Exemption of services under supervision – part 1

Exemption of services under supervision – Differences between 2008 Exemption and the Draft Exemption

The FSCA released the “Consultation Paper: Exemption on services under supervision” last week and mentioned that it is necessary to replace the 2008 Exemption with the Draft Exemption (the replacement) to achieve the objective of the exemption which is to facilitate the entry of new participants into the financial services industry without compromising the fair treatment of and good outcomes for clients.

The Draft Exemption, similar to the 2008 Exemption, allows a representative who does not meet all the competency requirements to work under supervision subject to compliance with certain conditions.

The FSCA’s discussion on the substance of the Draft Exemption is structured to highlight the significant differences between the 2008 Exemption and the Draft Exemption rather than to address each and every difference or new requirement.

In today’s article we will highlight the:

  • definition of “date of appointment” and compliance periods; and
  • intensity of supervision and direct and on-going supervision

Definition of “date of appointment” and compliance periods

The definition of “date of appointment” has been changed to remove the link between the appointment date and particular categories of financial services or particular financial products. This means that a person’s date of appointment is the date on which that person was first appointed as a representative of a financial services provider.

According to the FSCA the reason for the change is to limit the overall period a representative may work under supervision as it has come to the attention of the FSCA that a practice has developed whereby certain representatives extend their supervision periods or perpetually work under supervision by merely changing the financial products for which they are appointed.

The limitation does not apply to the experience requirement. In addition, a further exception has been made for specific representatives as defined in Condition 2 (“Specific compliance periods”). This exception allows a representative of a Category I FSP who only has a date of appointment –

  • to render financial services in respect of a Tier 2 financial product; or
  • to perform only the execution of sales in accordance with section 22(b)(ii) of the Fit and Proper Requirements,additional time to work under supervision where they are subsequently appointed for a Tier 1 financial product (other than the execution of sales referred to above). The Authority (FSCA) is of the view that the exception is necessary to achieve the objects of the Draft Exemption.

The provisions relating to the compliance periods in Condition 2 must be read with the representative’s “date of appointment” and no longer provides for a general mid-year compliance date for qualifications and regulatory examinations. The Authority is of the view that the general mid-year compliance date created an advantage for certain representatives in that it extended their compliance periods, in some instances by a year. It further defeated the purpose of the prescribed maximum periods.

The Authority is satisfied that the removal of the mid-year compliance date will result in minimal impact on industry in light of the requirement that came into effect on 1 May 2018 that obliges an FSP to establish, maintain and update on a regular basis the competency register contemplated in section 13(5) of the Fit and Proper Requirements.

Intensity of supervision and direct and on-going supervision

The 2008 Exemption distinguished, for purposes of Category I and IV FSPs, between direct and on-going supervision and prescribed the minimum periods that a representative must work under direct supervision. The only distinguishing factor between direct and on-going supervision was that for direct supervision the supervision must have occurred on a regular basis ranging between daily and weekly whilst for ongoing supervision it had to occur on a bi-weekly or monthly basis.

As regards representatives of Categories II and IIA FSPs, they were required to obtain prior approval of all transactions. Representatives of Category III FSPs, on a purposive interpretation of the requirements, required approval prior to the finalisation of a transaction or where such approval is not feasible, within a reasonable period thereafter.

The Authority, in line with principle based and outcomes focused regulation, removed the distinction between direct and on-going supervision and the requirements relating to prior approval of transactions. It is proposed that the FSP must determine the supervision arrangements and the level of intensity of supervision that must apply to a particular representative having regard to —

  • the nature, scale and complexity of the financial services and financial products to be rendered by the representative;
  • the representative’s assessed level of competency; and
  • the risk to clients and the FSP.

The FSP further must, at regular intervals, review the appropriateness, effectiveness and adequacy of the supervision arrangements and the level of intensity of the supervision and must determine criteria and procedures to assess whether it is appropriate for a representative to work under a reduced level of supervision.

The Draft Exemption also replaces the definitions of “direct supervision” and “ongoing level of supervision” with a definition of “supervision” that provides for rendering of financial services by a representative under the guidance, instruction and oversight of a supervisor using a variety of assessment, observation and oversight methods that are appropriate for the assessed level of competence of the representative.

In Part 2 we highlight:

  • Entry level requirements
  • Supervision agreement
  • Duties of FSP and Supervisor
  • Duties of Representative

Click here to download the Consultation Paper: Exemption of services under supervision dated 31 July 2018. The closing date for comments and submissions is 31 August 2018.

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