FAIS information circular 4 of 2012, published on 12 April 2012, contains information on bulk client transfers and the re-signing of client mandates. Most of the information below is copied directly from the circular for the benefit of those who may have missed it.
Changes to the legal structure of your business, or the buying of another FSP’s book, has implications which one should be aware of. There could also be instances where clients are transferred to a new FSP, where the same obligations apply.
This applies in instances where a bulk transfer of clients from one financial services provider to another takes place, or where, for instance, a sole proprietor changes its structure and becomes a close corporation or company.
Section 5(1) of the Code of Conduct for Administrative and Discretionary FSPs requires a FSP to obtain a signed mandate from a client before rendering any intermediary service to that client.
Selling a business
Should a FSP sell its business or transfer its clients to another FSP, this involves the termination of the existing agreement between the two parties. New mandates must be signed between the client and the receiving FSP as the contractual obligations are between different parties.
Under these circumstances the Registrar will not merely accept the notification of the transfer to the affected clients without new mandates being signed.
Conversion of Legal Structure of your business
The Registrar does not consider it a “conversion” when a FSP, who is a sole proprietor, changes its structure to a close corporation or company. When this happens the close corporation or company has to apply for a new FAIS license and as such a separate legal entity is formed which is distinctly different from the sole proprietor licensee.
Please note that the analysis of the business activities of a sole proprietor in terms of the FAIS legal framework, is substantially different from the analysis and supervision of a close corporation or company.
Please also note that the contractual relationship that existed between the client and a natural person (sole proprietor) will now be between such client and a juristic entity and as such, a new mandate will have to be signed.
The only circumstance in which a client will not be required to re-sign mandates is if the original mandate contained a cession clause authorising the transfer of contractual obligations to another FSP.
This is something to consider adding to one’s client mandate documentation to obviate the necessity of complying with the above obligations in future.
It is particularly relevant in the current environment where we foresee FSPs exiting the industry, and selling their client book, or transferring their clients to another FSP.