The South African financial services industry must take heed of JP Morgan Chase’s £3.08 million fine from UK financial regulator, the Financial Conduct Authority (FCA), for failing to keep accurate records that proved sound advice was provided to clients.

 

This is according to Richard Buttle, Chief Financial Officer of JSE-listed Metrofile Holdings Limited, who says local financial services providers (FSPs) that fail to comply with the Financial Advisory and Intermediary Services Act (FAIS) could face similar punitive penalties. “All FSPs are required under FAIS to ensure that an accurate record of all services rendered or advice offered is securely stored for up to five years, or risk hefty fines or possible closure by the Financial Services Board (FSB).

 

“The FAIS Act stipulates that every FSP and financial intermediary must have the appropriate procedures in place to record and securely store all verbal and written communication regarding any financial services or advice provided to a client.”

 

“Keeping an accurate record of advice is critical for all FSPs and financial intermediaries in South Africa. Should a client decide in the future that the advice offered to them wasn’t appropriate or that they were not fully aware of the risks involved, the intermediary must be able to show through accurate record keeping that they explained all the options to the client.”

 

He says accurate record keeping is not just about compliance, however, but also enables the business to operate at optimum efficiency levels, whilst also protecting confidential and sensitive information.

 

Buttle says all records also need to be kept in a secure environment that ensures easy access for a client, or the Registrar, on request. “The Registrar has the right to review the records at any time. While the records do not need to be kept on site, they must be kept in a location where they are readily available for inspection within seven days of the Registrar’s request.”

 

According to the Act, a record is defined as: a register, file, electronic record or written comment of information about a transaction or event. Any communication must be reduced to written or printed format, therefore any telephonic communication must be recorded and kept in an appropriate electronic or voice-logged format which can, if required by the Registrar, be easily reduced to written or printed form.

 

Buttle says all FSPs and financial intermediaries must, unless exempted by the Registrar, manage and store the following records for a minimum period of five years: records of advice given to clients; premature cancellations of transactions or financial products; complaints received, as well as the status of complaint resolution; records of the continued compliance with the authorisation requirements of FAIS; cases of non-compliance and the related reasons; accounting records; financial statements showing the financial position of the business on the last day of the financial year; and the results of operations and cash flow information for that period.

 

“It is essential for all FSPs or financial intermediaries who do not have effective records management systems in place to consult a reputable records management business that can help identity the most suitable system for their business needs not only to ensure compliance with FAIS but to also make the management of the business more efficient and effective,” concludes Buttle.

One of the biggest challenges facing intermediaries in 2013 is the on-going economic turmoil, both globally and in South Africa. It is possible that the industry will feel the effects of this contagion even more this year than last. To survive the tough times intermediaries should focus on maintaining and growing their businesses through diversification and the provision of outstanding service and sound financial advice to their clients.

 

In addition to the economic environment each segment within the financial services industry faces unique battles. The remuneration issue in the financial planning and short term industries, demarcation in the healthcare sector and retirement funding reform in the employee benefits space will dominate industry debate this year.

 

All sectors in the financial services industry also face the overarching challenge of legislation governing competency requirements, specifically the Financial Services Board (FSB) Regulatory Examinations (RE). The REs had the greatest impact on financial intermediaries in 2012 and are set to remain in focus this year as the deadline for rewrites looms.

 

The RE impacted intermediaries in two ways. Firstly, it created a financial burden in respect of training, study material and exam fees. Individual practices also had to allow for potential loss of income due to disruptions in their day-to-day business activities.

 

Secondly, it contributed to a loss of valuable industry experience. Financial services providers (FSPs) that failed the exam had to lapse their licences, with the result that valuable staff and representatives were forced to look for alternative employment in a shrinking financial services career environment. Many FSPs closed shop and entered into associations with other FSPs as a solution to this problem.

 

There is no disputing that the REs were offered in a format that certain intermediaries found difficult to master, but the bottom line is that these exams are a necessary step towards professionalism in the industry.

 

Compliance with the Financial Advisory and Intermediary Services (FAIS) Act and its Fit and Proper requirements will be a key area of focus for the FIA through 2013. Keeping our members informed and updated on all regulatory developments from a FAIS perspective will remain a priority.

