INSETA Learning Material RE 5 Representative 1 PDF

FSB REGULATORY EXAMINATION PREPARATION Section 4 First Level Regulatory Examination: Representatives © INSETA This material may be used and copied for your own personal use. This material may not be republished, nor may it be reverse engineered, translated, modified or us...

FSB REGULATORY EXAMINATION PREPARATION Section 4 First Level Regulatory Examination: Representatives © INSETA This material may be used and copied for your own personal use. This material may not be republished, nor may it be reverse engineered, translated, modified or used to make derivative information of materials. Short excerpts from the material may be reproduced without authorization on condition that the source is indicated. © Inseta RE 1 Section 4 Representatives 14b i  Table of contents Heading Page number TASKS v GLOSSARY OF TERMS vi TOPIC 1: EXECUTE THE REQUIRED ACTIONS AS A REPRESENTATIVE IN TERMS OF THE FAIS ACT 1 1.1 Introduction 1.2 The purpose of the Financial Advisory and Intermediary Services Act No. 37 of 2002 2 1.3 The roles, responsibilities and requirements regarding represent- atives in terms of FAIS 6 1.4 The requirements for licensing of the FSP for the role of the repre- sentative 10 1.5 The fit and proper requirements that apply to representatives 13 1.6 The purpose of the register of representatives 33 1.7 Distinguish between “advice” and “intermediary services” in terms of the FAIS Act 35 1.8 Explain when representatives can act under supervision 41 1.9 Supervisory requirements 45 1.10 Explain the record-keeping requirements in terms of Section 18 of the FAIS Act and the General Code of Conduct 48 1.11 The roles and responsibilities of the key individual in terms of FAIS 54 Relevant Legislation 53 Summary 73 Self-Assessment Questions 74 TOPIC 2: CONTRIBUTE TOWARDS MAINTAINING AN FSP LICENCE 77 2.1 Introduction 77 2.2 The requirements that an FSP must meet to maintain a licence 78 2.3 The processes that are required to remain updated with regard to other legislation, amendments, updates and requirements published that will affect the FSP 81 2.4 Undesirable business practices 81 ii © Inseta RE 1 Section 4 Representatives 14b 2.5 Licensing 83 2.6 The Ombud for Financial Services Providers (FAIS Ombud) 89 Relevant Legislation 94 Summary 111 Self-Assessment Questions 111 TOPIC 3: ADHERE TO THE SPECIFIC OBLIGATIONS IN TERMS OF THE RELEVANT CODE OF CONDUCT AND OTHER SUBORDINATE LEGISLATION 115 3.1 Introduction 115 3.2 Safe custody of funds and premiums 118 3.3 Disclosures 119 3.4 Discuss how to ensure transparency and manage conflict of interests 124 3.5 Ethical conduct in the financial services environment 127 3.6 Complaints 128 3.7 Steps when providing advice 130 3.8 Various provisions of the General Code of Conduct 133 Relevant Legislation 138 Summary 159 Self-Assessment Questions 162 TOPIC 4: APPLY KNOWLEDGE OF FINANCIAL PRODUCTS 167 4.1 Introduction 167 4.2 The different types of financial services and financial products 168 4.3 Explain the relationship between different industry players with regard to financial products 173 Relevant Legislation 176 Summary 180 Self-Assessment Questions 181 TOPIC 5: AWARENESS OF CONSEQUENCES FOR REPRESENTATIVES THAT HAVE BEEN FOUND TO ACT FRAUDULENTLY OR COMMITTED ANY OTHER ACT THAT GIVES RISE TO DEBARMENT 185 5.1 Introduction 185 5.2 Debarment of representatives 186 Relevant Legislation 190 Summary 191 Self-Assessment Questions 192 © Inseta RE 1 Section 4 Representatives 14b iii TOPIC 6: ALIGN EXECUTION OF DUTIES AND ACTIONS WITH THE COMPLIANCE REQUIREMENTS 197 6.1 Introduction 197 6.2 The role and function of the compliance officer 197 Relevant Legislation 201 Summary 204 Self-Assessment Questions 205 TOPIC 7: CARRY OUT THE PROPER RECORD-KEEPING ACTIVITIES 207 7.1 Introduction 207 7.2 Record-keeping 208 Relevant Legislation 212 Summary 214 Self-Assessment Questions 215 TOPIC 8: ADHERE TO THE REQUIREMENTS OF FICA AND OTHER RELEVANT ANTI-MONEY LAUNDERING LEGISLATION, AS IT APPLIES TO THE FSP 221 8.1 Introduction 221 8.2 The concepts of “money laundering” and “unlawful activities” 222 8.3 Background to anti-money laundering legislation 224 8.4 The money laundering legislation 225 8.5 The impact of FICA on FSPs 229 8.6 The consequences of non-compliance 241 Relevant Legislation 242 Summary 248 Self-Assessment Questions 249 ANSWERS TO SELF-ASSESSMENT QUESTIONS 252 Topic 1 Self-Assessment Answers 252 Topic 2 Self-Assessment Answers 254 Topic 3 Self-Assessment Answers 255 Topic 4 Self-Assessment Answers 257 Topic 5 Self-Assessment Answers 259 Topic 6 Self-Assessment Answers 261 Topic 7 Self-Assessment Answers 262 Topic 8 Self-Assessment Answers 264 SAMPLE EXAM PAPER/SELF-ASSESSMENT TEST 266 iv © Inseta RE 1 Section 4 Representatives 14b ANSWERS TO SAMPLE EXAM PAPER/SELF-ASSESSMENT TEST 275 ANNEXURES 284 Form FSP2 285 FSB Preparation Guide for representatives 286 FSB Preparation Guide: Appendix A 287 © Inseta RE 1 Section 4 Representatives 14b v  Tasks The material provided in this guide is based on the following tasks, as published in Government Gazette Board Notice 105 of 2008 and amended by Board Notice 60 of 2010: 1 Execute the required actions as a representative in terms of the FAIS Act 2 Contribute towards maintaining an FSP Licence 3 Adhere to specific obligations in terms of the relevant Code of conduct and other subordinate legislation 4 Apply knowledge of financial products 5 Awareness of consequences for representatives that have been found to act fraudulently or committed any other act that gives rise to debarment 6 Align execution of duties and actions with the compliance requirements 7 Carry out the proper record-keeping activities 8 Adhere to the requirements of FICA and other relevant anti-money laundering legislation, as it applies to the FSP Note: Any reference to masculine gender may also imply the feminine. Singular may also refer to plural and vice versa. vi © Inseta RE 1 Section 4 Representatives 14b  Glossary of terms Advice Any recommendation, guidance or proposal of a financial nature furnished, by any means or medium, to any client or group of clients:  in respect of the purchase of any financial product or in respect of the investment in any financial product, or  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  on the variation of any term or condition applying to a financial product on the replacement of any such product, or the termination of any purchase of or investment in any such product, and irrespective of whether or not such advice: - is furnished in the course of or incidental to financial planning in connection with the affairs of the client; or - results in any such purchase, investment, transaction, variation, replacement or termination, as the case may be, being affected. Credit system Each financial adviser needs to obtain a certain number of credits depending on the type of advice he provides. Credits refer to credits on the National Qualifications Framework (NQF) and are prescribed on a particular level. Client “Client” means a specific person or group of persons, excluding the general public, who is or may become the subject to whom a financial service is rendered intentionally, or is the successor in title of such person or the beneficiary of such service. Continuous professional development This is a process of learning and development with the aim of enabling a financial services provider, key individual, representative or compliance officer to maintain the competency to comply with the FAIS Act. © Inseta RE 1 Section 4 Representatives 14b vii Complaint “Complaint” means, subject to Section 26(l)(a)(iii), a specific complaint relating to a financial service rendered by a financial services provider or representative to the complainant on or after the date of commencement of the FAIS Act, and in which complaint it is alleged that the provider or representative- a) has contravened or failed to comply with the provision of the Act and that as a result thereof the complainant has suffered or is likely to suffer financial prejudice or damage; b) has wilfully or negligently rendered a financial service to the complainant which has caused prejudice or damage to the complainant or which is likely to result in such prejudice or damage; or c) has treated the complainant unfairly; Compliance officer The officer appointed by an FSP to oversee the provider's compliance function and to monitor compliance with the FAIS Act as well as to take responsibility for liaison with the Registrar. Financial product includes, amongst others  securities and instruments, including: - shares in a company other than a „share block company‟ - debentures and securities debt - any money market instrument - any warrant, certificate and other instrument acknowledging, conferring or creating rights to subscribe to, acquire, dispose of, or convert securities and instruments referred to above - any securities as defined in Section 1 of the Financial Markets Act, 2012.  a participatory interest in one or more collective investment schemes.  a long-term or a short-term insurance contract or policy, referred to in the Long-term Insurance Act No. 52 of 1998 and the Short-term Insurance Act No. 53 of 1998, respectively.  a benefit provided by a pension fund organisation or a friendly society (referred to in the Friendly Societies Act, 1956) to the members of the organisation by virtue of membership.  a foreign currency-denominated investment instrument including a foreign currency deposit.  a deposit as defined in Section 1 of the Banks Act, 1990 viii © Inseta RE 1 Section 4 Representatives 14b  a health service benefit provided by a medical scheme as defined in Section 1(1) of the Medical Schemes Act No. 131 of 1998.  