Square Peg in a Round Hole

Moonstone was intimately involved in developments in the industry since the publication of the FAIS Act of 2002 which became effective in 2004. We acted as recognised body for the licensing process from 2004 until March last year, provided compliance services from the word go, and is currently very involved in the provision of regulatory exams on behalf of the Regulator. 

During the licencing process, it became evident that a distinction had to be made between the various products offered to consumers, as well as the sophistication levels of products.

Underpinning all of these were the fit and proper requirements – you could not give advice if you were found wanting in terms of competency, or lacked honesty and integrity, for example.

Various dispensations and interim arrangements had to be put in place during the implementation phase of the legislation. For instance: provision was made for people, appointed before a specified date, to only obtain a limited number of “credits” to be able to stay in the industry, while other, stricter, requirements were set for new entrants.

Initially products were divided into 19 different categories, but as time went by, new subcategories were established to distinguish between various lines of business. Licence Category B1 and B2 were introduced, and the intention is to split these two categories even further into B1 A and B2 A.

The regulatory examinations were introduced in November 2011. It became apparent that representatives in the least sophisticated product lines, and whose qualification requirements were very basic, would never pass the exams. It was then decided to develop a specific exam, comprising both level 1 and 2 RE elements, for key individuals in these licence categories, whilst representatives would be exempt from having to pass the exams.

A similar approach was followed when the failure rate in category B1 and B2 was such that it was decided to delay their deadline for completion of the level 1 RE and to develop a bespoke exam for such candidates.

Between 2006 and 2008, the FSB consulted with the industry to develop qualifying criteria for different functions pertaining to the provision of financial advice and intermediary services. The fact that certain criteria were no longer valid, led to the recent announcement that the level 2 REs would be postponed until further notice.

Implementing a new piece of legislation as complex as the FAIS Act is as big a challenge for the Regulator as it is for the industry. When the peg is square, and the hole is round, adjustments need to be made.

Next year sees the introduction of the Twin Peaks model of regulation of the financial world in South Africa. The Reserve Bank will be responsible for prudential regulation, while the FSB will regulate market conduct. The big change in terms of the latter is that banking services, which fell under the Reserve Bank, will now resort under the jurisdiction of the FSB.

All of this will of course necessitate changes to a wide variety of laws.

If I was granted one early wish for my Christmas stocking, then I would ask for simplification of all applicable legislation. This would benefit both the Regulator, and the regulated.

A very unfortunate result of the current complicated laws is the inadvertent transgression of the law. If people have simple guidelines to follow, few will intentionally do so. I am sure that the same will apply at the FSB, concerning interpretation and application of the law. Just like the industry, they are human, and intricate laws will lead to different interpretations.

The purpose of legislation is often to make it as fool proof as possible to prevent transgressors from using loop holes to bypass the regulation. Call me naïve if you like, but should the focus not rather be on enabling the honest majority to comply? There is certainly enough practical experience at this stage to focus on the real issues which will benefit the consumer, about whom all of this is about.

In this case, less will definitely be more.

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