 

We will achieve this by developing new communication channels, hosting workshops on compliance-related topics and offering compliance assistance to members who have a need for face-to-face compliance monitoring.

 

Planning for RE level 2 exams is high on our agenda. The FIA is engaged in on-going consultations with the FSB and other industry stakeholders about which recognised qualifications will offer candidates exemption from the level 2 exams

 

A process of identifying training providers that offer recognised qualifications that will exempt members from the level 2 exams has already begun. The FIA will assist the FSB with reviewing the qualifying criteria due to changes in the regulatory environment that may have taken place since these were formulated in 2008. Training programmes will be implemented once the level 2 product exams have been finalised.

 

The FIA is also working closely with institutions that offer a FAIS Continuing Professional Development (CPD) platform for CPD providers to ensure that our members comply with CPD requirements effortlessly. The FIA aims to arrange and facilitate CPD activities for members countrywide once the initiative goes live.

 

New and amended legislation will remain high on the agenda for all intermediaries. We believe that the constant flux in the regulatory environment will affect our members in two ways

 

Firstly, they may find it difficult to cope with the sheer volume of change. Secondly – and this is perhaps the bigger challenge – they could be overwhelmed by the additional administration and financial burden they face, whether their practice is large or small.

 

Financial services regulation is here to stay. The FIA encourages its members to focus on the positive aspects of regulation as well as the long-term benefits to their practices introduced by safeguarding both industry and consumer.

Reducing the compliance risk in their business is an ongoing focus for advisors.  Here are some tips for what to focus on in 2013. 

Regulatory Exams

Contrary to this time last year when large numbers of the advisor population still had to sit the Regulatory Exams we sit in a better position today with the majority having passed. Those that have tried and failed were given a further extension until end of March 2013.   The FSB and INSETA are also offering additional assistance to those advisors whose brains freeze up in the exam room. Of course the process does not stop here with the second tier product exams and continuous professional development looming on the horizon, albeit a distant horizon at this stage. It is thus fair to say that barring fraud or a large exposure to Greek government bonds, this is one of your biggest compliance risks at this time and should be addressed sooner rather than later.

Get professional advice

It never ceases to amaze me that advisor practices pay money for lawyers and accountants but have asked their bookkeeper to undertake the compliance role or try to do their own FAIS license applications. Compliance is a profession and you need professional advice if it is to make any difference in your business. Most professional compliance officers are members of the Compliance Institute of South Africa www.compliancesa.com and this should be one of the first ports of call when you are looking for compliance professionals to assist you in managing your compliance risks.

Beware the tick box approach to compliance

Some advisors feel that they can do no wrong if they present a Record of Advice in the client file, however one needs to understand that this record must actually be able to be entered into evidence i.e. it should be dated, ideally signed by the client and the advisor, and clearly lay out the needs and objectives, recommendations and motivation. If this is not the case, even if the document is looking good in the file, it is to all intents and purposes, useless.

Do not ignore letters from the Financial Services Board  

I receive a number of phone calls and enquiries from desperate individuals who have received penalty letters or notices of suspension letters from the Financial Services Board with respect to non-compliance in submitting their financial statements, compliance reports or payments of levies. It should be a simple task to note the deadlines and ensure that you meet them. Given that the downside of not doing this is loss of your licence/business, I am once again amazed that key individuals do not empower themselves with this knowledge.

Keep enough cash in the bank

Some FSPs are required to keep a minimum amount of operating expenses in the bank, from 4 weeks to 13 weeks at all times, in terms of their Fit and Proper requirements. Those of you who read the newspapers should have seen various fines being issued to providers who have not maintained this level of cash in their bank accounts. What you save in cash will certainly cost you a lot more in reputational harm.

Record your advice diligently

You must record advice diligently and ensure that you have records which clearly indicate your recommendations and reasons as to why such recommendations were made. A complaint to the Ombud’s office will almost certainly elicit a request from said office for your documentation relating to the financial transaction and an undoubtedly dim view will be taken where you are recollecting events and have no supporting evidence from the files.

