The Financial Services Board subcontracted the beleaguered KPMG to do an impact assessment on the proposed amendments related to the Fit and Proper requirements, as published in the Draft fit and proper requirements (2016).
In particular, the study focused on the proposed changes to the second level Regulatory Examinations (REs) and the Continuous Professional Development (CPD) requirements.
The introduction to the findings of the assessment provides a very neat summary of what the new Fit and Proper requirements, and specifically insofar as training is concerned, will entail.
The actual published details, most of which come into effect on 1 April 2018, differ slightly from those on which this assessment was conducted.
The current reality
At present, FSPs, KIs and Representatives are required to write and pass the relevant level REs. There are a maximum number of four examinations which make up the first level REs that deal with the regulatory framework applicable to FSPs, i.e. the provisions of the FAIS Act (2002) and the Financial Intelligence Centre Act of 2001 (FICA).
In addition, the FAIS Act (2002) legislation refers to second level REs, which were earmarked to be more product specific and would focus on the categories and subcategories in which the FSP, KI and Representative is authorised to render financial services. However, the Registrar extended a general exemption relating to the second level REs in June 2013 applicable to all FSPs, KIs and Representatives by means of the General Exemption from the Second Level REs requirements (2013). At present, the FAIS Act (2002) does legislate that FSPs ensure that training for KIs and Representatives regarding products are in place.
Proposed product knowledge requirements
The new Fit and Proper legislation refers to the replacement of the 26 product specific second level REs with class of business training and product specific training, known jointly as product training. Accredited providers, which are accredited by the relevant Skills Education Training Authorities (SETA) according to Quality Council for Trades and Occupations (QCTO) criteria, must provide class of business training.
In contrast, anyone may provide product specific training, but these are likely to be product suppliers who have the necessary information and expertise. Furthermore, FSPs are responsible for recording all class of business and product specific training (provided both internally and externally) in their competence register, along with other competency requirements.
New Continuous Professional Development requirements
A number of changes were made to the last published discussion document:
|(1)||Subject to subsection (2) below, the fit and proper requirements relating to CPD apply to all FSPs, key individuals and representatives.|
|(2)||The fit and proper requirements relating to CPD contained in this Chapter do not apply to|
|a)||a Category I FSP, its key individuals and representatives that are authorised, approved or appointed only to render financial services or manage or oversee financial services in respect of the financial products: Long-term Insurance subcategory A and/or Friendly Society Benefits; and|
|b)||a representative of a Category I FSP that is appointed to only:|
|i.||render a financial service in respect of a Tier 2 financial product; and/or|
|ii.||render an intermediary service in respect of a Tier 1 financial product.|
Summary of cost analysis results
For the product knowledge requirements, KPMG compared two scenarios: second level REs versus the combined cost of product training and CPD. It found that, under the new dispensation, the cost impact would be significantly reduced.
In terms of CPD requirements the study found that the cost of the proposed CPD requirements would be substantially less than the present value costs of the current CPD programme. This is difficult to understand, given the limited scope of CPD, currently, as opposed to when it impacts on the whole industry.
Potential risks and possible mitigation strategies
It is evident that there are still many unknown factors which can impact on the real outcomes. Under the heading “Understanding the nature of outcome based regulation and its success factors”, the assessment states:
The proposed changes introduce new roles for market players. The FSB’s role is more information provision and credibility related while industry players have a higher degree of autonomy. In light of this, concepts such as class of business training as well as the related definition of ‘assessment’ require clarification and discussion.
A major concern is the narrow scope of the KPMG impact study in that it was not tasked with assessing the impact of the level of service provided to the lower end of the market in terms of the exemptions provided advisers working in that market.
Whilst it is so that the industry will have a larger degree of autonomy, there is also the danger of problems being identified only after the damage had been done. Of particular concern here is the introduction of “execution of sales” which will rely on the untested content of script written by the FSP.
Another major concern is the ever increasing workload on the industry, and particularly smaller FSPs who find their sustainability increasingly under pressure due to the demand of complying with regulatory obligations.