Moonstone: Financial soundness requirements

The Fit and Proper requirement referred to as “Financial Soundness” was expanded in Board Notice 106, and affects all FSPs, from Cat I to IV. Although it only comes into effect on 1 January 2011, you may want to make sure that your record keeping is in place. Most readers are currently involved with the submission of the financial statements to the FSB, which makes it an opportune time to review the requirements applicable to you.

We list below the requirements per license category:

1. Category I who does not collect premiums:
- Assets must exceed liabilities

2. Category I who collects premiums/ hold assets
- Assets must exceed liabilities
- Current assets must meet current liabilities
- Hold liquid assets equal to 4/52 weeks (one month) of annual expenditure

3. Category II & IV
- Assets must exceed liabilities
- Current assets must meet current liabilities
- Hold liquid assets equal to 8/52 weeks (two months) of annual expenditure

4. Category IIA & III:
Assets must exceed liabilities with R3 million
Current assets meet current liabilities
Hold liquid assets equal to at least 13/52 (three months) of annual expenditure

5. Multiple Categories
- If multiple categories apply to the FSP, it must meet the most onerous requirement only.

What obligations are there on an FSP to monitor this? We do not believe that you are obliged to keep proper monthly records specifically for this purpose. The FSB will monitor the situation by means of your annual return, unless it becomes aware of problems with the solvency of your business, in which case it will ask for proof that your assets exceed your liability.

The term “Current” assets refer to those assets which can readily be converted to cash, usually within a 12 month time frame. The same applies to “current liabilities”. This means that your 20 year bond will not be classed as a current liability.

Why does a Category I FSP who handles client funds have two seemingly similar obligations (current as well as all assets and liabilities)? This is because the FSB does not see fixed, long term assets as adequate “current” cover for short-term liabilities.

Liquid Assets are defined as “…cash or cash equivalents that can be liquidated with in seven (7) days without realising a loss on liquidation.”

And as we observed before, your wine collection is not regarded as liquid assets, even though it can be "realised" a lot sooner than 12 months. I in fact hold some kind of record for starting wine collections, none of which, apart from the current one, is still in existence.