A late change to the regulatory examination regime
A couple of weeks ago a compliance expert informed us that the Financial Services Board (FSB) was about to publish a “ground breaking” announcement with regards Level 1 Regulatory Examinations. We were told that the regulator would soon apply a sweeping l
After a few hasty telephone calls to our trusted industry contacts we were assured this change had been under discussion for some time. It was also suggested that we not whip up a media storm until after the official FSB communication was distributed. In due course – Friday, 8 June 2012 – we received a copy of FSB Board Notice 102, titled Exemption of certain persons from the Level 1 Regulatory Examination requirements. (Government Gazette No. 35422, 6 June 2012).
Getting to grips with the regulatory jargon
There are two points worth considering before we unpack the content of the latest FSB decree. The first is that the persons qualifying for this exemption are painstakingly defined. If you are giving advice then the RE compliance requirement and examination deadline are both still set in stone. A second observation centres on the slightly misleading use of the word “exemption”. The notice, issued in terms of Section 44(4) of the Financial Advisory and Intermediary Services (FAIS) Act of 2002, identifies persons who will be exempt from the Level 1 RE requirement in its current form… The “exempted” persons will still have to “successfully complete a relevant first level regulatory examination [based, we assume, on a new and simpler question set] by a date to be determined by the registrar”.
In plain English: What has happened is that a number of financial services providers felt that RE Level 1 was too onerous for categories of staff in their employ. They lobbied the FSB through various industry bodies for changes to be made. It was subsequently agreed that an exemption would be granted on application (by the services provider) provided that the FSB could set a more appropriate examination and deadline for the affected individuals. The FSB reserves its right either to amend the exemption or withdraw it by way of notice in the Government Gazette.
We asked Ian Middleton, managing director at Masthead Distribution Services if he could add to our explanation. “Apart from a concern about the number of people in this sector who may not pass the first level RE exams, [this notice] is a recognition that the exams may not be appropriate in their current form for this group,” he said. “This would typically apply to products offered by advisors who work the lower end of the market – the funeral and/or group scheme sector.” At a basic level the “exemption” decision stems from the need to distinguish between persons operating in the “easy to understand” financial products world and the “more complex” one. The FSB believes that advice – even on simple products – is important in encouraging savings and risk protection.
The extent of exemption and condition...
The question is which sector of the financial advice space is affected by the Deputy Registrar of Financial Services Provider’s decision. Paragraph (2) in the communication reads: A provider is exempted from sections 3(3), 3(4), 6(1) (f) and 10 of the Demarcation of Fit & Proper Requirements insofar reference is made to the first level regulatory examination, provided that the provider –
a) Successfully completes the relevant first level regulatory examination by a date to be determined by the Registrar of Financial Services Providers;
b) Must register the exemption with the Registrar in the prescribed format and manner by 30 June 2012, or upon application for authorisation in case of an unauthorised financial services provider;
c) Must inform the Registrar in writing within 15 days after the change has taken place, of any change in respect of the information that was submitted for the purpose of registering the exemption.
The decree does not shed much light on the persons singled out for this exemption. To get to the bottom of the matter one has to spend a few minutes wrestling with the definitions provided in Paragraph (1). I found the easiest way to tackle the problem was to consider each of the three types of exempted “provider” referred to in Paragraph (2), with additional clarifying comments where necessary.
Provider – first definition: “A representative who is employed or mandated by an authorised financial services provider to render financial services in respect of a “policy” only”. The Registrar goes into great detail as to what constitutes a policy in both the long and short-term space… In the long-term space it refers to the policies set out under long-term insurance subcategory B1 and B2 in the Determination of Fit & Proper Requirements, Section 1. In addition it provides that subcategory B2 policies “must provide for the premiums to be invested in an investment portfolio managed by the product supplier with no option by the policyholder to change or amend that portfolio.”
In the short-term space it refers to Short-term Insurance Personal Lines policies, defined in the Fit & Proper Requirements as “short-term insurance contracts or policies referred to in the Short-term Insurance Act, 1998, purchased by natural persons acting otherwise than in a business capacity.” The Regulator excludes group policies and marine policies, and requires that personal lines policies require no or limited underwriting, define policy benefits as a sum assured, provide for the replacement of the insured assets or the settlement of outstanding balances, have contract terms of 24 months or less, are not subject to average, and carry limited liability exclusions.
Provider – second definition: “A financial services provider, its key individuals and representatives who render financial services to or for or on behalf of a “private equity fund” only”. For the purposes of the regulation a private equity fund’s business is to invest primarily in unlisted companies to earn income and capital gains. Such funds will be managed by a member of the South African Venture Capital & Private Equity Association or other relevant industry body and cannot be open (or offered) to the public as an investment.
Provider – third definition: “A financial services provider, its key individuals and representatives who renders financial services as an “underwriting manager” (as defined in regulation 6.1 of the Regulations) only”.
A layperson’s take on BN 102 of 2012
After two hours of reading, re-reading, writing, summarising and re-writing, it occurred to us we were nowhere nearer understanding what category of FSP employee would be exempted by BN 102 of 2012! We again turn to Ian Middleton for clarity. “There are no distinguishing ‘job titles’ for the reps that qualify for the exemption, but they are likely to fall mainly under the tied sales forces of product providers, be reps under larger broker operations that specifically service the lower end of the market, or be employed by Direct Marketers,” he said.
Editor’s thoughts: The FSB Board Notice 102 of 2012 can be viewed at http://www.fsb.co.za/. As we struggled through the copy we lamented how unnecessarily complex it was – and chuckled to ourselves about the irony in the Regulator’s inability to use the “plain and simple” language it frequently advocates. Have you read the Board Notice 102 and would you agree its language is particularly “dense”? Add your comment below, or send it to [email protected]
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