By Tasneem Gangat, Head of Compliance at Glacier by Sanlam
The guiding purpose of the government regulator is to prevent rather than to create something.
Alan Greenspan, former Chair of the Federal Reserve
Regulation in our industry continues to increase and we need to find the opportunities this brings – to find solutions to these challenges in the form of new products and opportunities for investors.
The regulator – a friend?
With the implementation of the Twin Peaks regulatory framework and the move to outcomes-based legislation, we’re seeing not only an increase in regulatory requirements, but also enhanced supervision. This means we need to be an active participant in, and be able to influence, the outcome of supervisory interactions by actively preparing for these sessions and ensuring transparency and open communication.
Seeing the regulator as an ally may appear to be more time-consuming and costly, but in the long run, it may help financial institutions to ensure that the regulator understands their business and sees them as cooperative. This would avoid regulatory misunderstandings and unpleasant reviews that can otherwise result in even more costly fines and penalties and ultimately, reputational damage.
As part of the Sanlam group, Glacier actively engages with the various regulators and asks for insight. We do, in some instances, push back in order to fight for our clients if we deem the requirements impractical or overly burdensome. We also provide feedback through the Association for Savings and Investment South Africa (ASISA) and other professional bodies that engage with the Authority on regulatory matters.
Regulatory update
Here, we provide a few highlights on three important pieces of regulation due to take effect soon: RDR, FAIS general code of conduct, and POPIA.
Retail Distribution Review (RDR) proposals
The deadline for industry comment into these proposals was May 2020.
Adviser categorisation
Product Supplier Agents (PSAs) – previously referred to as tied agents – it is proposed that PSAs will only be allowed to provide advice on financial products of the product supplier under whose licence they operate and sell products from within the product supplier’s group. They won’t be able to advise on products belonging to another financial group, but they may refer their clients outside of the group. Also, the use of the word “independent” cannot be used to describe a PSA.
Registered Financial Advisers (RFAs) may advise on a range of product suppliers and products where they have broking agreements, provided there is no influence being exercised over the RFAs.
The regulator’s view is that an adviser can be either a PSA or an RFA, but not both.
Adviser categorisation – business arrangements & FSP licence
- Business structure – Where there are PSA and RFA channels in a particular financial services group of companies, each channel must be run in a separate legal entity and be managed as such. Channels must identify, manage and mitigate any conflicts of interests.
- Referral agreements - PSAs will be able to refer clients to product suppliers outside their own group to an RFA advice channel in terms of a referral agreement that must be at the Financial Service Provide (FSP), on a business-to-business level.
- Advisers may not be representatives on more than one FSP licence, subject to two exceptions:
- for adviser development (e.g. an adviser needs to gain product-specific experience)
- the second licence is part of the same group structure.
It is important to note that the Financial Sector Conduct Authority (FSCA) proposes similar restrictions for Key Individuals, unless both FSPs are in the same group
Investment Related Matters
The proposals aim to define the different activities performed under a discretionary investment mandate, with the following categorisation being put forward:
- Asset management: discretionary investment management
- Multi-management: discretionary investment management comprising manager selection
- Alternative investment management: to include hedge fund management, private equity management, and potentially other alternative investment strategies.
Additionally, the paper focussed on:
- Mandates for convenience, which will not be regarded as exercising investment discretion
- Remuneration and charging structures where it is proposed that written customer consent will be required for the amount, frequency, payment method and recipient of fees
- Enhanced disclosures in respect of fees and costs and disclosure documents, similar to the Minimum Disclosure Documents currently in the Collective Investment Scheme environment.
The FSCA is still considering the divergent views expressed regarding:
- Facilitating and monitoring advice and other fees
- Remuneration for automated advice and non-advice distribution
- Mitigating the risk of conflicted exercise of discretionary mandates.
FAIS General Code of Conduct Amendments
The following are some of the key sections that came into effect immediately:
- Changes to existing and new definitions – Several existing definitions were amended and quite a few new definitions were inserted, e.g. “replace or replacement”, “variation”, “white labelling” and “loyalty benefit”.
- Unregulated products or services – FSPs that offer products or services that are not regulated by the Financial Sector Conduct Authority (FSCA) cannot give the impression that they are regulated.
- Independent – There are strict rules around which advisers may refer to themselves as independent.
- Comparisons – The section dealing with what you can and cannot do when comparing different financial products, product suppliers, providers or representatives is now followed by a section that requires FSPs to apply the same principles when using comparisons in advertisements to these types of financial product or product supplier comparisons.
- Forecasts, illustrations, hypothetical data or projected benefits and past performance data – The requirements, relating to advertisements that incorporate any of these, must also be applied when using this type of information to provide a financial service to a client.
- The extent of information necessary to provide appropriate advice – When performing an analysis there may be circumstances that vary the extent or depth of the information needed to provide appropriate advice and that these circumstances can be taken into consideration.
- Record of Advice – The FSCA can prescribe the format.
Further sections to be implemented
There are further sections to the FAIS Act that are to be introduced on 26 December 2020, or 26 June 2021. These include:
- Financial interest and conflict of interest management policy – There have been enhancements to ensure that clients fully understand and agree to fees payable and the services they can expect in return.
- Information about a financial service – This requires that there should be a written agreement between the client and the provider detailing the specifics relating to the client’s monetary obligations in terms of amount, frequency, payment method, services to be provided and termination arrangements.
- Advertising – The section on advertising has been aligned with other regulations such as the Policyholder Protection Rules (PPRs).
- Complaints – Requirements relating to complaints have been replaced with a completely new section which is aligned with the PPRs.
The Protection of Personal Information Act (POPIA)
The POPIA commencement date or effective date was 1 July 2020 and following this there is a 12-month grace period. The compliance deadline for implementation of this Act has been set at 1 July 2021 and is unlikely to be moved out.
For more information on the POPIA Act and what it entails, see next Thursday’s issue of Glacier Weekly (5 November).
