Moonstone Monitor 27 February 2008 : Feedback from FSB on Site Visits

The Financial Services Board recently conducted a series of on-site reviews of selected Financial Services Providers (FSPs) (“theme visits”) to establish the general level of compliance with the requirements of the FAIS Act and the FAIS Regulations, Codes of Conduct and other requirements. The general findings of the theme visits is summarised as follows in a letter received by a Moonstone Compliance client:

1. 29% of all FSPs reviewed did not have plans for business continuation in place. This affects mostly sole proprietors. Although it is not a regulatory requirement it is expected in terms of sound business principles that financial services providers should have a strategic view and plans to achieve these objectives irrespective of the size of the provider.

2. 71% of the FSPs had only one Key Individual and no business continuation plan which could create problem if the Key Individual is unable to work for an extended period of time.

3. 90% of all FSPs reviewed did not have formal management structures and processes. This creates a situation where there are no records of decisions made on behalf of the business.

4. Only 38% of the FSPs reviewed actually had risk management plans in place. This creates a situation where FSPs do not diligently manage the risk inherent in doing business which is a requirement in terms of section 12 of the General Code of Conduct for financial services providers and their representatives (General Code).

5. FSPs without access to an informed compliance officer tended to have gaps in their processes and generally had many instances of non-compliance with the legislative requirements. This was typically the case with many sole proprietors that do not have a compliance officer.

6. 50% of the Key Individuals did not meet the relevant qualification requirements as prescribed in the Determination of Fit and Proper Requirements for Financial Service Providers (BN 91 of 2006). Of these, 50% did not have any plans in place to meet the requirements by the relevant deadlines. The implication is that if the Key Individual does not meet the relevant Fit and Proper requirements on the compliance date, they must stop performing the regulated functions. In such a case, where there is only one key individual the licence of the FSP will be suspended on the relevant deadline.

7. Only 5% of the FSPs reviewed knew how and when to debar a representative. It is important that FSPs familiarise themselves with the procedure to debar a representative and also change their human resource policies to make provision for the debarment of representatives.

8. 5% of the FSPs had representatives working under supervision. It is important to remember that such representatives must also appear on the representative register. There was a lack of formal performance review processes, which is in contravention of Section 3(e)(i), (ii) and (iii) of the Exemption Of Authorised Financial Service Providers As Regards Representatives (BN 15 of 2008). The requirements are:

“a supervisor -

(i.) Must conduct performance appraisals and progress assessments of financial services rendered by the representative, in order to assist the representative to acquire and apply the necessary skills to render financial services;

(ii.) Must, where the representative is rendering discretionary financial services, review and approve in writing the rendering of such services prior to the conclusion or execution of any transaction; and

(iii.) Must review and assess the financial service rendered by the representative on an ongoing basis.”

9. The majority of FSPs reviewed failed to submit all the required annual returns to the Financial Services Board. Section 17 of the FAIS Act imposes the obligation to submit annual compliance reports, and section 19 of the FAIS Act imposes the obligation to submit annual financial statements. FSPs are reminded that they need to familiarise themselves with the relevant submission dates and required formats, and must then submit all reports as required. Any outstanding reports should be submitted as soon as possible as penalties for late submission are calculated from the date the report had to be submitted.

The process of conducting on-site reviews will continue during 2008 and beyond. The reviews will not necessarily focus on the same aspects, and different topics that are of importance may be selected. Financial Service Providers are selected at random, and reviews are conducted across all the provinces in South Africa. Appointments are made in advance.

Should you have any queries or inputs, please liaise with your relevant industry body or professional organisation to discuss industry specific concerns with the FSB.