any other product similar in nature to any financial product referred to above declared by the Registrar by notice in the Gazette to be a financial product for the purposes of this Act.  any combined product containing one or more of the financial products referred to above.  any financial product issued by any foreign product supplier and marketed in the Republic and which in nature and character is essentially similar or corresponding to a financial product referred to above. For the purposes of FAIS, a financial product does not include any financial product exempted from the provisions of the Act by the Registrar by notice in the Gazette, taking into consideration the extent to which the rendering of financial services in respect of the product is regulated by any other law. Financial services provider “Financial services provider” means any person, other than a representative, who as a regular feature of the business of such a person: - furnishes advice; or - furnishes advice and renders any intermediary service; or - renders an intermediary service. Financial service “Financial service” means any of the services contemplated above. The FAIS Act regulates financial services in respect of deposits, up to and exceeding 12 months. Fit and proper Financial services providers and their representatives need to be fit and proper. Fit and proper refers to the experience, qualifications and knowledge of the adviser, personal character qualities such as honesty and integrity as well as the meeting of continuous professional development requirements. Furthermore, the adviser needs to have the competence and operational ability to fulfil the responsibilities imposed by the FAIS Act. The provider must meet the appropriate standards relating to operational ability and financial soundness. © Inseta RE 1 Section 4 Representatives 14b ix Financial Services Board (FSB) The government-appointed regulator which is responsible for the implementation and monitoring of the FAIS Act; the FSB is established in terms of the Financial Services Board Act. FAIS Act Financial Advisory Services and Intermediary Services Act 37 of 2002 The Ombud for Financial Services Providers The person appointed to resolve disputes between clients and financial service providers; often referred to as the FAIS Ombud. FICA Financial Intelligence Centre Act Intermediary services “Intermediary services” are defined as: 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 the 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, managing, administering, keeping in safe custody, maintaining or servicing a financial product purchased by a client from a product supplier in which the client has invested; or 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. x © Inseta RE 1 Section 4 Representatives 14b Key individuals Natural persons responsible for the managing or overseeing of, either alone or together with other people, the activities of a financial services provider and the representative/s Official web site “Official web site” means a web site, as defined in Section 1 of the Electronic Communications and Transactions Act No. 25 of 2002, set up by the Board. Product supplier Any person who issues a financial product Person “Person” means any natural person, partnership or trust, and includes any state organ, any company and any body of persons, corporate or unincorporated. The term „natural person‟ is used simply to distinguish a natural person from a legal person such as a trust or a company. POCA The Prevention of Organised Crime Act POCDATARA The Protection of Constitutional Democracy against Terrorism and Related Activities Act Registrar The executive officer of the FSB is the Registrar of Financial Service Providers for purposes of the FAIS Act. Representative Any person who renders a financial service for or on behalf of a financial services provider, in terms of conditions of employment or any other mandatory agreement, but excludes a person rendering clerical, technical, administrative, legal or accounting service, which service does not require judgment on the part of that person, or does not lead a client to any specific transaction in respect of a financial product in response to general enquiries. © Inseta RE 1 Section 4 Representatives 14b xi  Topic 1 Execute the required actions as a representative in terms of the FAIS Act 1.1 INTRODUCTION Before the introduction of FAIS, clients who received poor advice and service from insurance agents/brokers could only try to resolve their issues by going to court and in some instances there may have been relief through the Ombud. Many people never went to court because they did not have the money to do so or just simply because they did not want to go through the ordeal of a court hearing. This topic tells you about the measures introduced by FAIS that have changed the financial services environment. Intermediaries and FSPs have to comply with specific requirements and consumers now enjoy protection in their dealings with financial services providers. In this topic, you will gain knowledge in the following areas: 1. Describe the roles, responsibilities and requirements regarding representatives as defined in the FAIS Act. 2. Describe the role and responsibilities of the key individual as defined in the FAIS Act. 3. Explain the requirements for licensing by the FSB for the role of the representative. 4. Explain when an individual is obliged to be registered as a representative in terms of FAIS. © Inseta RE 1 Section 4 Representatives 14b 1 5. Explain the fit and proper requirements that apply to the representatives. 6. Discuss the purpose of the register of representatives. 7. Distinguish between advice and intermediary services in terms of the FAIS Act. 8. Explain when representatives can act under supervision. 9. Describe the implications if a representative does not meet all the requirements in terms of being fit and proper by the relevant date. 10. Explain the record-keeping requirements in terms of Section 18 of the FAIS Act and the General Code of Conduct. The following skills criteria are related to the knowledge criteria listed above: 1. Apply knowledge of the role of the representative in terms of the FAIS Act. 2. Keep records in terms of the requirements of the Act and General Code of Conduct. 1.2 THE PURPOSE OF THE FINANCIAL ADVISORY AND INTERMEDIARY SERVICES ACT NO. 37 OF 2002 “The era of properly regulated financial services has dawned, which should banish the dark ages of non-disclosure, unreadable fine print, and mis-selling.” Trevor Manuel, Minister of Finance at the launch of the Ombud for Financial Services Providers (FAIS Ombud) Before the introduction of the Financial Advisory and Intermediary Services Act (FAIS Act), clients who felt that they received inappropriate/poor advice from insurance agents/brokers had to seek recourse through the formal court system. The basis of a claim of this nature was the concept of delictual liability. The client had to prove on a balance of probabilities that the wrongful intentional/negligent act or omission of the adviser caused damage to the client. Very few clients had the financial means, the time and the knowledge to effectively access the court system. A gap existed for a more expeditious and cost-effective way of resolving consumer complaints. 2 © Inseta RE 1 Section 4 Representatives 14b The situation was worsened by the fact that the different role-players and products in the financial industry were/are all governed and regulated by different Acts:  Banks are regulated by the Banks Act No. 94 of 1990.  Long-term insurers are regulated by the Long-term Insurance Act No. 52 of 1998.  Short-term insurers are regulated by the Short-term Insurance Act No. 53 of 1998.  Collective investment schemes are regulated by the Collective Investment Schemes Control Act No. 45 of 2002.  Disclosures to clients were regulated by the Policyholder‟s Protection Rules, issued in terms of the Long-term Insurance Act No. 52 of 1998  Retirement funds are regulated by the Pension Funds Act No. 24 of 1956  Medical schemes are regulated by the Medical Schemes Act No. 131 of 1998. These Acts regulate the institutions with regard to certain aspects, but their main purpose was never the protection of the consumer as far as advice is concerned. Where a financial services provider or one of its representatives provided advice relating to a financial product to a client, the field was wide open. Further confusion arose from the fact that many of these Acts created an Ombudsman or Adjudicator to assist clients with complaints. It was not always clear where a client should lodge a complaint against poor advice. FAIS has addressed these problems with its definition of “financial services provider”, which includes (see section below) almost the entire range of financial services providers, such as insurers, agents, brokers, banks, etc. In fact, any person who as a regular feature provides financial advice as covered by the FAIS Act is included. With the introduction of a single Ombud for Financial Services Providers (FAIS Ombud), the confusion is cleared, as the consumer now knows who to complain to regarding financial advice issues. With the introduction of the FAIS Act, the net was tightened around South Africa‟s financial services providers, including financial advisers. Until the introduction of the Act, anyone, even a person without any relevant skills, knowledge or qualifications could enter the business of providing financial advice. The introduction of the Act followed on a long list of financial scandals such as the collapse of Masterbond. In the late 90s investors lost about R600 million in the Masterbond scam and the collapse of the scheme had a devastating effect on investors. The Nel Commission of Inquiry which followed © Inseta RE 1 Section 4 Representatives 14b 3 the Masterbond saga recommended that tough new legislation be put in place. The FAIS Act was created in response to that call, according to Charles Pillai, the first Ombud for Financial Services Providers. FAIS became effective on 30 September 2004. The purpose of the Act is to regulate the rendering of all financial advisory and intermediary services to clients. Affected parties had until 15 June 2004 to register in order to be effective as from 30 September 2004 (the so-called Section 7 date). The FAIS Act was also promulgated with the aim of changing the concept of financial broker to one of professional financial planner. To ensure that the financial planner shows reasonable care and skill when imparting financial advice to a client, the Act created the role of an Ombud to protect and advise the individual client. The purpose of the Act therefore is to:  regulate the rendering of certain financial advisory and intermediary services to clients.  