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Here’s what FSCA has to say about you

21 April 2022 Gareth Stokes

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 [email protected].

Comments

Added by Gareth, 23 Apr 2022
@justsaying: You raise an interesting point about the impact of regulation on access to financial services and financial inclusion. The regulator is aware of this problem and is experimenting with introducing light touch regulation for smaller FSPs (as one example) to counter the impact of the growing compliance burden. Sadly, this just introduces further complexity for financial institutions, as well as introducing the risk of regulatory arbitrage (my view).
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Added by Gareth, 23 Apr 2022
Indeed, @Johan, there does seem to be no end to the regulator’s reach. I think Twin Peaks adds to the burden by creating the potential for overlapping oversight, as well as having two regulators that are both expected to rationalise their existence by produce more and more regulation. We end up with a bit of a snowball effect, with regulated industries forced to dedicate more and more human resources to keep abreast of the regulatory process; from public participation to implementation to compliance.
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Added by Gareth Stokes, 23 Apr 2022
Be careful what you wish for @John… Although AI, chatbots and other forms of digital innovation can make life easier, interacting with these can leave users just as frustrated (if not more) than when dealing with call centre staff. That said, I agree that the quality of service offered by the regulator in support of the industry, which includes the PA, FSCA and the many Ombudsman schemes, should be exemplary. At the very least it should be on par with the TCF they expect of FSPs. The FSPs are, after all, customers of the regulator and associated bodies.
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Added by Gareth, 23 Apr 2022
Thank you for insightful comments @Cheryl. It does seem that product providers are pushing more of the administrative burden down the chain- and much of the recent regulation creates the situation, whether real or perceived, that advice FSPs must now answer to both product provider and regulator. Certainly, the product provider carries the proverbial can if they do not monitor outcomes across their distribution channels, including the intermediated channel!
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Added by Gareth Stokes, 23 Apr 2022
Interesting angle, thank you for your detailed response @Peter. It would be fantastic if all sectors of the public sector were held up to the standards expected from FSPs, and we need to strive for that outcome sooner rather than later.
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Added by Peter Dexter, 22 Apr 2022
I fully support the sound intentions of FAIS. I believe it necessary to protect the South African Public from abuse by the financial services sector. The FSCA is one arm of government and continually raises the standards, but no one seems to be asking the obvious question: "Why should the South African Public only be protected against abuse from the (well managed) financial services sector when they receive no similar protection from other sectors?" It is the same South African Public who are served by all, so it is rational that the same levels of protection and duty of care should be applied evenly. Would our municipalities and their staff meet the FSCA fit and proper and compliance standards? Would our National Assembly? Clearly not. I understand that the SA Constitution sets the bar very low for these institutions, but we should it be higher for financial services? EG. Sect 47 of the Constitution reveals that there is no competence requirement for entry into Parliament.
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.
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Added by Ben Holtzhausen, 21 Apr 2022
My comment will just repeat what has already been said as I have experienced the same as the other contributors.
What can I say?
Nowadays I'd much rather go fishing or golfing, and I like neither of the two.
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Added by justsaying, 21 Apr 2022
We have a multi layered "watch dog" leaning over the adviser's shoulder. Too many in fact. If the FSCA is alarmed at what is happening now, how do they think the landscape will change for the benefit of both the Client and adviser in future? What with the fast dwindling ranks that is supposed to provide an advisory service to the benefit of Joe & Jane Public? The interference by every man & his dog in the compliance/"policing" space, has strangled our hours supposed to be making a more financially inclusive society, by consulting with more people. The comments by others where the adviser has to carry more and more admin/compliance burden by employing more support staff with falling revenues as dictated by very self same watchdog is a zero sum game. More interference on the horizon by the way, for us the adviser to look forward to. Those FSPs that we act on behalf for are happy to give the adviser more work, more hoops to jump through, more arbitrary rules by more Ivory Tower incumbents and less service & support. It's no wonder that our numbers are falling at a rapid clip with those entering, leaving shortly thereafter (approx. 3 to 6 months) as it is much, much easier to earn a living elsewhere, despite popular & completely false belief. I for one have already made it clear to my sons that they will never take up this occupation. I humbly do not think I am the only parent that would not recommend this line of work to their progeny to earn their living? It's a hard slog and gets harder and more petty every year - had I known 17 years ago, I would not have taken up this occupation, as the sleepless nights and everyday grind just does not seem worth the "return on investment" . I do wish every man and woman that has stuck it out so long. all the very best in the future and tip my hat to you all. As for the FSCA, rather be more grateful for what we (whom their appears to be an undercurrent of mistrust) earn for you as well in terms of the fees you levy the FSPs with. Those very selfsame fees which are paid to you from us, the adviser force and our Clients.
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Added by John Johnston, 21 Apr 2022
I am in my 43rd year in this industry and never has the service provided by some of the product providers fallen to such a poor level before. My wish is for more Robots or "bots" as they are called simply because bots don't lie or guess or pretend they know an answer to a problem. Technology by and large is excellent until there is a curved ball and the human factor comes into it. I doubt whether some of the service professionals or operators can indeed read for meaning judging by some of the responses I receive to some of my queries. The FSCA should be looking at this aspect and not just controlling the advisors who, I am sure there are many who will agree, that we become exhausted from acting as "shock absorbers" to smooth the ride between clients and product providers,
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Added by Cheryl van Rooyen, 21 Apr 2022
A very interesting read, considering I recall 35 000 odd FA’s 10-15 years ago. Now only 11 185 licensed FA’s!
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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Added by Johan du Toit, 21 Apr 2022
Maybe it is time for this authority to scale out and not just down. Their intention it seems, was and is to try and regulate peoples’ hearts and minds……. Has there not been a lot of customer abuse going on in any case, since their appearance on the scene? The ombuds should be able to handle any discrepancies between advisers and their clients.
Perhaps just another money making effort in/by a more draconian society we find ourselves in…..
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