Does your practice meet conflict of interest provisions?
An amendment to the General Code of Conduct for Authorised Financial Services Providers and Representatives (General Code) was published in the Government Gazette on 19 April 2010. The Registrar of Financial Services Providers, Dube Tshidi, confirmed the amendment in Notice 58 of 2010. The amendments were necessary to put in place ‘conflict of interest’ rules for all stakeholders in the financial services industry. “In defining ‘conflict of interest’ the regulator has shared its views on the topic with the industry,” says Wendy Hattingh, Head of FAIS Supervision at the Financial Services Board (FSB).
The amendment is open to wide interpretation and financial services providers (and their representatives) will have to identify and disclose any actual or potential conflict of interest in the future. In today’s article we’ll look at the amendments in more detail and shed some light on what financial services practices must do to comply with the ‘conflict of interest’ provisions.
Amendments to the General Code
We will begin by considering the changes to the General Code. Section 1 of the General Code has been modified to include a number of new definitions. Terms such as associate (as it relates to natural and juristic persons), company, conflict of interest, distribution channel, fair value, financial interest, holding company, immaterial financial interest, ownership interest, subsidiary and third party are clearly documented. Hattingh observes that the ‘conflict of interest’ amendments must be interpreted by reading the provisions and then considering the definitions. A failure to consider the context of the definitions within each provision could result in inaccurate conclusions.
Duties of financial providers and their representatives
The crux of the ‘conflict of interest’ provision is the replacement of Section 3 (1) a and 3 (1) b. Under the ‘old’ provisions stakeholders had to either avoid or disclose conflicts of interest. Now the legislation requires they either avoid, or where it’s not possible manage and disclose the conflict of interest. The disclosure provisions have been extensively revised! The replaced paragraphs clarify conflict of interest and the steps that must be taken to manage such conflicts:
3(1)a: A provider and representative must avoid and where this is not possible mitigate, any conflict of interest between the provider and a client or the representative and a client;
3(1)b: A provider or a representative must, in writing, at the earliest reasonable opportunity –
(i) Disclose to a client any conflict of interest in respect of that client, including: (aa) the measures taken, in accordance with the conflict of interest management policy of the provider, to avoid or mitigate conflict; (bb) any ownership interest or financial interest, other than an immaterial financial interest, that the provider or representative may become eligible for; and (cc) the nature of any relationship or arrangement with a third party that gives rise to a conflict of interest, in sufficient detail to a client to enable the client to understand the exact nature of the relationship or arrangement and the conflict of interest;
(ii) Inform a client of the conflict of interest management policy and how it may be accessed.
What fees can you receive?
Legitimate financial receipts include commissions (as authorised under the Long-term Insurance Act, Short-term Insurance Act and Medical Schemes Act) and other fees (as stipulated in the aforementioned Acts and subject to such fees being reasonable). If you haven’t received commissions as stipulated in the legislation you can charge fees provided they are agreed (in writing) with the client and are commensurate with the services rendered.
Section 3A(1)(a)v of the General Code also allows reasonable fees or remuneration for rendering specific services. The acid test regards charging clients for financial services seems to be whether the rates charged are reasonable for the levels of service rendered, and advisers will still be bound by the FAIS Act to give appropriate advice. Section 3A(1)(b) specifically prohibits certain financial incentives:
A provider may not offer any financial interest to a representative of that provider for –
(i) Giving preference to the quantity of business secured for the provider to the exclusion of the quality of the service rendered to clients
(ii) Giving preference to a specific product supplier, where a representative may recommend more than one product supplier to a client
(iii) Giving preference to a specific product or a product supplier, where a representative may recommend more than one product of that product supplier to a client.
Managing conflict of interest
Financial services providers will have to create and maintain a conflict of interest management policy. This requirement is documented by the insertion of Section 3A (2) in the General Code. “We have adopted a mix of principle and rule-based approaches,” says Hattingh. Section 3A(2)(a) begins: Every provider, other than a representative, must adopt, maintain and implement a conflict of interest management policy that complies with the provisions of the Act… You have to inform you clients of the existence of this document and make it accessible publicly at any time. The document will set out how you manage and monitor conflicts of interest. Says Hattingh: “It’s shocking to see the level of compliance in our industry relating to disclosure!”
Financial services providers and their representatives have three months (from 19 April 2010) to comply with Section 3 of the General Code. Section 3A(1)(a) and (c) and Section 3A(3) will take effect six months after the Gazette date. Product providers will have slightly longer to comply. Section 3A(1) (b) and Section 3A(2) take effect on 19 April 2011. The FSB says no further extensions will be granted!
Editor’s thoughts: Board notice 58 of 2010 is available from the Financial Services Board website (http://www.fsb.co.za/). Have you taken the time to read the conflict of interest amendments to the General Code? Add your comment below, or send it to [email protected]
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