repeal or amend certain laws.  provide for matters incidental thereto. The regulation of advisory and intermediary services protects consumers and ensures that they are able to make informed decisions upon receipt of appropriate information. Financial Services Board The FAIS Act states that the executive officer of the Financial Services Board is the Registrar of Financial Services Providers and the deputy executive officer of the board is the Deputy Registrar of Financial Services Providers. They have the powers and duties provided for, by or under this Act, which includes the duty to administer this Act. (Section 2) The Deputy Registrar acts under powers delegated by the Registrar. The Financial Services Board is a unique independent institution established by statute to oversee the South African non-banking financial services industry in the public interest. The FSB is committed to promote and maintain a sound financial investment environment in South Africa. 4 © Inseta RE 1 Section 4 Representatives 14b  FSB STRUCTURE Retirement funds Investment Market conduct and Insurance and friendly Institution consumer education societies Licensing Capital Registration and FAIS Markets Registration Collective Registration Investment Prudential Prudential Schemes Supervision Surveillance Directorate Compliance and of Market Enforcement Abuse Compliance Regulatory Research Framework and Policy Enforcement Consumer Education Figure 1.1 (Source: www.fsb.co.za) Enforcement Committee and Board of Appeal The Enforcement Committee (EC) is an administrative body established to adjudicate on all alleged contraventions of legislation, regulations, codes of conduct, etc. administered by the Financial Services Board. The Committee may impose unlimited penalties, compensation orders and cost orders. Such orders are enforceable as if it was a judgment of the Supreme Court of South Africa. The FSB has stipulated effective enforcement as an important factor in its strategic plan. To aid effective enforcement, the FSB Enforcement Committee (EC) was established by statute in the Financial Institutions (Protection of Funds) Act, 2001. The Committee considers cases of alleged contraventions of legislation administered by the FSB. The Committee is appointed by the Board of the FSB. © Inseta RE 1 Section 4 Representatives 14b 5 Which cases may be referred? If the Registrar is of the opinion that any provision of any Act administered by the FSB has been contravened, he may refer the case to the EC. However, if the Registrar himself is by law empowered to impose a penalty; such case may not be referred to the EC. In other words, the Registrar and the EC do not have dual jurisdiction. In simple cases of late submissions and returns, the Registrar retains his authority to impose penalties. Every other case of non-compliance with FSB legislation (and subordinate legislation), may be referred to the EC. Board of Appeal The Appeal Board first came into existence by virtue of Section 26 of the Financial Services Board Act No. 97 of 1990 (the FSB Act) and was re- established in expanded form and with amended procedures under the Financial Services Laws General Amendment Act No 22 of 2008. The latter Act introduced Sections 26A and 26B to the FSB Act which now deal with the Appeal Board, its panels and appeal proceedings. The Appeal Board is an independent tribunal comprising members who are neither employees of the FSB nor active participants in the financial services industry. (Source: www.fsb.co.za) 1.3 THE ROLES, RESPONSIBILITIES AND REQUIREMENTS REGARDING REPRESENTATIVES IN TERMS OF FAIS 1.3.1 The role of a representative The role of an authorised representative is to provide financial services to clients for or on behalf of an FSP. In this role the representative could be an employee of the FSP. He could also provide this service in terms of any other mandatory agreement with the FSP. This means that the representative may also be a consultant, an outsourced person or a temporary employee. 6 © Inseta RE 1 Section 4 Representatives 14b A “representative” is any person who renders a financial service for or on behalf of a financial services provider, in terms of conditions of employment or any other mandatory agreement, but excludes a person rendering clerical, technical, administrative, legal or accounting service, which service does not require judgment on the part of that person, or does not lead a client to any specific transaction in respect of a financial product in response to general enquiries. The following examples explain the role of a representative in practical terms. Example 1: John is employed by Excel Life. This agreement authorises him to provide financial services for Excel Life to clients. John is a representative for Excel Life (the authorised FSP). Example 2: Jack is an independent broker. He has a mandate from Excel Life. This agreement authorises him to provide financial services on behalf of Excel Life to clients. Jack is a representative for Excel Life (the authorised FSP). Persons who do not qualify as representatives in terms of FAIS are those that provide clerical, technical, administrative, legal and accounting services in a subordinate capacity, provided that their service either does not require judgement, or does not lead a client to a specific transaction in respect of a financial product in response to general enquiries. Example 1: Joan is a clerk in the admin department of Excel Life. She processes clients' applications for policies. Example 2: Wilfred captures claims submitted by clients. He does not process the claims, but merely captures them on the electronic system. © Inseta RE 1 Section 4 Representatives 14b 7 1.3.2 The requirements for representatives The representative renders an intermediary service and/or gives advice to clients on behalf of an authorised (licensed) FSP. As such, the representative does not act for him/herself, but for the FSP – even in the case of a sole proprietor FSP – the whole business may consist of only one person, but the person fulfils various roles and in different legal and regulatory 'persona'. Representatives are appointed by FSPs and the FSP takes responsibility for the actions (and omissions) of the representatives. It is therefore very important that the FSP ensures that the representatives, who act on its behalf, meet all the regulatory requirements. Section 13 of the FAIS Act stipulates that only lawfully appointed representatives that are fit and proper are able to render financial services. Representatives need to be able to provide proof at all times and prior to rendering a financial service, that they are authorised to act as representatives of the FSP. In addition, the FSP has to confirm that it accepts responsibility for the activities of its representatives. FAIS requires that representatives meet specific requirements:  A representative must confirm to clients (as certified by the FSP) that he has an employment or mandate agreement with the FSP, to represent the FSP and that the FSP accepts responsibility for the activities of the representative performed in terms of the agreement.  If a representative was debarred, he can only operate as a representative again if the procedures for reappointment of debarred representatives have been followed  A representative must be fit and proper as required by the FAIS Act. (We discuss this in more detail below.)  A representative may work under supervision while obtaining the required experience requirements, subject to certain conditions.  A representative must comply with the FAIS Act and other relevant laws which apply to the conduct of business. (We discuss compliance with the General Code in more detail below).  If a representative also acts as a key individual, it follows that the representative will also have those responsibilities, in addition to the representative responsibilities. 8 © Inseta RE 1 Section 4 Representatives 14b 1.3.3 The responsibilities of representatives Section 16 of the FAIS Act requires that the Registrar must draft a Code of Conduct for authorised financial services providers. This has been done and the General Code of Conduct requires that financial service providers and their representatives fulfil the following responsibilities:  They have to act honestly and fairly, and with due skill, care and diligence, in the interests of clients and the integrity of the financial services industry.  When representations are made or information provided to a client, it must be factually correct; it must be provided in plain language; it should not be misleading; it must be adequate and appropriate given the level of knowledge of the client and it must be provided timeously so as to afford the client reasonably sufficient time to make an informed decision.  They must have and effectively employ the resources, procedures and appropriate technological systems for the proper performance of professional activities.  