Check your licence product scope

Product suppliers are checking to ensure that contracts with advisors are licensed correctly insofar as their underlying product categories reflect correctly. In many instances this is not the case and largely due to ignorance on the part of the FSP insofar as the product categories are concerned. If you do not have the correct categories then the product supplier will cease business and new business acceptances and commission flows until you have rectified the situation. Applying for a new product category is a time consuming task and in the event that you do not have the required experience, it will simply not be granted by the FSB’s registrations department.

Disclosure of fees

Despite having rules in place requiring the disclosure of fees in Rand amounts, I continue to see and hear ever more interesting stories as to why this cannot be done; i.e. the calculation is too complicated to show the monetary amount or it is dependent on fluctuation of exchange rates. In terms of FAIS it is quite clear that a client should be made aware of the costs of any product and whilst a percentage is often shown, there seems to be continued reluctance to reflect the Rand amount, which I can only assume means that an advisor would not want their client to see it as they may think it is too high and may be difficult to explain as to exactly how the fee is earned. This is particularly the case in some upfront fee structures, as we are all aware.

Keep your representative registers up-to-date

We receive a stream of emails from FSPs wanting to know why they are being billed levies for representatives who no longer work with them. Further investigation shows that they did not remove the said representatives by the end of August in time for the levy cut-off and therefore are being billed for individuals who are no longer in their employ. Please make sure that you diarise to check representative numbers at the end of July and forward notification to the FSB in good time for the deadline at the end of August.

Learn the meaning of TCF

This is going to be the next BIG thing and will affect everyone in the industry in one form or another. You will no doubt hear a more about this form the FSB and industry stakeholders in time to come.

Compli-Serve SA – www.compliserve.co.za - offers professional compliance services and support to financial professionals

With the spotlight on Treating Customers Fairly (TCF), Richard Rattue, MD of Compli-Serve says that the first step in achieving fair treatment is through transparent disclosure.

“Disclosures are essentially the only way to ensure a client can make an informed decision when entering into any given agreement, contract or fund,” he told delegates at a recent hedge fund forum hosted by the Financial Services Board.

There are two types of disclosures; tick box and real – both are based on the assumption that the regulator has thought to include everything in an agreement. But, says Rattue, companies need to realise they must go above what the regulators say. “Question if every detail has been documented and disclosed in-line with everything that you would want to know about your own product or service.”

Further, be aware that a seismic change has occurred in disclosures, whereby companies are urged to do away with contracts with too much legalese, and instead, put forward contracts that are in plain, understandable terms – making it fair and easy for all customers to fully understand what they are signing.

“The overseas trend is to do away with drafting contracts through legal departments because by the time the contract reaches the end customer, the document is effectively meaningless as it’s written in such a complex, confusing manner,” Rattue adds.

Failure to disclose effectively can create an expectation gap, which can result in client dissatisfaction.
According to the FAIS Act (Financial Advisory and Intermediary Services Act), section 8A1 confirms that requirements pertaining to disclosure apply equally to both Category 2 and Category 2A companies.
Category 2A is an extension of Category 2 and does not exclude Category 2 requirements, meaning that confirmation from a client, and therefore fair disclosure in making any decisions is essential in both Category 2 and Category 2A agreements.

In the case of a customer investing in a hedge fund for example, there are specific requirements to be met in-line with Hedge Funds BN571 which lists certain disclosures that must be demonstrated, as well as mandate requirements that must be met. Before a business can render hedge fund services, a hedge fund mandate must be concluded and approved by the Registrar. This mandate has to be kept up-to-date and must comply with section 5 of the FAIS Act.
“When communicating with a client in this case, you need to specify that there are risks, you need to be open with the status of the hedge fund, and you need to assess if there are other invested disclosures that are necessary to mention, as well as make sure that the client fully understands,” says Rattue.

Compliance Officers should utilise principles including fairness, ethical conduct, transparency, responsible investing, and respect towards clients, which in turn result in adequate disclosure and form part of effective TCF practice. Failing to do so can put the company at risk.

“If you don’t disclose, you cannot defend yourself or manage complaints effectively. You must stay in touch with your clients and make sure that they fully understand any piece of paper you give them,” says Rattue.

Rattue further advises to avoid using jargon and generalisations when communicating with clients, to stay within your area of expertise and authorisation, and to always act professionally and fairly in the best interests of your clients.