Financial Advisory and Intermediary Services Bill: briefing

Meeting report

FINANCE PORTFOLIO COMMITTEE
25 September 2001
FINANCIAL ADVISORY AND INTERMEDIARY SERVICES BILL: BRIEFING

Chairperson: Ms B Hogan (ANC)

Documents handed out:
Financial Advisory and Intermediary Services Bill [B52 – 2001]
Powerpoint presentation on Bill by Financial Services Board
Full presentation by FSB

SUMMARY
Representatives of the Financial Services Board (FSB) briefed the committee on the aims and scope of the Bill. The FSB highlighted the important issues in the Bill and concluded by giving the Committee an insight into the contentious matters of principle that other role players will discuss in their submissions.

MINUTES
Introduction to Financial Advisory and Intermediary Services Bill
Mr Van Rooyen (CEO of FSB) said that the bill plugs the regulatory gap that exists in respect of intermediaries and it creates a FAIS Ombuds that will be regulated by a separate bill. The Bill will go along way in protecting the consumer. It cannot be said however that all the risks will be eliminated. The plugging of regulatory gaps is expensive so other initiatives are also embarked on, e.g. consumer awareness.

Background to Bill
Mr Wessels, Head of Legal Services: FSB, said that the Bill seeks to regulate the activities of insurance brokers, financial advisers and investment managers. There is no law regulating financial intermediaries especially investment advisers. Mr Wessels quoted from submissions by the Short Term Insurance Association and the Life Offices Association and pointed out that all the role players see a need for legislation such as this.

He also quoted from the interim report of the Nel Commission that states that intermediaries are indispensable links in the fraud perpetrated by the public. These intermediaries have no qualifications, no skills, do not adhere to a code of ethics, are never prosecuted and are never in a position to repay any monies.

The body tasked with formulating policy around this matter was the Policy Board for Financial Services and Regulation. The board consists of representatives from the industry, the consumers, the FSB and the Registrar of Banks. The main aim was investor protection. The regulation is achieved by setting entry requirements for advisers, a requirement that advisers must have a licence before they act and by setting the standards for the market conduct of advisers.

A range of financial products was included in the Bill. Eventually the range was expanded to include bank deposits. He noted that not only the giving of advice needs to be regulated but also intermediaries. Ttherefore by the inclusion of intermediaries, investment managers are also drawn into the ambit of the Bill.

With the extension of the ambit there is no doubt that the activities of the entire broker fraternity is covered by the Bill.

Scope of Bill
Mr Wessels said that the Bill is not aimed at institutions but rather at functions. Therefore persons who perform certain functions must be licenced. The specified function is either the rendering of financial advice or intermediary services or both. This function must be done as part of one’s regular business and must relate to a financial product as listed in the Bill. The regulatory net will not catch you if your advice does not relate to a financial product.

If advice is not furnished as part of your regular business but is incidental to the main business then the Bill does not apply. For example, actuaries sometimes give advice but they do not do it as a regular part of their business.

The advice rendered must be directed at a client. For example, if the advice is in the form of an article in the Financial Mail, then the Bill does not apply.

The drafters thought of defining what ‘regular part of business’ means but decided not to because there is case law that has defined it and also to prevent restricting the ambit of the Bill.

Persons included in the ambit of the Bill are those who give direct advice, sell products directly, manage investments, advise on investments, insurance intermediaries, and financial planners.

Excluded from the ambit are the following:
- Giving factual advice about a product
- Describing a financial product
- Analysis or report of a financial product
- Advice by a bank about its own deposits
- Debit orders of banks
- If the intermediary service is already regulated
- Advice by trustees of pension funds and medical schemes

Financial Services Providers
Financial Services Providers (FSPs) conduct the business of giving financial advice or rendering intermediary services. These people are covered in the Bill but so are their representatives. The representative engages in the same business as the FSP but does so on behalf of the FSP by virtue of a contract of employment or mandate.

An FSP must be licenced. Before being licenced the registrar must be satisfied with the following:
- honesty and integrity
- competency and operational ability (will be regulated by subordinate legislation)
- financial soundness

The licence that is granted can be an open licence or can be endorsed with restrictions and conditions. It cannot be renewed but can be suspended or withdrawn. The representative need not be licenced but cannot render financial services other than on behalf of the FSP. The clients must be shown that the representative has a mandate from or is employed by the FSP and that the FSP accepts all risks on behalf of the representative. The FSP must oversee the honesty and competency of the representative, the representative must comply with a prescribed code of conduct, the FSP must keep a register of all representatives and the registrar has a list of these representatives.

Ms Hogan asked if a Financial Services Provider was an individual or an institution.

Mr Wessels said that it could be both.

Ms Hogan wondered whether attorneys and lawyers were covered by the Act.

Mr Wessels said that they were not.

Mr Van Rooyen added that they were regulated elsewhere and the FAIS Bill was concerned with the areas that are unregulated.

