Common questions asked since FAIS was introduced include:
“Does this constitute an intermediary service?” or “Must I be an FSP or representative?”
The judgment on 16 May 2013 in the Supreme Court of Appeal in Tristar Investments v The Chemical Industries National Provident Fund (455/12)  ZASCA 59, provides welcome clarity on the issue. The court had to determine what constitutes an intermediary service under the FAIS Act.
Tristar Investments is an authorised FSP, licenced under the FAIS Act to provide advice, but not intermediary services. It had an ‘Investment Consultancy Agreement’ with the Chemical Industries National Provident Fund. In terms of this agreement Tristar undertook to:
- ‘draft detailed asset manager mandates for [the Fund’s] domestic and international asset managers’;
- ‘implement the asset allocation model, investment strategy and asset manager mandates’;
- ‘negotiate any contractual issues with the current and any new asset managers on behalf of ;
- ‘manage the transition from [the Fund’s] current domestic and international portfolios to be created as a result of this process’;
- monitor and evaluate the performance of the investments, and the performance of the asset managers, and, in some cases to ‘correct any underperformance’, and in other cases to ‘take appropriate corrective action’.
The Chemical Industries National Provident Fund took Tristar to court. One of the arguments of the fund was that the agreement between them was void because it was unlawful. The unlawfulness present was that Tristar was rendering an intermediary service for which it was not licensed.
The court analysed the meaning of intermediary service of the Act. The definition of an intermediary service is as follows:
“intermediary service” means, subject to subsection (3) (b), any act other than the furnishing of advice, performed by a person for or on behalf of a client or product supplier—
- a. the result of which is that a client may enter into, offers to enter into or enters into any transaction in respect of a financial product with a product supplier; or
- b. with a view to—
i. buying, selling or otherwise dealing in (whether on a discretionary or non-discretionary basis), managing, administering, keeping in safe custody, maintaining or servicing a financial product purchased by a client from a product supplier or in which the client has invested;
ii. collecting or accounting for premiums or other moneys payable by the client to a product supplier in respect of a financial product; or
iii. receiving, submitting or processing the claims of a client against a product supplier;
The Supreme Court held that part (a) of the definition implies a direct result achieved by an intermediary between a client and a product supplier, while part (b) refers to the management or administration of financial products.
The court then held that none of the services that Tristar performed fell under the ambit of an intermediary service as:
- It was not to bring about transactions
- Nor was it to manage or administer any financial product.
The court held that “so far as it was to manage or administer anything at all, it was to manage and administer no more than the mandates of the asset managers” and that the court could see no reason “why the legislature would have thought it necessary for services of that kind to be regulated…In those circumstances TriStar was not required to be licensed to provide them”.
This is a welcome judgement on the very slim volume on case law that exists on the FAIS Act. This judgement illustrates the important principle that intermediary services must be related to a financial product. The mere management or monitoring of a fund manager will not constitute an intermediary service under the Act.
Although the client in this instance was a provident fund, the same principles should apply to an individual client where an FSP or representative performs a similar function with regards to an asset manager. This decision can also then raise a number of questions in terms of section 7 of the Act – whether one must be licensed as an FSP and the concomitant issue of only dealing with other authorised FSPs in terms of section 7 (3) and the nature of contractual services versus financial services and the nature of those services on financial products or something else, like a fund manager.
At this date, the FSB has issued no comment on the judgement and it would be interesting to see whether they agree with the court’s interpretation. Whilst certainly the judgement is correct in terms of the letter of the law, one wonders how the
FSB might see it in terms of the spirit of the law.
For financial planners this highlights the issue that FAIS deals only with the advice or intermediary services of a financial product. Advice or services on wills, trusts, and tax fall outside the scope of the FAIS Act.
The opinions expressed in this article are the author’s own and do not necessarily reflect the view of Moonstone Information Refinery.