Here’s what FSCA has to say about you
The financial advisory and intermediaries industry “stands out as the largest industry” that the Financial Sector Conduct Authority (FSCA) oversees, with around 11283 registered financial institutions providing advisory and intermediation services to financial consumers. This was among the revealing facts shared in the opening paragraphs of chapter 8 of the 2022 Financial Sector Outlook Study, a report compiled by Genesis Analytics in partnership with FSCA.
Refresher info for financial and risk advisers
The report offers a much-needed overview of the South African financial landscape and the financial industries regulated by the Authority as we enter 2022. “The study details developments within the different industries and the associated risks and trends observed [and] looks at macroeconomic developments and drivers of change, including the impact of the Covid-19 pandemic on the financial sector,” they write. As FAnews, we are most concerned with what the report says about our readers, many of whom ply their trade in the competitive market for financial, investment and risk advice.
Those of you who fit the above description are tasked with giving advice in accordance with the Financial Advisory and Intermediary Services (FAIS) Act. The legislation describes the duties and obligations you owe to your clients, including giving trusted and appropriate advice that matches their affordability and suitability profiles; treating them with honesty and integrity; ensuring that they know the details of fees, including all costs and commissions; and giving them an annual update on their product. The legislation also introduces the client’s right to recourse for poor financial advice, through the FAIS Ombud.
Bird’s eye view of SA’s FSPs
We thought it opportune to kick-off today’s newsletter with a refresher on the number and category of financial advisory and intermediary service providers registered under the FAIS Act. At December 2020, the financial advice landscape can be summarised as follows.
- 10196 Category I FSPs, described as financial advisers and intermediaries who render financial advice on a non-discretionary basis.
- 730 Category II FSPs, also referred to as discretionary FSPs, who render intermediary services of a discretionary nature with regards to the choice of a financial product without any bulking.
- 122 Category IIA FSPs, also referred to as hedge fund FSPs, who render intermediary services of a discretionary nature in relation to a particular hedge fund or fund of hedge funds, in connection with a financial product.
- 30 Category III FSPs, also referred to as administrative FSPs and linked investment service providers, who render intermediary services in respect of financial products on the instructions of a client or another FSP, and through the method of bulking.
- 107 Category IV FPSs, described as administrative FSPs who render intermediary services in relation to the administration of assistance policies on behalf of an insurer.
Key themes and trends impacting your practice
The Covid-19 pandemic had a significant impact on advice FSPs. “A noticeable consequence of the Covid-19 pandemic was the increase in the number of lapsed FAIS licences, as a number of FSPs closed down their operations in 2020,” the report said. “A number of sole traders retired early due to slow business activity and
resultant liquidations [and] many smaller businesses merged to share operational costs and improve the customer proposition through a wider selection of financial products under one brand”. The Authority did not share statistics for closures or mergers, but it seems reasonable that smaller businesses would have struggled more with the macroeconomic conditions during 2020 and 2021.
Another consequence of pandemic and lockdown is that traditional, client-facing advice practices had to find new ways of conducting business. The impact of remote working on advice practices is well documented and we are all quite familiar with the role that digital technologies played in enabling remote client onboarding and servicing. “Traditionally, financial advisory services have been centred around the physical presence of an adviser to provide advice; however, remote working has forced advisers to adopt digital channels to connect with their customers,” noted the report. As we emerge from pandemic it seems likely many advice practices will continue to leverage digital technologies for cost and operational efficiencies.
The pros and cons of digital everything
The acceleration into digital has its plusses and minuses. “Feedback received by the industry association suggests that many sole proprietors have found that digital or online meetings have allowed them to connect with more of their customer base more regularly as they save in travel time and can schedule more meetings,” noted the report, referencing stakeholder engagements between the Authority and the Financial Intermediaries Association of Southern Africa (FIA). Other benefits of the wider utilisation of digital platforms include more affordable and wider access to financial advice and product. The main drawbacks include the cost to FSPs of building and maintaining digital infrastructure alongside the risk of leaving a segment of the consuming public behind.
Financial and risk advisers have been operating under FAIS for a number of years, and it appears the industry is at peace with the consumer-focused, principles-based regulatory framework. The FSCA does, however, remain concerned over the relatively large number of smaller FSPs that do not have compliance officers. “The lack of compliance officers means the accuracy and credibility of regulatory submissions within the industry may be challenged, and poses a threat to the integrity of financial markets,” the report stated. “To bridge the gap, the FSCA has hosted webinars aimed at small FSPs to guide them through the requirements of the legislation, and to help them understand the broader landscape of financial services”.
The 2022 Financial Sector Outlook Study also referenced the FSCA’s latest Regulatory Strategy update, which details how the FSCA plans to respond to many of the key trends and risks identified in the report. FAnews readers should run their practices with due consideration for the Authority’s key strategic objectives, which include improving industry practices to achieve fair outcomes for financial customers; acting against misconduct to support confidence and integrity in the financial sector; and promoting the development of an innovative, inclusive and sustainable financial system, among others.
Writer’s thoughts:
The Financial Sector Conduct Authority (FSCA) has its hands full reporting on all of the financial institutions it has oversight of, with the latest report covering sectors as diverse as commercial banking and payment collection. Given the wide divergences between financial industries, are you still comfortable with a regulatory framework that delineates by conduct and prudential aspects rather than by activity? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.
Comments
I am convinced that, the application of increasingly onerous fit and proper, compliance, and accountability standards only to the financial services sector, while simultaneously lowering the bar in the public sector, results in unfair unconstitutional discrimination against the financial services sector. I do not propose the removal of financial services legislation, rather than continually raising the bar in a sector that effectively delivers good results to society, it is time to accept that the bar is high enough in financial services, but far too low in the public sector. (The Zondo Commission is a good read) The principles of the FAIS Act must be applied to all sectors of government in order to reduce the prejudice the South African Public are experiencing at the hands of the state. There is no point in providing protection for these individuals via the FSCA whilst we have ample evidence that the very same people are being far more severely prejudiced by an incompetent state (which the FSCA is part of.) It would be irrational for the FSCA to continue to raise the bar if the state does not greatly improve competence, integrity, compliance, and accountability standards across the entire public service. Report Abuse
What can I say?
Nowadays I'd much rather go fishing or golfing, and I like neither of the two. Report Abuse
Besides the pandemic, there are a few very important points that FSCA have also neglected to disclose that I experience in my practice and find soul destroying as a long-standing passionate FA of the financial services industry:
1. The product providers service levels and accuracy of completion of tasks have left a huge impact by their shocking services, and FA’s therefore spending more time on servicing and follow up with product providers to finalise changes and alterations to client products. More and more, a simple task becomes time consuming having to continuously follow up to completion due to errors made by the product provider’s administrative support.
2. The product providers seem to be opening up more of their administrative tasks to be done online by FA’s, thus adding the burden that the FA’s need to employ more administrative staff to keep up with servicing or spend their “advice and sales time” following through on administrative servicing tasks.
3. The regulatory framework, has added more pressure to ensure compliance, thus again having to spend more time on administration than sales or advice time.
4. The state paid services such as providing a basic need such as electricity, too has a huge impact on moral, expenses and productivity of an effective FA practice.
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Perhaps just another money making effort in/by a more draconian society we find ourselves in….. Report Abuse