisional liquidation. The financial soundness standards differ according to the FSP’s category.

Transitional provisions. These are applicable to all FSPs, key individuals and representatives that are authorised, and are applicable until 2014. Asset managers should take careful note of the transitional arrangements and ensure that key individuals are on track to comply within the set time frames.