They should obtain appropriate and available information regarding clients' financial situation, financial product experience and objectives in connection with the financial service required.  They have to act with caution and treat clients fairly in a situation of conflicting interests. This Code of Conduct also contains particular responsibilities relating to:  the making of adequate disclosures of material information, including disclosures of actual or potential own interests in relation to dealings with clients.  adequate and appropriate record-keeping.  avoidance of fraudulent and misleading advertising, canvassing and marketing  proper safekeeping, separation and protection of funds and transaction documentation of clients.  where appropriate, suitable guarantees or professional indemnity or fidelity insurance cover and mechanisms for adjustments of such guarantees or cover by the Registrar in any particular case; and  any other matter that is necessary or expedient to be regulated in the code for the better achievement of the objects of the Act. © Inseta RE 1 Section 4 Representatives 14b 9 When giving advice (Section 8 of the General Code), representatives/FSPs must ensure that they:  take reasonable steps to seek from the client appropriate and available information regarding the client‟s situation.  conduct an analysis based on the information obtained.  identify the financial product(s) that will be appropriate to the client‟s risk profile and needs.  make adequate disclosures when replacing one product with another (fees, costs, consequences, special terms, etc.).  take reasonable steps to ensure that the client understand the advice and that the client is in a position to make an informed decision.  keep a record of advice and provide the client with a copy. 1.4 THE REQUIREMENTS FOR LICENSING OF THE FSP FOR THE ROLE OF THE REPRESENTATIVE The Registrar authorises an FSP to act by issuing a licence to act as authorised financial services provider. Representatives are appointed by the FSP, either through contract of employment or through another mandate agreement. A person may not act as a representative of an authorised financial service provider unless the person has been appointed as a representative of the FSP under Section 13 of the FAIS Act. Once appointed, the FSP will authorise the representative to act on the FSP‟s behalf. Representatives act on behalf of the FSP and the FSP is responsible for the actions of the representative insofar as the representative provides a financial service in respect of financial products. As such, the FSP must maintain a register of all the representatives and key individuals employed or mandated by the FSP. This register must regularly be updated and be available to the Registrar for reference or inspection purposes. The register must contain every representative‟s or key individual‟s name, ID number and business address, as well as:  state whether the representative acts for the provider as an employee or as mandatory;  indicate if the representative is working under supervision or not;  and specify the sub-categories in which such representatives are competent to render financial services. 10 © Inseta RE 1 Section 4 Representatives 14b The FSP must notify the Registrar in writing of the removal of the names from the register within a period of 15 days from the date thereof or appointment. The FAIS Registrar does not issue licences to representatives, nor does the Registrar „approve‟ Representatives. The FSP appoints representatives and carries all the responsibilities in relation to ensuring that the representatives are fit and proper and comply with legislation and the FAIS subordinate legislation in particular (like the General Code). The FAIS Act currently provides for the following categories of licences for FSPs: Category I FSP This category has 20 sub-categories; each has been categorised based on the types of financial products that financial services providers and their representatives may sell and deal with. Most FSPs fall within this category. Category II Discretionary FSP This category of FSP provides intermediary services of a discretionary nature, such as investment managers. Category IIA Hedge fund FSP This category of FSP provides intermediary services of a discretionary nature with regard to hedge funds. Category III Administrative FSP This category of FSP renders intermediary services of a discretionary nature through the method of bulking. The category includes LISPs, for example. Category IV Assistance Business FSP This category FSP renders intermediary service in relation to the administration of assistance policies (funeral policies) which means work performed by a person relating to the offsetting of claims, the processing of claims or the payment of fees or commission in respect of an assistance policy. Note The categories of FSPs are then further subdivided into sub-categories, based on products, for example: Long-term Insurance Sub-category A refers to assistance policies. © Inseta RE 1 Section 4 Representatives 14b 11 Long-term Insurance Sub-category B is split into two categories as follows: Long-term Insurance Sub-category B1 refers to disability, health and life policies as defined in the Long-term Insurance Act, which provide only risk benefits. Long-term Insurance Sub-category B2 refers to long-term policies as defined in Section 1 of the Long-term Insurance Act, 1998 which are: a) investment policies as defined in Part 5B of the Regulations under the Long-term Insurance Act, 1998, which guarantee a minimum return of any premium paid at a specific future date or dates, and where such minimum is ascertainable in Rand terms at inception; b) disability, health and life policies that provide risk benefits as contemplated in the Regulations under the Long-term Insurance Act, 1998, and have a guaranteed investment value or a materially equivalent value; c) annuities which guarantee a minimum annuity for the term of the policy which annuity is ascertainable in Rand terms at inception; or d) any policy which combines the policy features included in paragraphs (a) to (c), but excludes fund policies, fund member policies and policies referred to in the definitions of Long-term Insurance Sub-categories A, B1 and C; [Definition of „Long-term Insurance Sub-category B2‟ inserted by BN 60 of 12 May 2010] Long-term Insurance Sub-category C refers to policies as defined in the Long- term Insurance Act, excluding fund member policies and retirement annuity policies, and policies issued to and/or in respect of preservation funds as well as policies specified in Long-term Insurance Sub-category A and B. Category C policies do not necessarily offer guarantees. A full list of sub-categories appears under Section 1.4.3. For ease of reference we have provided the definition of “long-term policy” from Section 1 of the Long-term Insurance Act below: "Long-term policy" means an assistance policy, a disability policy, fund policy, health policy, life policy or sinking fund policy, or a contract comprising a combination of any of those policies; and includes a contract whereby any such contract is varied; 12 © Inseta RE 1 Section 4 Representatives 14b 1.5 THE FIT AND PROPER REQUIREMENTS THAT APPLY TO REPRESENTATIVES Section 6A of the FAIS Act determines that the Registrar must determine fit and proper requirements for the key individuals, representatives, key individuals of representatives of providers and compliance officers for each category of providers. Fit and proper requirements may relate to personal character qualities of honesty and integrity; competence (experience, qualifications and knowledge tested through examinations determined by the Registrar); operational ability; financial soundness and continuous professional development. Different fit and proper requirements may be determined for natural persons and for partnerships, trusts or corporate or unincorporated bodies. The Registrar may amend the fit and proper requirements from time to time. Fit and proper requirements were published in the Government Gazette on 15 October 2008. The following documents together contain all the requirements and conditions to which authorised FSPs, key individuals and representatives must adhere. These are called Board Notices and they may be amended from time to time.  Board Notice 103 of 2008 – Determination of Continuous Professional Development (CPD) Requirements, 2008  Board Notice 104 of 2008 – the Exemption in respect of services under supervision in terms of Requirements and Conditions, 2008  Board Notice 105 of 2008 – the Determination of Qualifying Criteria and Qualifications for Financial Services Providers, 2008; and  Board Notice 106 of 2008 – the Determination of Fit and Proper Requirements for Financial Services Providers, 2008.  Board Notice 60 of 2010 - Amendment of Fit and Proper Requirements, exemption of services under supervision, continuous professional development and determination of qualifications and qualifying criteria. The table below provides a summary of the fit and proper requirements and how they apply to the different role-players. © Inseta RE 1 Section 4 Representatives 14b 13  Table 1.1 „Fit & proper‟ FSPs (Sole Key Compliance FSPs Representatives requirement proprietors) individuals officers Y Honesty & (Director, Y Y Y Y integrity member, etc.) Competence: Experience N Y Y Y Y requirements Competence: N Y Y Y Y Qualifications Competence: Regulatory N Y Y Y Y Examinations (RE Exams) Competence: Continuous professional N Y Y Y Y development (CPD) Operational Y Y Y N Y ability Financial Y Y N N Y soundness For the purpose of this module we shall only discuss those fit and proper requirements that are applicable to representatives. These requirements can be summarised as follows: Fit and proper requirements for representatives Any key individual and/or representative of an FSP must:  be a person who is honest and has integrity.  