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Fit and Proper Requirements: Financial Soundness

Posted on 8 Mar 2018

The new Fit and Proper requirements have introduced some important changes to the financial soundness requirement, particularly for those FSPs that collect premiums or hold client funds, and also for those FSPs that have Juristic Representatives. In this article we will focus on the new requirements for all FSPs, which include new liquidity calculations, reporting requirements and early warning reports where FSPs operate close to certain financial soundness limits.

Who is affected by the financial soundness requirements?

The financial soundness requirements are no longer limited to FSPs only. These new rules now also apply to Juristic Representatives of FSPs, although they do not apply to Key Individuals or Representatives who are natural persons. FSPs that are registered Banks, Long-term or Short-term insurers are also exempt, providing they meet the financial soundness requirements of the legislation that applies to them.

Part of an FSP’s responsibility has always been to apply financial management principles, which includes ensuring that the FSP meets the financial soundness requirements. This requires FSPs to keep an up to date set of monthly accounts so that the Key Individuals can ensure continued compliance with the financial soundness requirements. It is commonly accepted that one cannot manage a business properly, unless FSPs have financial performance tracking tools, reporting instruments and proper financial processes and controls in place.

In terms of the new requirements all FSPs must ensure:

  • Assets at all times exceed their liabilities, and
  • must at all times maintain financial resources that are adequate to carry out their activities and ensure that liabilities are met as they fall due.

The consequences of not doing this are serious – if an FSP or Juristic Representative is insolvent, liquidated or proceedings of this nature are pending, or they seriously or persistently fail to manage any of their financial obligations, that FSP or Juristic Representative cannot continue to operate.

In addition to the above requirements, Cat I FSPs that collect premiums or hold assets as well as Cat II, IIA, III and IV FSPs must also implement a financial strategy to assess and maintain on an ongoing basis adequate financial resources, which includes the following:

  • Must at all times comply with additional asset requirements, working capital requirements and liquidity requirements referred to in Table B of BN 194; please click here
  • Must comply with additional reporting requirements to the Registrar (submission of Form A) on a half-yearly or annual basis.

So, what are “assets”?

In order to determine whether your assets exceed your liabilities you need to understand how “assets” are defined. The new requirement expressly excludes certain assets and certain liabilities from the calculation. Goodwill, intangible assets, investments in and loans to related parties are excluded from total assets. The requirement that investments with or loans to persons to whom the FSP renders financial services, for purposes of determining whether or not the assets exceeds the liabilities, has been removed. Liabilities of the FSP exclude subordinated loans in favour of other creditors.

The new requirements have also extended the range of assets that could qualify as “liquid assets” for purposes of the liquidity requirement. The range of assets that can qualify as liquid assets include “cash and assets equivalent to cash” and money market,  and now also include the market value of a participatory interest in a collective investment scheme. (This gives greater flexibility to those FSPs that need to maintain liquid assets, as it allows FSPs to invest outside of cash e.g. shares or CIS. However, there are restrictions: e.g. only 70% of the market value of the collective investment schemes can be used in the calculation of liquid assets and these investments need to be able to be converted into cash relatively quickly and with low or no penalty.

Liquidity Calculation Declaration now needed for some FSPs

Although working capital and liquidity requirements remain, a Liquidity Calculation Declaration has also been introduced. FSPs are required to provide a Liquidity Calculation Declaration to the FSB. Cat I FSPs that collect premiums and Cat IV FSPs must submit this Declaration once a year together with their Annual Financial Statements. Cat II, IIA and III FSPs must submit this Declaration bi-annually based on their financial year.  FSPs should diarise this requirement as the declaration must reach the FSB within 45 days after their financial half year-end. A request for extension must be done within 15 days prior to the submission date.

The new requirements have also introduced Early Warning reporting.

Cat I FSPs that collect premiums, Cat II, IIA, III and IV FSPs must report to the FSB if:

  • Assets exceed liabilities by less than 10%
  • Current assets exceed current liabilities by less than 10%
  • Additional asset requirement exceeds the minimum requirement by less than 10% (affecting Cat IIA & III FSPs)
  • If any of the financial soundness requirements are not met or if the FSP becomes aware of any situation that may result in any of the above

The new Financial Soundness Requirements Section 44 (1), 45, 48 and 49, comes into effect on 1 March 2019.


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