FSB Guidance Note on Section 13(1)(c)

This guidance note comes into effect in a few days, and will have serious consequences for a number of FSPs and representatives. Alan Holton, a FAIS specialist, shares his views on the practical impact of this document.

Comment on the Guidance Note on the Interpretation of S 13(1)(c) of the FAIS Act, 2002, issued by the Registrar on the 24th June 2015 – Alan Holton.

The FAIS Act, 2002, was amended by the Financial Services Laws General Amendment Act 45 of 2013. Section 13 of the FAIS Act, 2002, was amended by the inclusion of S 13(1)(c) which provides that a person may not render financial services or contract in respect of financial services, other than in the name of the financial services provider of which such person is a representative.

This amendment, which comes into effect on Wednesday, 1st July 2015, applies to all representatives of FSP’s, irrespective of whether such representative is employed as a representative or mandated by the FSP.

The effect of the amendment is essentially to ensure that representatives are now agents of the FSP and that all financial services provided by any representatives are in fact services rendered as agents of the FSP and all contracts concluded by the representative are contracts with the FSP.

The amendment goes further than the standard common law provisions relating to agents by including the provision that any act or contract concluded by the representative must be done “in the name of the FSP”.

Please note that S 13(1)(b) of the FAIS Act, 2002, was also amended and all representatives must, before rendering any financial service to a client, provide confirmation to the client that a service contract or other mandate to represent the FSP exists and that the FSP accepts responsibility for those activities of the representative.

The reasons for the inclusion of S 13(1)(c) in the FAIS Act, 2002, are given in paragraph 4 of the Guidance Note. These reasons make for interesting reading and deserve careful consideration.

The net effect of this particular amendment can be summarised as follows:

Premium Collection

A representative may no longer collect premiums or hold client assets or funds in its own name. All such collections must be done in the name of the FSP. This means that the FSP will, inter alia, be required to open and maintain a separate bank account into which all such collections must be paid. Such separate bank account is subject to a special audit.

In the case of premiums on short term insurance products, there are a number of unique consequences.

  • If a representative is mandated to collect premiums on behalf of the FSP, then such premiums must be paid directly into a bank account held in the name of the FSP – not into a bank account held by the representative.
  • The FSP that collects and accounts for premiums on short term insurance products is exempt from the requirement that a second bank account be opened and maintained for such premiums. (S 10(1)(3) of the General Code of Conduct). This exemption does not apply to any other premiums or client funds collected and accounted for by the FSP.
  • The security required in terms of S 45 of the Short Term Insurance Act 1998 and Regulation 4.2 – usually in the form of an IGF policy – must be held by the FSP. The group IGF policies that have been applied in circumstances where juristic representatives were previously authorised to collect premiums no longer apply. Juristic representatives may not collect premiums any longer.
  • The written authorisation of the insurer to collect premiums may not be given to representative – a juristic or individual. The required written authorisation may only be granted to the FSP.

Contracts with suppliers

Any contract concluded between a representative and a supplier must be concluded in the name of the FSP. In other words, if a representative signs a contract with a product supplier or client, he, she or it does so as an agent of the FSP. The contract is thus concluded between the FSP and the product supplier/client but may be signed by the FSP’s authorised agent (the representative).

Binder Agreements

The Guidance Note states that a representative may not enter into a binder agreement in its own name.

Paragraph 7.2 of the Guidance Note states that the “activities that constitute binder functions are activities that also constitute the rendering of intermediary services as defined in section 1(1) of the FAIS Act.”

It is my respectful submission that this statement is incorrect. Binder functions are specifically defined in S 49A of the Long Term Insurance Act, 1998 and 48A of the Short Term Insurance Act 1998. These definitions do not fall within the definition of financial services as defined in S 1 of the FAIS Act, 2002. Further dialogue is required to reach consensus.

In the meantime, if this specific issue is of importance, I strongly recommend that specialist legal advice be sought.

Alan Holton
Compliance Monitoring Systems CC

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