comply with the applicable minimum experience requirements.  have the relevant qualification as prescribed.  have successfully passed the relevant first and second level Regulatory Examinations.  comply with the CPD requirements as set out. 14 © Inseta RE 1 Section 4 Representatives 14b 1.5.1 Personal character qualities of honesty and integrity A person who wants to be authorised as an FSP, key individual or representative has to show that he is an honest person who has integrity. In other words, he has to show that his behaviour is always uncorrupted, fair and upright. It is the responsibility of the FSP to confirm a person's honesty and integrity before he is appointed as a representative. In determining whether an FSP, key individual or representative complies with this requirement, the Registrar may refer to any information in his possession or brought to his attention. The following factors constitute clear (prima facie) evidence that an FSP, key individual or representative does not qualify as a person who is honest and has integrity. Factor 1: If a person has, within a period of five years preceding the date of the application, been found guilty in any criminal or civil proceedings by a court of law (whether in the republic or elsewhere) of having acted fraudulently, dishonestly (e.g. having stolen money from an employer), unprofessionally, dishonourably or in breach of a fiduciary duty (breach of trust). Factor 2: If a person has, within a period of five years preceding the date of application, been found guilty by any professional or financial services industry body (whether in the Republic or elsewhere) recognised by the Board, of an act of negligence, dishonesty, incompetence or mismanagement. Factor 3: If a person has, within a period of five years, preceding the date of application, had a licence refused, suspended or withdrawn by any regulatory or supervisory body (e.g. the FSB) on account of an act of dishonesty, negligence, incompetence or mismanagement. Factor 4: If a person has, within a period of five years preceding the date of application, been refused admission to a statutory professional or voluntary body on account of dishonesty, negligence, incompetence or mismanagement © Inseta RE 1 Section 4 Representatives 14b 15 Factor 5: If a person has, within a period of five years preceding the date of application, been found guilty by any regulatory or supervisory body (inside or outside the country) of an act of dishonesty, negligence, incompetence or mismanagement of sufficient importance Factor 6: If a person has at any time been disqualified or prohibited by any court of law from taking part in the management of any company irrespective of whether this disqualification has since been lifted or not. What is the importance of being a person who is honest and has integrity? Think of the key role that a representative fulfils in advising clients on their financial matters. In the process the representative will also receive money from clients and has to complete forms on behalf of clients. Clients rely on representatives to guide them honestly in the process of providing appropriate financial services advice. The following example, taken from the “Guide on Fit and Proper Requirements in Plain Language for Representatives" (downloaded from www.fsb.co.za on 20 October 2009) illustrates the importance of honesty and integrity. Example: A large financial services provider (FSP) initiated a disciplinary hearing against one of its representatives, after a forensic investigation revealed that the representative had copied clients‟ signatures and pasted them on the policy application forms. The clients concerned confirmed that although the representative had contacted them regarding the insurance policies and that they had agreed to invest in the policies, they did not sign the application forms. One client also indicated that he had signed blank documentation given to him by the representative. 16 © Inseta RE 1 Section 4 Representatives 14b During the disciplinary hearing the representative admitted that he had taken a “short-cut” by reproducing the clients‟ signatures by copying and pasting the signatures onto the application documents, as he was under severe financial pressure and needed to get business on the books to ensure that he received an income in the immediate future. He further stated that his actions were not malicious as the clients had agreed to invest in the policies and he had merely reproduced the clients‟ signatures to save time. The representative was found guilty of fraud and misrepresentation by the FSP. The FSP dismissed the representative and debarred him under Section 14 of the FAIS Act based on the fact that the representative did not comply with the honesty and integrity requirements. A consequence of his debarment is that he will, for at least 12 months from the date of debarment, not be able to be reappointed as a representative of another FSP. Even after the 12-month period has lapsed, he will have to provide evidence that: a) the defect of character that led to him being debarred no longer exists. b) he has, inter alia, undergone a genuine, complete and permanent reform. c) if appointed as a representative, he will in future conduct himself honourably and will be someone who can be trusted to carry out the duties of a representative in a satisfactory manner as far as clients and members of the public are concerned. Evidence of being an honest person and having integrity is not only a requirement on appointment as a representative, but it is an ongoing requirement. Representatives have a duty to report if anything has happened that may change their fit and proper status. FSPs have to conduct checks in this regard and report any changes to the Registrar. The FSP must also indicate to the Registrar what action they have taken in this regard. 1.5.2 Competency requirements A representative must have the competence to correctly fulfil his responsibilities imposed by the FAIS Act. This means that the following requirements must be met:  Comply with the minimum experience requirements.  Have the relevant qualifications. © Inseta RE 1 Section 4 Representatives 14b 17  Have successfully passed the relevant first and second level Regulatory Examinations as set by the Registrar.  Ongoing compliance with continuous professional development (CPD) requirements. General competency requirements for representatives A representative must, at date of appointment by an FSP, comply with the following:  The minimum experience requirements  All the applicable required qualifications  The relevant regulatory examinations Except if: The Registrar exempted a representative from any of the above while rendering a financial service under supervision. Note When a person is a sole proprietor FSP he cannot work under supervision and therefore has to meet all the above mentioned requirements before a licence will be granted. A health service representative must be accredited as a broker or apprentice broker if services are performed under supervision. Once all the qualifications, experience and regulatory examination requirements are met, the representative must complete CPD as required. 1.5.3 Experience requirements A person has to have, or gain, hands-on experience in the category/categories for which he is appointed. This means that he acquires knowledge, skills and expertise in a practical way by actively rendering financial services in the sub- categories for which he seeks appointment. Representatives may gain the experience whilst providing financial services under supervision and may therefore be exempted from compliance with the requirements when appointed (subject to the criteria and requirements for services under supervision). The specific experience requirements in respect of each sub-category is published in the subordinate legislation and shows the 18 © Inseta RE 1 Section 4 Representatives 14b number of months/years, in a table format, required for each sub-category, where applicable. Because of the nature of the business, Categories IIA and III do not have tables. Let's look at the table applicable to Category I: Table A: Category I experience requirements for an FSP and representative Advice: Services: Sub-category Minimum Minimum experience experience 1.1 Long-term Insurance Sub-category A 6 months 2 months 1.2 Short-term Insurance Personal Lines 1 year 6 months 1.3 Long-term Insurance Sub-category B1 1 year 6 months 1.4 Long-term Insurance Sub-category C 1 year 6 months 1.5 Retail Pension Benefits 1 year 6 months 1.6 Short-term Insurance Commercial 1 year 6 months Lines 1.7 Pension Fund Benefits 1 year 6 months 1.8 Securities and Instruments: Shares 2 years 1 year 1.9 Securities and Instruments: Money 2 years 1 year market instruments 1.10 Securities and Instruments: 2 years 1 year Debentures and securitised debt 1.11 Securities and Instruments: Warrants, 2 years 1 year certificates and other instruments acknowledging debt 1.12 Securities and Instruments: Bonds 2 years 1 year 1.13 Securities and Instruments: Derivative 2 years 1 year instruments excluding warrants 1.14 Participatory Interests in one or more 1 year 1 year Collective Investment Schemes 1.15 Forex Investment Business 2 years 1 year 1.16 Health Service Benefits 2 years 2 years 1.17 Long-term Deposits 6 months 3 months 1.18 Short-term Deposits 6 months 3 months 1.19 Friendly Society Benefits 6 months 2 months 1.20 Long-term Insurance Sub-category B2 1 year 6 months (Published in Board Notice 106/2008, amended by BN 151/2008 and BN 60/2010) © Inseta RE 1 Section 4 Representatives 14b 19  Note The Category I table was changed to 20 sub-categories in Board Notice 135 of 2012, where the qualifications are mapped. Sub-category 1.3 is now Long-term Insurance Sub-category B1. Sub-category 