Financial Advisory and Intermediary Services Bill: briefing

Meeting report

FINANCE SELECT COMMITTEE
13 August 2002
FINANCIAL ADVISORY AND INTERMEDIARY SERVICES BILL: BRIEFING

Chairperson: Ms Mahlangu (ANC)

Documents handed out:
Financial Advisory and Intermediary Services Bill - as adopted by the NA
FSB Presentation on the FAIS Bill
FSB PowerPoint presentation

SUMMARY
Representatives of the Financial Services Board briefed the Committee on the Financial Advisory and Intermediary Services Bill. The Bill seeks to provide greater consumer protection through regulation over those providing financial advice and intermediary services. The Bill contains a wide definition of both "advice" and "intermediary service", as well as "financial products", to which the advice or intermediary service must be linked. The Bill requires that those engaging in particular actions must be licenced and approved through direct regulation. It also provides for Registrar and ombudsman positions, as well as setting out compliance arrangement and criteria relating to honesty and competency.

MINUTES
The Chair remarked that she hoped the record would reflect that the meeting was begun 40 minutes late due to the lateness of members. She introduced Dr Francois van Zyl and Mr Louis Wessels from the legal department of the Financial Services Board (FSB), who would be briefing the Committee on the Financial Advisory and Intermediary Services (FAIS) Bill.

Mr Wessels stated that though the Bill had seen a number of amendments, it was still the same Bill that had been issued for consultative purposes. The Bill came about as a result of the Masterbond collapse in 1991, which made the need for regulation apparent. An examination was undertaken into how deficiencies could be addressed and it was found that South Africa, unlike most jurisdictions, had no regulations. The Policy Board consists of a body of experts, whose main objective is to advise the Minister of Finance on matters of crucial public interest where there is a lacuna in the law. The Board is representative of the industry, consumers and the government. The idea was to provide advice in respect of investments.

Investment protection had been and still was the main objective of the Bill. The law was about creating professionalism in the ranks of the industry. The FSB had been mandated to draft the necessary legislation and conduct the consultative process, and they had been doing so for the previous three years. Workshops had been held and the conclusion had been reached that the ambit of the Bill could not be limited to advice. It had therefore been decided to include "intermediary services" within the ambit. It was also a requirement that the advice and intermediary service be always related to a financial product, the definition of which had been widened to include almost every insurance product available in the market place.

The Bill has a functional and not an institutional approach, which means that persons would need to be licenced not because of who they were but because of the particular activities that they were engaged in. The functions of the Bill were to furnish "advice" and to render an "intermediary service" - the definitions of which had also been broadened. In addition, the service must be rendered to a client.

The Chair was not sure how the Bill would be regulated and monitored. She gave the example of an insurance company that would leave brochures at the entrance to Parliament and asked if that would fall within the scope of the Bill.

Mr Wessels replied that the practicality of the Bill meant that most people would have to be licenced eventually. Brochures would not fall within the scope of the Bill. It would only apply once a person telephoned the company and advice could be given.

The Chair questioned how the follow-up call would be monitored.

Mr Wessels responded that it would be regulated in terms of the Bill. All product suppliers would have to be registered. It was only Liberty Life that would not have to register as all their work was carried out by brokers.

A member inquired if the Bill would impact on past investments.

Mr van Zyl replied that it was not possible to make the law retrospective but the continuation of businesses meant that they would have to register.

Mr Wessels continued that in terms of the licencing, certain criteria would have to be met: honesty and integrity, competency and operational ability and financial soundness.

The Committee questioned how this would be measured.

Mr Wessels explained that it would be a massive exercise and likened the procedure to be similar to that for admittance as an attorney, such as a lack of criminal convictions and/or dishonest practices.

A member asked if South Africa would be following the US in this regard or the UK's rule of self-regulation.

Mr van Zyl responded that, while the US system was purely self-regulatory, the UK was also moving back to a system of direct regulation. The Bill proposed a hybrid of the two concepts. The licence would be issued by regulators and there would be a degree of monitoring by peers but ultimately the screening would be done through direct regulation.

A member suggested that there should be a requirement by law that licencees subscribe to an insurance policy to cover themselves for financial losses.

Mr Wessels replied that there were intensive compliance provisions in the Bill and should something occur causing the broker to become non-compliant, the Registrar would have to be informed and the broker would be taken off the roll. The testing of honesty and integrity would be difficult but would not be made onerous. This was thought appropriate as the result would have been that may people would not apply for licences if the test were to be made onerous by, for example, requiring that financial security be provided. However, the issue of honesty and integrity would be dealt with strictly.

Mr Wessels continued that the Bill further provides that representatives of Financial Services Providers (FSP) need not be licenced, however it would have to be shown that the representative was in the employ of the FSP and that the FSP accepts responsibility for the actions of the representative.

Mr Conroy (NNP) asked if the Bill would cover the so-called "pyramid" schemes.

Mr Wessels responded that to answer that question one must first go back to the beginning and answer two questions. Firstly, was there advice or an intermediary service and secondly, did it relate to a financial product. If the answers to both questions are yes, then the Bill would cover the situation. The pyramid schemes however fall under the Banks Act and are not subject to the regulations in the Bill. This was perhaps a problem that needed addressing.

Moving on to methods of regulation, he said that the Bill lays down standards for the market conduct of FSPs and representatives. The Financial Services Board was almost finished with drafting Codes of Conduct in this respect.

A member was of the opinion that this was not sufficient and that there should also be a cooling off period which would allow a person to withdraw from an agreement within reasonable time. He highlighted the need to allow for the transfer of funds. In most situations the cost of withdrawing money from an investment was too high and prevented investors from withdrawing money. It was felt that regulations should be put in place to allow for the transfer of funds with no negative effects.

Mr Wessels replied that at the present time there is a provision in the Policy Holders Protection Rules, which allows for a cooling off period. It was presently being considered whether or not to apply it to other things because at the present time it only applies to insurance policies, where there has been a real problem. It was fairly easy to withdraw from other investments.

Mr van Zyl was of the opinion that it should from part of other law and it was not within the scope of the FAIS Bill.

Mr Wessels continued that the Bill provides for three pillars of compliance: compliance officers, record-keeping and proper accounting. Consumer complaints would be dealt with by an ombudsman arrangement. The Bill also provides for civil remedies, where the Registrar would bring an action against a person accused of causing loss by the persons suffering loss. Criminal sanctioning provides for a fine of up to R1 million.

A member recommended that where consumer protection was being provided for it should be done provincially so as to be more accessible to the public.

Mr Wessels remarked that, while they were not pre-empting the Committee, the process had begun to set up an ombudsman so that the position would be ready in time. The Bill was a flexible one and allows for unintended consequences to be addressed.

The rest of the meeting was not minuted. However the Committee did not make any decision on the Bill. The Committee did request documentation in terms of African countries that have similar financial advisory and intermediary services legislation.

The FFC Recommendations were not discussed because no submissions had been received from the provinces. This may be discussed on 20 August 2002.