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Financial Soundness of Representatives

The new Determination of Fit and Proper Requirements for Financial Services Providers, 2017 (Board Notice 194 of 2017) sets out a number of new requirements relating to the financial soundness requirement of representatives.

Natural Persons

The financial soundness requirements set out in Chapter 6 of the Board Notice do not apply to any representative who is a natural person.

However, as of the 1st April 2018, an FSP must ensure that where it appoints a natural person as a representative, the person must not have been declared insolvent or provisionally insolvent.

What happens if a natural person is sequestrated or provisionally sequestrated after 1 April 2018, or had been sequestrated or provisionally sequestrated prior to 1 April 2018?

There is, in my view, no reason to terminate the appointment as representative unless the FSP is concerned that such appointment will, inter alia, materially increase any risk to the FSP or to the fair treatment of its clients or materially impair the quality of the governance framework of the FSP, including the FSP’s ability to manage its risks and meet its legal and regulatory obligations.

The Insolvency Act, 1936 specifically provides that an insolvent may follow any profession or occupation or enter into any employment.

What will have to be considered in these circumstances is whether or not the insolvency was occasioned in any manner by any dishonesty on the part of the person or in any manner suggests a lack of integrity. Then, as the person is not honest and lacks integrity, the person must be debarred – but not because they have been sequestrated.

Juristic Representatives

S 40 of the Board Notice (Appointment of Representatives) provides that an FSP may not appoint a juristic representative that is under liquidation, provisional liquidation or business rescue.

Sections 44 and 45 of Board Notice 194 of 2017 are also important and come into effect on 1 March 2019.

S 44 provides that every juristic representative will, as of 1 March 2019, be required at all times to maintain financial resources that are adequate both as to amount and quality to enable it to carry out its activities and to ensure that liabilities are met as they fall due.

S 44(3) which became effective on 1 April 2018 provides that no person may continue as a juristic representative if it has been placed under liquidation or provisional liquidation or is subject to any pending proceedings which may lead to liquidation or provisional liquidation. In addition, no person may continue as a juristic representative if it seriously and persistently failed or fails to manage any of its financial obligations satisfactorily. This places an obligation on the FSP to ensure the overall financial soundness of its juristic representatives.

S 45 applies to juristic representatives of Category 1 FSPs. As of 1 March 2019, the assets of a juristic representative of a Category I FSP must at all times exceed the liabilities of that juristic representative.

The financial soundness requirements of juristic representatives of Category II, IIA, III and IV FSP’s are set out in S 46 – S 49 of the Board Notice are important but have not been considered in this article. These provisions should be studied carefully and the effective dates set out in S 53(1) of the Board Notice should be noted.

Click here to access BN 194 of 2017 – Chapter 6 (Financial Soundness)

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