1.20 is now Long-term Insurance Sub-category B2. Let's look at the table applicable to FSPs and representatives in Category II – Discretionary FSPs who render intermediary services of a discretionary nature; also known as investment managers Table B: Category II experience requirements for an FSP and representative Sub-category Minimum experience 2.1 Long-term Insurance 2.1.1 Sub-category B1 2 years 2.1.2 Sub-category B2 2 years 2.2 Long-term Insurance Sub-category C 2 years 2.3 Retail Pension Benefits 2 years 2.4 Pension Fund Benefits 2 years 2.5 Securities and Instruments: Shares 3 years 2.6 Securities and Instruments: Money market 3 years instruments 2.7 Securities and Instruments: Debentures and 3 years securitised debt 2.8 Securities and Instruments: Warrants, 3 years certificates and other instruments acknowledging debt 2.9 Securities and Instruments: Bonds 3 years 2.10 Securities and Instruments: Derivative 3 years instruments excluding warrants 2.11 Participatory Interests in one or more 2 years collective investment scheme 2.12 Forex Investment Business 3 years 2.13 Long-term deposits 1 year 2.14 Short-term deposits 1 year (Published in Board Notice 106/2008, amended by BN 169/2009 and substituted by BN 60/2010) 20 © Inseta RE 1 Section 4 Representatives 14b  Note The Category II and IIA table was amended in Board Notice 135 of 2012 to include 16 sub-categories with sub-category 2.1 being Long-term Insurance Sub-category B1, sub-category 15 being Category II Hedge Fund FSPs and sub-category 16 being Long-term Insurance Sub-category B2. Let‟s look at the general experience requirements which apply to all representatives in all the categories.1 The representative must, on the date of appointment (by the FSP) meet the minimum experience required in the different sub-categories (as described in the relevant table).  It must be practical experience gained in the rendering of financial services in the different categories and the sub-categories concerned, provided that the experience:  involved the active and ongoing gaining of knowledge, skills and expertise required in terms of the Act.  was obtained through active involvement in providing financial services and could have been gained while working under supervision for the minimum experience period.  could have been gained within or outside the borders of South Africa.  could have been gained in intermittent periods, not more than five years prior to the application, and includes experience gained prior to the implementation of the FAIS Act. The dates relating to the experience must be clearly stated.  could have been gained simultaneously in multiple sub- categories, provided that proof of such experience can be submitted. Now we look at the experience requirements that apply specifically for representatives for each category. 1 Sections 4(1)(b), 4(2)(b), 4(3)(b), 4(4)(b), 4(5)(b) of BN 106 © Inseta RE 1 Section 4 Representatives 14b 21 Experience requirements for Category I representatives  All the general experience requirements must be met in relation to Category I and the sub-categories concerned.  In addition, if the licence changes to include other financial services or other sub-categories, the experience requirements of the other sub- categories must be met, provided that:  if the change includes additional financial service (advice and intermediary service), the representative must obtain 50% of the experience requirements applicable to the additional financial services (as indicated in the applicable table); and  if the change relates to an additional sub-category, the representative must obtain 100% of the experience requirements applicable to the additional sub-category (as indicated in the applicable table). Experience requirements for Category II representatives  All the general experience requirements must be met in respect of Category II and the sub-categories concerned  In addition: - the experience could have been gained in a team environment where the person participated in the process of making investment decisions while working under supervision; and - if the licence changes to include the financial services in other sub-categories, the experience requirements of the other sub- categories must be met. Experience requirements for Category IIA (Hedge Fund FSP) representatives  All the general experience requirements must be met in respect of Category IIA.  In addition, the representative must have three years‟ practical experience in the rendering of financial services in Category IIA. Experience requirements for Category III (Administrative FSP) representatives  All the general experience requirements must be met in respect of Category III.  In addition: - the representative must have three years‟ practical experience in the rendering of financial services in Category III; 22 © Inseta RE 1 Section 4 Representatives 14b  - It must be practical experience gained in the rendering of financial services, as referred to in the definition of “administrative FSP”. Experience requirements for Category IV (Assistance Business FSP) representatives  All the general experience requirements must be met in respect of Category IV.  In addition the representative must have one year practical experience in the rendering of financial services, as referred to in the definition of “administration of assistance policies” (“administration of assistance policies” means work performed by a person relating to the offsetting of claims, processing of claims or payment of fees or commission in respect of an assistance policy.) Example: Long-term Insurance Category A requires six months‟ minimum experience with regard to intermediary services for the giving of advice and two months‟ minimum experience with regard to intermediary services. An individual can gain experience in different categories at the same time. The experience period differs per category or sub-category. Such experience could have been gained during intermittent periods but not more than five years prior to the application. Representatives that have not gained the required experience yet may work under supervision until such time as they meet the requirements. Look at the following example of how this principle is applied: Example: Michelle worked as a representative within Category I Securities and Instruments (Sub-categories: Shares and Money Market Instruments) for the whole of 2002, thus gaining one year of appropriate experience. © Inseta RE 1 Section 4 Representatives 14b 23 She left work to have a baby at the beginning of 2003 and applied to return to her same company at the beginning of January 2009. Her application was approved subject to the requirement that she work under supervision from 1 January 2009 to 31 December 2010 to gain the required two years of experience for those sub-categories because her original experience took place more than five years prior to her application in 2009. 1.5.4 Qualifications In the fit and proper requirements, the relevance of qualifications is based on their coverage of qualifying criteria. The qualifying criteria serve two purposes: 1. It is used to evaluate the content of the qualifications. 2. It is used to set the standards for the regulatory examinations. The qualifying criteria describe what a person must know (knowledge) and what a person must be able to do (skill) in order to complete a specific task relating to giving advice and/or rendering intermediary services successfully. A representative must meet the entry-level qualifications for his category or sub-category when appointed. He may then work under supervision until he completes the full qualification requirements. The FAIS Registrar published a list of "recognised qualifications" for each category and sub-category. Should the representative already have completed further qualifications, he needs to check that his qualification appears on the list. When a representative is responsible for more than one category or sub- category he needs to have a qualification that meets the most onerous requirements; there is no need to have a qualification for each category or sub- category. In order to establish which qualifications are recognised as appropriate for representatives, the qualifications must meet the qualifying criteria, also set by the Registrar and published in the subordinate legislation. Should the representative have to complete a further full qualification, the qualification must be completed within six years of appointment. 