Mr Andersen (FSB) explained the concept of investment managers. These include the dealers who buy and sell shares on behalf of others. They have been regulated for a long time but very loosely. Over the past ten years, the regulations have grown in importance and stature. The regulatory framework contains fit and proper requirements, disclosure requirements, solvency requirements etc.

There are approximately 260 investment managers and 80% of the funds held by them are institutional funds. These managers will fall under one of the onerous categories of Financial Services Providers and the current regulations will form the basis of the new regulations. In the past, only listed shares and debentures were covered. Now the shares and debentures can be that of a private company and will fall under the ambit of the Bill.

Methods of Regulation
Mr Wessels said that the Bills seeks to establish a professional group of FSPs by setting entry requirements, imposing responsibilities in respect of their representatives and by setting standards for the market conduct of FSPs and representatives.

The Bill makes provision for compliance arrangements and these include:
- compliance officers
- record keeping
- proper accounting.

Not every FSP will have to lodge accounting records because all FSPs are not the same. Regulations will deal with this.

The Ombuds office that the Bill sets up will not cost the complainant a cent if there is a dispute to settle.

The Bill includes civil remedies and for the first time makes provision for civil remedies.
The registrar is given the power to declare a practice undesirable and the Bill further provides for criminal sanctions and administrative penalties.

Scheme and features of the Bill
The Bill creates a registrar which is the CEO of the FSB and provides for an advisory committee with whom the registrar consults. The registrar can delegate because it is impossible for the registrar alone to manage the Bill in practice. The registrar will delegate to a body recognised by the FSB. Industry will help and is already helping with such matters as setting codes, formulating fit and proper requirements and the licencing.

The Bill is flexible in its interpretation to accommodate for unforeseen circumstances in the future. The flexibility is highlighted by the following:
- The various categories of FSPs
- Different entry requirements
- Open and restricted licences
- Different codes of conduct
- Compliance arrangements differ from category to category
- Exemption for record keeping and accounting records
- Registrar can exempt certain FSPs

Exemptions
Dr van Zyl (FSB) said that to prevent duplication, members of self-regulating bodies such as financial exchanges are excluded from the ambit of the Bill. Executors of deceased estates, curators, liquidators and guardians of minors are also excluded because it is sufficiently regulated.

The overriding test is that if the matters defined are a regular part of the business then there will be no exemption.

Repeal of Laws
Dr Van Zyl said that investment managers are regulated in the Stock Exchange Control Act. The Bill repeals the relevant sections in that Act and puts in into the Bill. Policy Holder Protection Rules are also repealed.

Subordinate Legislation
Many provisions in the Bill call for subordinate legislation. The Bill sets out the principles with which the subordinate legislation must comply.

Controversies
Mr Wessels said that the controversies are more perceived than real. There were many more controversies in the beginning because the first draft of the Bill had made the application of the Bill burdensome. The Bill before them is a result of consultations with all the role players. The majority of the industry and consumer representatives accept the main principles. Mr Wessels said that there are concerns only about minor aspects of the Bill.

The banking sector is regulated already so they argue that banking deposits must not be included because there is no risk - no person has said that he has lost money because of a bank deposit. The policy board debated this and deposits were excluded. Then other role-players submitted that bank deposits can be compared to certain insurance products and it should be included. It was then decided that it would be included to a degree. It was amended again to state that if a bank advises about its own products, then it is not included. The Bill as it stands now adopts this approach. However the banking sector still opposes this so the FSB has decided to compromise further and propose that the Bill should be amended to provide that deposits that are for less than 12 months are excluded. The FSB sees deposits for a year or less as a proper banking service. If it is for longer, then it is an investment and belongs in the Bill.

Health brokers is another area of controversy. The Association of Health Brokers has made submissions on this. Mr Wessels confessed that the FSB was a bit erratic when handling the question of health brokers. The FSB had first wanted to repeal section 65(3) & (4) in the Medical Schemes Act and regulate health brokers in this Bill. The Registrar of Medical Schemes had not commented on this and had said it was fine as currently there is very little regulation of health brokers. The Medical Schemes Act only deals with their
accreditation. If the broker is not accredited, then no commission can be earned. The Act goes no further. The Registrar of Medical Schemes was replaced and the new registrar said that health brokers must be left in the Medical Schemes Act. The FSB had no problem with this and deleted health brokers altogether from the Bill.

The FSB has reconsidered this and feels that the medical registrar can still accredit brokers but the conduct of the brokers must fall within the ambit of the Bill. The FSB would have no objection if the Medical Schemes Act properly deals with health brokers. However, it submits that it is better if it is dealt with in the Bill because then the FAIS Ombuds will have jurisdiction to deal with complaints.

Cost effectiveness
In conclusion Mr Van Rooyen said that at the moment the analysis of the cost and benefits looks favourable. The Policy Board has stated that the benefits of regulation far outweigh the cost of regulation because the investors become better educated.

As there were no comments from committee members, the meeting was adjourned.