Sound governance and outsourcing compliance – key considerations in terms of Fit & Proper

Des Leatt from Compli-Serve SA.

Financial soundness as it impacts juristic representatives is among the key changes FSPs face in the final version of the Fit & Proper Regulations. Along with the implementation of a governance framework that sets out standards including how to deal with the outsourcing of functions to a person who is not a representative of the FSP – the checklist to being compliant with Fit & Proper is becoming more onerous.

Financial soundness

For an FSP and any of its juristic representatives to be considered financially sound, assets must at all times exceed liabilities.

An FSP, other than Cat 1 that does not hold or receive monies, and a juristic representative of such an FSP must have effective, comprehensive strategies and systems to cover the nature and level or risks involved, including the risk that they might not be able to meet the financial soundness obligations in the future. No person may become an FSP or a juristic representative if business rescue proceedings have commenced. A person authorised as an FSP, or appointed as a representative under more than one category of FSP must comply with the most onerous of the financial soundness requirements. Implementation of the additional requirements for juristic representative is just a year away; 1 March 2019.

Governance framework

An FSP must adopt, document and implement an effective governance framework that provides for the prudent management and oversight of the financial services it provides to ensure fair treatment of clients.

Your governance framework must;

• Be proportionate to the nature, scale, complexity and risks of the business.
• Provide for the development, implementation and oversight of fair treatment policies, and prudent management and oversight of the business of the FSP.
• Include a business plan setting out the aims and scope of the FSP, the business strategies and related matters.
• Provide for sound and sustainable remuneration policies and practices that promote alignment of the FSP with its clients.
• Provide for corrective actions required in respect of non-compliance or weak oversight.
• Include effective systems of corporate governance, risk management, contingency planning and internal controls.

Robo-advice compliance

Many FSPs are now able to offer “automated advice” or robo-advice, which is the furnishing of advice through an electronic medium that uses algorithms and technology without the direct involvement of a natural person. Additional operational requirements come in to play. They include provision for human resources and capabilities, policies and procedures, monitoring and testing algorithms and filters, as well as adequate and sufficient technology.

Outsourcing

We now have very clear guidelines that apply when an FSP outsources functions to a person who is not a representative of the FSP. An FSP must exercise due skill, care and diligence, when entering into, selecting, managing or terminating any arrangement for the outsourcing of its functions, when that functions is:

• A function prescribed to be performed by the FAIS Act or another law.
• A function that is integral to the nature of the authorised financial services of the FSP.
• Of material importance to the operation of the FSP.

It is essential to ensure that the person to whom the function has been outsourced, has the required ability, capacity and legal authorisation to perform the outsourced functions, and most importantly, is able to carry out the agreed services effectively. Any remuneration or fee paid must be reasonable and commensurate, as well as not structured that it may increase the risk of unfair treatment of clients. An FSP must have contingency plans to ensure that it continues to function and provide service to clients should the outsourced service be terminated, or if it becomes ineffective.

Further, outsourced individuals may not be permitted to outsource or sub-delegate any activity or part thereof relating to the tasks performs on behalf of the FSP.

Checking that you have your checklist

As many facets influence the ability to stay compliant, seeking the assistance of a compliance professional could go a long way into ensuring you stay safely on course and properly fit.