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Review of Intermediary Services Definition on the Cards

The postponement of the Insurance Laws Amendment Bill, 2013 also impacted on a proposed change by the FSB to the FAIS Act. The objective of the proposed changes was to close regulatory gaps which “…are increasingly being exploited by certain sectors in the financial services industry to circumvent regulation under the Act.”

A new definition of “intermediary services” will “…effectively bring product suppliers rendering intermediary services within the ambit of the Act. It also clarifies that intermediary services need not be rendered “on behalf” of a client or product supplier, but could be rendered by the product supplier itself acting through its employees or organs.”

The proposed new definition now reads:

“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 in respect of a financial product [against a product supplier];”;

(The sections in bold are additions to the current definition, while the underlined phrase will be removed.)

This is further enhanced by the deletion of subparagraph (ii) of subsection (3)(b) which currently provides as follows:
“1(3) For the purposes of this Act-
(b) intermediary service does not include –
(i) …;
(ii) an intermediary service rendered by a product supplier –
(aa) who is authorised under a particular law to conduct business as a financial institution; and
(bb) where the rendering of such service is regulated by or under such law;”.

The rationale for the proposed changes is given as follows:

Certain product suppliers have increasingly taken the view that they are not subject to the Act when engaging, through their employees, in the direct marketing of their own products to clients.

Since inception of the Act it has been the official view of the FSB that a product supplier rendering an ‘intermediary service’ through its employees or so-called tied agents must be licensed under the Act, and its employees must be registered as “representatives” unless such service is regulated by the law under which they are authorised to conduct business as a financial institution.

The FAIS Act aims to regulate the furnishing of advice and rendering of intermediary services in respect of financial products, in the furtherance of consumer protection. The exclusion of product suppliers and their employees from the Act, to the extent they are not regulated elsewhere, could never have been intended as such an interpretation would defeat the purpose and objective of the Act.

This leads to the unequal treatment of persons performing the same activity e.g., an independent intermediary must comply with the Act and meet competency requirements when selling financial products, whilst employees of product suppliers performing the same activity do not have to meet such requirements.

The media release on the postponement of the ILAB concludes with the following statement:

The proposed amendment to the Financial Advisory and Intermediary Services Act No. 37 of 2002 (“FAIS Act”) section 1(3)(b)(ii), which seeks to bring product suppliers rendering intermediary services within the ambit of the FAIS Act, may be given effect through either a consequential amendment in a schedule to be published in the revised second draft Twin Peaks Bill or through a separate Financial Services Omnibus Bill.

We expect the latter option as the more likely one.

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