FAIS and power of attorney

Lize de la Harpe, Legal Adviser at Glacier by Sanlam.

No person is by nature able to act on behalf of another - he or she must have the necessary authority to do so. This authorisation is commonly given in the form of a power of attorney. But, as with most principles, there are limitations set by statute. In this edition we will look at why a financial services provider cannot provide discretionary investment instructions on behalf of a client by means of a power of attorney.

Background

A power of attorney (hereinafter referred to as “POA”) is a formal document by which a person (“the principal”) empowers/authorises another (“the agent”) to conclude juristic acts on his or her behalf. A juristic act is an act whereby legal relationships are created and which has legal consequences, for example entering into an agreement.

A POA is not a contract, but rather an expression of will by the principal that the agent shall have the power to act on his or her behalf. Through signing a POA the principal not only empowers the agent to act, but also indicates to third parties his or her will to be bound by acts performed by the agent. A properly authorised agent who validly enters into a contract on behalf of another is therefore protected from any liability arising from that contract. However, if the agent is not properly authorised, the principal acquires no rights and incurs no duties in respect of that juristic act and the third party can hold that agent personally liable for breach of “warranty of authority”.

The Financial Advice and Intermediary Services Act, 2002 (“FAIS”)

The FAIS Act was enacted to regulate the rendering of certain financial advisory and intermediary services to clients - it not only requires FSPs to be appropriately licensed, but also imposes a professional code of conduct with which all FSPs must comply.

Before we proceed, let’s look at a few important definitions as set out in section 1 of FAIS:

“Financial service” is defined as any service contemplated in paragraph (a), (b) or (c) of the definition of “financial services provider”, including any category of such services. In turn, a financial service provider (“FSP”) is defined as any person, other than a representative, who as a regular feature of the business of such person furnishes advice, renders any intermediary service or renders both.

“Advice” means any recommendation, guidance or proposal of a financial nature furnished, by any means or medium, to any client or group of clients—

(a) in respect of the purchase of any financial product; or

(b) in respect of the investment in any financial product; or

(c) on the conclusion of any other transaction, including a loan or cession, aimed at the incurring of any liability or the acquisition of any right or benefit in respect of any financial product; or

(d) on the variation of any term or condition applying to a financial product, on the replacement of any such product, or on the termination of any purchase of or investment in any such product,

and irrespective of whether or not such advice—

(i) is furnished in the course of or incidental to financial planning in connection with the affairs of the client; or

(ii) results in any such purchase, investment, transaction, variation, replacement or termination, as the case may be, being effected.

“intermediary service” means any act other than the furnishing of advice, performed by a person for or on behalf of a client or product supplier—

(a) the result of which is that a client may enter into, offers to enter into or enters into any transaction in respect of a financial product with a product supplier; or

(b) with a view to—

(i) buying, selling or otherwise dealing in (whether on a discretionary or non-discretionary basis), managing, administering, keeping in safe custody, maintaining or servicing a financial product purchased by a client from a product supplier or in which the client has invested;

(ii) collecting or accounting for premiums or other moneys payable by the client to a product supplier in respect of a financial product; or

(iii) receiving, submitting or processing the claims of a client against a product supplier.

Authorisation of an FSP

Chapter II of FAIS deals with, inter alia, the authorisation of FSPs. Section 7(1) states that:

Authorisation of financial services providers —

With effect from a date determined by the Minister by notice in the Gazette, a person may not act or offer to act as a—

(a) financial services provider, unless such person has been issued with a licence under section 8; or
(b) representative, unless such person has been appointed as a representative of an authorised financial services provider under section 13.
(2) Subject to section 40, a transaction concluded on or after the date contemplated in subsection (1) between a product supplier and any client by virtue of any financial service rendered to the client by a person not authorised as a financial services provider, or by any other person acting on behalf of such unauthorised person, is not unenforceable between the product supplier and the client merely by reason of such lack of authorisation.
(3) An authorised financial services provider or representative may only conduct financial services related business with a person rendering financial services if that person has, where lawfully required, been issued with a licence for the rendering of such financial services and the conditions and restrictions of that licence authorises the rendering of those financial services, or is a representative as contemplated in this Act.

(my emphasis)

Reading section 7, together with the definitions as explained above, it is clear that an FSP may only render advice/intermediary services if licenced/authorised to do so. Furthermore, an FSP may only conduct business with another FSP if the FSP is licenced to render the services in question.

The effect of FAIS on administrative FSPs

In addition to the above, the Code of Conduct for Administrative Financial Services Providers (issued in terms of BN 79 of 8 August 2003), Chapter 1, Part II Paragraph 4, 5.1 and 5.2(a)(b) specifically states:

“General functions"

(4) An administrative FSP must, prior to accepting instructions from a person who is providing intermediary services on behalf of another person, ascertain whether that person is an authorised financial services provider and, if not, whether that person is required to be so authorised and, if so, decline to accept instructions from that person until that person is so authorised.”

“Dealing with clients" 

5.1 An administrative FSP must obtain a signed mandate from a client, before rendering any intermediary service to that client: Provided that the parties may agree to complete an electronic mandate in respect of which appropriate controls and personal identification procedures have been put in place that ensures security of information.

5.2 The mandate must comply with the following minimum requirements:
(a) State whether the client will deal with the administrative FSP through another person or in a personal capacity;

(b) if the client will deal with the administrative FSP through another person –

(i) state the name of the person;
(ii) state whether that person is an authorised FSP;
(iii) state whether that FSP is appointed with full or limited discretion and where the discretion is limited, indicate those limits;
(iv) authorise the administrative FSP to accept from that FSP instructions given on behalf of the client”.

An authorised administrative FSP (which is also regarded as an accountable institution) is therefore required to ensure that FSPs are duly authorised by clients to transact on their behalf and appropriately licensed. The administrative FSP may not process any transactions on clients’ investments without obtaining a duly completed instruction from the client or from the FSP on behalf of that client – which authorisation may be granted via a mandate that specifies an adviser is authorised to transact on behalf of his/her client and may refer to full or limited discretion.

Conclusion

Prior to FAIS an FSP could act on a POA in order to provide investment instructions on behalf of his/her client. This is no longer acceptable. The FSP will have to be appropriately licensed and enter into an FSB approved mandate with his/her client in order to exercise discretion regarding investment decisions.