24 © Inseta RE 1 Section 4 Representatives 14b In order to understand the qualification requirements, it is crucial to identify whether one will be classified as part of the “transitional arrangements” (appointed prior to 1 January 2010) or as a “new entrant” (appointed 1 January 2010 onwards). Types of qualifications One of the competency requirements for fitness and propriety beyond 2010 is that the representative must have an appropriate qualification. The FAIS Registrar published a list of "recognised qualifications" for each category and sub-category. It is not possible for all qualifications to meet all the qualification criteria, and you will find that some qualifications‟ content meets 80% of specific criteria, and others may meet 100% of the applicable criteria. The main reason for the differentiation and classification of qualifications is to indicate whether a person has to complete a regulatory examination, in addition to the qualification. To differentiate between the qualifications, the Regulator introduced a "rating" system. Table 1.2 If you Then have a qualification and the content meets the qualifying criteria only you have to complete a product-specific partially, it is recognised as a Generic regulatory examination. (G) qualification. have a qualification and the content meets the qualifying criteria 80%, it is recognised as a Specific (S) you will be exempted from the qualification. This status only relates applicable product-specific regulatory to representatives and FSPs examination, as the transitional appointed under the transitional arrangements are applicable to you. requirements, i.e. prior to 1 January 2010. © Inseta RE 1 Section 4 Representatives 14b 25  If you Then have a qualification and the content meets the qualifying criteria 100%, it is recognised as a Specific (SP) qualification. SP status refers to post- you will be exempted from the product- transitional requirements, i.e. specific regulatory examination. representatives, key individuals and FSPs authorised from 1 January 2010. Qualifications list The Registrar will, from time to time publish an updated version of the qualification list in the Government Gazette. If a particular qualification is not on the list, application can be made to the FSB for recognition. (Download the form from the FSB web site.) Examples of qualification lists: In the example below we are looking at an extract from Board Notice 268 of 2013, List 1 for Category I FSPs. 26 © Inseta RE 1 Section 4 Representatives 14b Source: Government Gazette, 20 December 2013 © Inseta RE 1 Section 4 Representatives 14b 27 You will notice that the list shows the name of the qualification and the institution that offers it, as well as the South African Qualification Authority (SAQA) number that is used to identify different qualifications. It also shows the NQF level of the qualification and the number of credits. Thereafter the 20 sub-categories of Category I are listed, with the last column allocated to qualifications that are acceptable for key individuals. Each qualification is rated as a G, S or SP based on its coverage of the qualifying criteria, as discussed above. Appointment dates There are different qualification requirements for different appointment dates. “Appointment date” means the first date on which a representative was appointed by any financial services provider to render financial services in relation to a specific category or sub-category. Representatives appointed between 2004 and 2009 are subject to the transitional arrangements published in the subordinate legislation. These rules determine the type of qualification which is required, as well as arrangements regarding the requirements in terms of experience, regulatory examinations and CPD. Transitional arrangements The transitional arrangements apply to those that have been authorised, appointed or approved before 31 December 2009. Different qualifications (or skills programmes) must be achieved for the different categories, based on the list of recognised qualifications published by the Registrar Refer to Board Notice 106 of 2008 as amended for detailed information. Remember – we are referring to date of first appointment. Individuals appointed or approved during 2009 should meet a specific entry level requirement: 28 © Inseta RE 1 Section 4 Representatives 14b  Table 1.3 Qualification requirement By when Representatives appointed up until 31 December 2007: 31 December Meet the “old” fit and proper requirements as per BN 91 2009 of 2006. (Also referred to generally as the “credit” requirements). Representatives appointed between 1 January 2008 and 31 December 2009: This group has a choice between the following options: Option 1: Meet the “old” fit and proper requirements as per BN 91 of 2006 (Column 2 of Table E) by 30 December 2011. Option 2: Meet the “new” fit and proper requirements, i.e. select a full qualification from the list of recognised qualifications (Board Notice 105 of 2008, Annexure 2) by 31 December 2013. Table 1.4 Entry level requirement By when Category I and IV entry level requirement: At the date of Matric, Grade 12 or an equivalent appointment/approval Refer to Board Notice 106 of 2008 (as amended) for detailed information. Category II, IIA and III entry level requirement: At the date of appointment/approval Relevant Bachelor‟s degree or equivalent. Note Representatives who only work with sub-category 1.1 (Long-term Insurance Category A) and/or sub-category 1.19 (Friendly Society Benefits) should only prove that they can read, write and calculate. The FSP that is their employer should be satisfied that they can perform their duties. © Inseta RE 1 Section 4 Representatives 14b 29 Beyond 2010: Only the new fit and proper requirements apply. This would mean that: Category I and IV  Entry level requirement: Matric, Grade 12 or an equivalent qualification  Obtain a full qualification from the list of recognised qualifications as per Board Notice 105 of 2008, within six years of appointment/approval. The representative must obtain the relevant qualification by 30 June after the expiry of 72 months (6 years) from the date of first appointment as a representative. (Refer to Board Notice 260 of 2013.) Category II, IIA and III  Entry level requirement: Relevant Bachelor‟s degree or equivalent from the list of recognised qualifications (as per Board Notice 105 of 2008, Annexure 2). (Source: FSB Newsletter 7 of 2009) 1.5.5 Regulatory examinations To meet the fit and proper requirements in terms of competence, representatives have to complete the relevant first and second levels Regulatory Examinations (within the prescribed dates). These exams include a set of core examinations (known as first level Regulatory Examinations) which focus on the role and responsibilities of the representative, and what you need to know about the FAIS and FICA Act in order that you remain compliant. In addition, there will be specific examinations (known as second level Regulatory Examinations) relating to the product category or sub-category in respect of which the FSP is authorised to render financial services. These examinations will be product specific and will focus on the testing of technical knowledge and skill an individual should have when dealing with these financial products. As with qualifications, there are specific timeframes in which individuals must complete the regulatory exams successfully. All representatives must 30 © Inseta RE 1 Section 4 Representatives 14b successfully complete the relevant first level Regulatory Examination by 30 June after the expiry of 24 months from the date of first appointment as a representative. All representatives must complete the relevant second level Regulatory Examination by 30 June after the expiry of 72 months from date of first appointment. (Refer to Board Notice 260 of 2013.) Note Board Notice 120 of 2013 granted a general exemption from the Second Level Regulatory Examinations to FSPs, key individuals and representatives until a date to be determined by the Registrar. In the FAIS Information Circular 8/2013 (25 October 2013) it was stated that it was anticipated that this exemption will be in force for at least three years to allow for the development and implementation of a new model. There is provision in the legislation that representatives may be appointed without having completed the relevant regulatory examination as long as the representatives work under supervision in the particular category or sub- category. The regulatory examination must then be completed in terms of the requirements which apply to services under supervision. The Registrar appointed examination bodies which are responsible for compiling the examination questions and for administering the examinations. In some instances, the second level Regulatory Examination may be offered in conjunction with the first level Regulatory Examination. Let‟s look at some examples: Example 1: Wilfred is a representative for a Category I FSP who is appointed only for the Health Care Benefits sub-category. He will be required to write two regulatory examinations:  Regulatory Examination Level 1 for Representatives, and  Regulatory Examination Level 2 for Health Care Benefits. © Inseta RE 1 Section 4 Representatives 14b 31 Example 2: Mandy is a representative (appointed after 1 January 2010) for a Category I FSP, and who gives advice on the following sub-categories:  Long-term Insurance: Category C  Retail pension funds  Collective Investment Schemes and  Pension fund benefits. She will have to write the following regulatory examinations:  Regulatory Examination Level 1 for representatives;  Long-term Insurance: Category C and Retail Pension Funds (one exam)  Collective Investment Schemes and  Pension fund benefits. In total, Mandy would thus be required to complete four regulatory examinations. Should Mandy have a qualification that has SP status for any of these categories, she will be exempt from the second level Regulatory Examination for the category where SP is indicated. 1.5.6 Continuous professional development Continuous professional development (CPD) is a new requirement and is defined in Board Notice 103 of 2008 as a process of learning and development with the purpose to ensure that representatives:  develop and maintain professional competence in order to provide financial services of a high quality.  understand that the primary responsibility of competence vests in the individual.  render financial services with due care, competence and diligence with an ongoing duty to maintain knowledge and skills at required levels. A representative must meet the CPD requirements specified for the various product categories and sub-categories once they have met the experience, qualifications and Regulatory Examination (Level 1 and Level 2) requirements. 