Moonstone Monitor 24 April 2008 : Draft Amendments To Financial Services Act

Paul se Perspektief/Paul's perspective

Dynamite comes in small packages, but carries a lot of clout.

Yesterday I saw an obscure article in the paper on plans to submit amendments to financial services legislation before the July recess of parliament. When I read the details on the Treasury website I was quite shocked; virtually every Act that affects us is included in the amendments.

Provision is made for input from interested parties, but the closing date for this is 9 May. Given the fact that next week can virtually be discounted, that leaves very little time to provide meaningful feedback.

Today’s Monitor is therefore dedicated to giving you a very basic overview of the proposed changes. The full document can be downloaded.

Of particular significance is the insertion of two words in the Financial Services Board Act, 1990 which now reads “…to supervise and enforce…” The changes to this Act as well as those to FAIS Act provide a lot more bite to the FSB’s bark, particularly in the sense of practical applications such as on-site visits, public disclosure of the results of such visits and extended powers to the registrar to suspend or withdraw licenses, amongst others.

While those who toe the line and stay on the right side of the law should have no concerns, we know from experience that it takes time for new laws to be properly implemented and interpreted.

Die eksperimentele reëls wat tans getoets word in die Super 14 het reeds tot baie skokkende beslissings deur veral onervare skeidsregters gelei - mens moet net hoop en bid dat dit hier sal anders gaan; dis nie sport nie, dis mense se voortbestaan wat op die spel is.

De kube yiveki ezayo /Till next time /Tot volgende keer

Paul Kruger

An Overview of the proposed Amendments

The following Acts will be amended should this draft legislation be promulgated:

• The Pension Funds Act, 1956
• The Friendly Societies Act, 1956
• the Financial Services Board Act, 1990
• The National Payment Systems Act, 1998
• The Financial Institutions (Protection of Funds) Act, 2001
• The Financial Advisory and Intermediary Services Act, 2002
• The Co-operative Banks Act, 2007

In the preamble to the draft legislation, the following summary is provided in respect of the three Acts most likely to affect us all, the Pension Funds, FSB and FAIS Acts.

The Pension Funds Act, 1956:

To define and further define certain expressions; to provide for the registration and regulation of beneficiary funds; to empower the registrar to exempt certain funds from the certain provisions of the Act; to further regulate the appointment and removal of a fund’s principal officer, auditor and valuator; to effect improvements regarding the restrictions on the payment of fees or commissions on transfers; to effect improvements regarding the retrospective application of payment of benefits in terms of a divorce order; to extend the powers of the registrar to prescribe certain matters; and to provide for consequential amendments.

The Financial Services Board Act, 1990:

To define and further define certain expressions; to update references to legislation and institutions; to extend the functions of the board; to amend the provision for the filling of vacancies on the board; to provide anew for the establishment of committees of the board; to provide for the establishment of an enforcement committee; to provide for the appointment of an acting executive officer; to extend and regulate the power of delegation by the Minister and the board; to extend the grounds for disclosure of information obtained in the course of performing functions; to extend the ambit of provisions relating to limitation of liability; to repeal provisions relating to the board of appeal, and to make provision for a new board of appeal; and to increase fines for contraventions of certain sections.

The Financial Advisory and Intermediary Services Act, 2002:

To define and further define certain expressions; to empower the registrar of financial services providers to conduct on-site visits and inspections of the businesses of providers and representatives, and the disclosure of details of on-site visits and inspections; to extend the duties of providers and representatives regarding carrying on business with unauthorised persons rendering financial services; to make new provision regarding fit and proper requirements in respect of all directors, members, trustees and partners of providers; to combine and extend the powers and duties of the registrar regarding the grounds for suspension and withdrawal of licenses, and the disclosure of details of suspensions and withdrawals; to effect changes and improvements regarding the qualifications of representatives and their key individuals, the maintenance of a central register of representatives, and the debarment of representatives; to empower the registrar to debar certain persons rendering financial services; to extend the power of the registrar regarding drafting of codes of conduct; to empower the registrar to control or prohibit incentives; to effect improvements regarding provisions relating to compliance officers; to improve the submission to the registrar of financial statements; to improve the institution of civil remedies by the registrar; and to create new offences.

The preamble concludes as follows:

To provide for consequential amendments of the Long-term Insurance Act, 1998, the Short-term Insurance Act, 1998, the Collective Investment Schemes Control Act, 2002, and the Securities Services Act, 2004; to provide for certain transitional provisions; and to provide for matters incidental thereto.

All I am missing is a disclaimer in case there is some obscure Act they may have missed.

Some practical Examples

Cobus Gresse who heads our Legal and Compliance Division very kindly submitted some practical examples of what may flow from these proposals.

1. Section 1: The definition of a “Representative” is amended to also include natural persons who are employed or otherwise mandated by ‘Juristic Representatives.”

2. Section 4: The powers of the Registrar are extended in order to allow him to instruct any person to conduct on-site visits of the business and affairs of FSP’s or Representatives to determine compliance with the Act.

3. Section 7: An authorised FSP or its Representative may only conduct business with a person rendering financial services, if such person has been issued with a licence or is a duly authorised Representative in terms of FAIS. This will place a duty on FSP’s to ascertain the authorisation status of any person before conducting business with that person. The "financial services" referred to above entail the provision of advice and/or intermediary services.

4. Section 8: All directors, members, trustees or partners of FSP licence holders, who do not qualify and function as Key Individuals for such entities, will also and at all times have to meet the Fit and Proper requirements in terms of honesty and integrity. The FSP will have the responsibility to monitor the status of such individuals and keep the Registrar informed, failing which it may lead to the suspension or withdrawal of licence.

5. Section 9: The Registrar will also be entitled to suspend or withdraw a licence in the event of failure to pay FSB levies, failure to make full disclosure of all relevant information during licence application or furnishing false or misleading information or failure to comply with any provision of the Act.

6. Section 14 A: The Registrar may debar any person, including a Representative , if he is satisfied on the available facts and information that such person no longer meets the fit and proper requirements regarding the qualities of honesty and integrity or is in contravention of or failed to comply with any provision of the Act.

7. Section 16: The Codes of Conduct will have to be revised specifically in order to provide for the control or prohibition of incentives given or accepted by financial service providers. This would include overseas trips and the provision of free services.

8. Section 17: Only persons with suitable qualifications and experience as determined by the Registrar may be appointed as Compliance Officers for FSP’s. A transitional period of 18 months will apply in the case of FSP’s where directors, members, auditors, trustees, principal officers, public officers or company secretaries were appointed as Compliance Officers purely on the strength of the positions that they hold in such FSP’s. The Registrar will also have the right to withdraw the approval of a Compliance Officer at any time if he is satisfied that such individual has contravened or failed to comply with any provision of the Act or no longer meets the prescribed criteria and guidelines, and publish such withdrawal details.

The last point above makes it very clear that there will a significant increase in the responsibilities of compliance officers, be they internal or external. It would appear that they will in fact have to act as the eyes and ears of the FSB in the brokerage and will as such need to be totally objective; a huge challenge in the light of the potential conflict of interest involved.

The requirement that non-qualified internal CO's will have 18 months in which to obtain a legal or accounting degree, or a suitable qualification from the Compliance Institute, will no doubt impact even further on the resources of the business.