32 © Inseta RE 1 Section 4 Representatives 14b Continuous professional development will require 15 to 60 notional hours of development over a three-year cycle. If a representative is appointed in multiple categories or sub-categories, the highest requirement in terms of notional hours will apply. The concept of notional hours involves time taken for an „average learner‟ to achieve the desired outcome, taking into account contact time, time spent in structured learning and individual learning. Continuous professional development activities and/or programmes must be verifiable and could include courses, conferences, seminars, studies leading to formal assessment, workshops and structured self-study programmes. The FSB must approve CPD activities and/or programmes and BN 103 of 2008 contains the conditions for approval. Examples of verifiable CPD programmes and/or activities include the following:  Courses, conferences and seminars  Studies leading to formal assessments (e.g. additional qualification, which may be through private study, distance learning or attendance at formal courses  Workshops  Structured self-study programmes, including web-based, computer- based or paper-based delivery that assess the knowledge. Note If a representative does not meet all the fit and proper requirements by the relevant date, he will be debarred. 1.6 THE PURPOSE OF THE REGISTER OF REPRESENTATIVES An authorised FSP must maintain a register of representatives and key individuals of such representatives, which must be regularly updated. The purpose of this register is to:  provide a record of all the representatives of an FSP (and, where applicable, key individuals of juristic representatives) which shows © Inseta RE 1 Section 4 Representatives 14b 33  personal information, capacity of the representative (employee/mandatory), compliance with fit and proper requirements and the applicable categories and sub-categories the representative is appointed for or key individual is approved for.  enable the Registrar to maintain a central register with all the information gathered from the FSP registers.  calculate the levies (fees) payable by the FSP in respect of each representative and key individual. The register requires the following information: Table 1.5 1. FSP reference number 14. Physical address, postal code 2. Natural person ID no or 15. Date of appointment passport no or registration no 3. ID type (Natural, juristic) 16. Key individual of rep 4. Type (Natural or juristic person) 17. ID number of rep 5. Title 18. Category/Sub-category/A/B; A=Advice B=Intermediary Service 6. Initials 19. Accreditation number 7. First name of natural person 20. Qualifications 8. Surname of natural person or 21. Debarred company name of juristic person 9. Date of birth 22. Date debarred 10. Country of registration (if juristic 23. Reason for debarment person) or passport no 11. Physical (Business) address 1 24. Process flag (Add/Update/Delete) 12. Physical address 2 25. Regulatory examinations 13. Physical address 3 The Registrar may also require other information from the FSP so as to enable him to maintain and continuously update a central register of all representatives and key individuals; such register must be published in appropriate media. 34 © Inseta RE 1 Section 4 Representatives 14b 1.7 DISTINGUISH BETWEEN “ADVICE” AND “INTERMEDIARY SERVICES” IN TERMS OF THE FAIS ACT Before we can distinguish between advice and intermediary services in terms of the FAIS Act, we have to agree on the meaning of advice and intermediary services. So let‟s first consider each of these terms separately. 1.7.1 What is “advice”? According to the FAIS Act, “advice” includes any recommendation, guidance or proposal of a financial nature by any means or media, to any client or group of clients. This advice must be in respect of purchasing or investing in a financial product or the conclusion of a transaction aimed at incurring a liability (cession/pledge), or in respect of the variation, replacement or termination of a financial product. The elements of "advice" include the following: © Inseta RE 1 Section 4 Representatives 14b 35  ADVICE: Make Provide guidance Provide proposal recommendation Financial nature To a client or group of clients About buying a financial product About investing in a financial product In conclusion of any other transaction aimed at incurring a liability, e.g. loan or cession About changes on financial products:  Variation of terms or conditions  Replacement or  Termination of any purchase or investment It does not matter if the advice was given during or incidental to financial planning with the client OR if it results in buying, investing, transacting, variation, replacement or termination. Figure 1.1 36 © Inseta RE 1 Section 4 Representatives 14b The following is not included in the definition of "advice": Procedures for entering into a financial transaction Advice is not Describing a financial product factual advice/ Answering routine admin queries information Displaying or distributing promotional material Giving objective information about a financial product An analysis or report on a financial report without an express or implied recommendation, guidance or proposal that a transaction in respect of the product meet the client's needs, investment Advice is objectives or financial situation. not Advice by a board member of any pension fund organisation or friendly society, to their members on benefits to be enjoyed by the members Advice by the board of trustees of a medical scheme to members of the medical scheme on healthcare benefits Figure 1.2 The Registrar may also exempt any other advisory activity from the provisions of this Act. 1.7.2 What is an “intermediary service”? Let‟s look at the elements of "intermediary service" in order to distinguish between the two components which make up "financial service". © Inseta RE 1 Section 4 Representatives 14b 37 The FAIS Act defines “intermediary service” as follows: “any act, other than the furnishing of advice, performed by a person for or on behalf of a client or product supplier: c) the result of which is that the client may enter into, offers to enter into or enters into any transaction in respect of a financial product with a product supplier; or d) with a view to – i. Buying, selling or otherwise dealing in, managing administering, keeping in safe custody, maintaining or servicing a financial product purchased by a client from a product supplier of in which the client has invested; or 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.” In practice, “intermediary service” means the facilitation of a financial transaction where the service is not a recommendation or guidance or proposal regarding financial products. The elements of "intermediary service" include the following: 38 © Inseta RE 1 Section 4 Representatives 14b  INTERMEDIARY SERVICE IS Any act, other than giving advice by a person For a client or on behalf of a product supplier Resulting in or With a view to The client entering into or offering Do the following in respect of a to enter into a transaction in financial product purchased by a respect of a financial product with client from a product supplier or a product supplier. in which a client has invested:  buying, selling or dealing in (discretionary or not);  managing;  administering;  keeping in safe custody;  maintaining or  servicing. or With a view to  collecting or accounting for premiums;  or other money  which a client has to pay to a product supplier in respect of a financial product. or With a view to  receiving;  submitting or  processing the claims of a client against a product supplier. Figure 1.3 © Inseta RE 1 Section 4 Representatives 14b 39 1.7.3 What is the difference between “advice” and “intermediary services”? The difference between “advice” and “intermediary services” could be explained as follows:  Advisory services assist the client to make a decision in relation to a financial product.  Intermediary services may facilitate the administration of the product. The following examples show the difference between “advice” and “intermediary services”: Example 1: Jack Daniels advises Andy Moloi on how to invest his inheritance. (Jack is offering advice which will help Andy to make up his mind about an investment.) Example 2: Owen advises a client that insurance is a requirement on a bond. (Owen is giving factual advice. Factual advice is excluded from the definition of advice in terms of FAIS.) Example 3: Mia helps Jennifer to complete an application form for purchasing a whole-life policy. Mia does not give any advice on the whole-life policy. (Mia is facilitating the action leading the client to take up this product – she is not giving advice, but rendering an intermediary service.) Now that we understand the difference between “advice” and “intermediary services”, it is important to consider the full definition of “representative”. The FAIS Act defines “representative” as follows: “…any person, including a person employed or mandated by such first-mentioned person, who renders a financial service to a client for or on behalf of a financial services provider, in terms of conditions of employment or any other mandate, 40 © Inseta RE 1 Section 4 Representatives 14b but excludes a person rendering clerical, technical, administrative, legal accounting or other service in a subsidiary or subordinate capacity, which service: (a) does not require judgment on the part of the latter person; or (b) does not lead a client to any specific transaction in respect of a financial product in response to general enquiries.” It is thus clear that when a person gives advice, he qualifies as a representative and he has to be on the register of representatives. There are however also representatives who only renders intermediary services and do not give any advice to clients. From this definition it is also clear that there may be employees who render intermediary services, but who do not qualify as representatives, as they render a service which is of a clerical, technical, administrative, legal or accounting nature and the service either does not require judgment, or it does not lead a client to a specific transaction in response to general enquiries. It is