The FSCA warns the public to act with caution when dealing with Metro Finance (Pty) Ltd, as they are not authorised in terms of the Financial Advisory and Intermediary Services Act, 2002 (“FAIS Act”), to render any financial advice and intermediary services.
The transition to advice-based fees can reduce the impact of the proposed RDR changes on your business and improve business sustainability.
The Retail Distribution Review (RDR) discussion document released in 2014 proposed changing the remuneration structures for financial advisors. Masthead proposed that the Financial Sector Conduct Authority (FSCA, previously known as the FSB) allow for a transitional period to introduce new fee models.
A survey Masthead conducted in 2015, revealed that 42% of advisors felt very uncomfortable about charging advice fees. Advisors mainly believed clients would not be prepared to pay advice fees that are separate to commission.
From the RDR proposals and subsequent updates it is clear commission on long-term risk business is not being completely banned. Instead, the FSCA is proposing a regulated remuneration model in which clients pay fees and product suppliers pay commission. Clients will need to pay for work done for them, such as advice given or a needs analysis, while product suppliers will pay commission for work done on their behalf, such as submitting and servicing business.
The FSCA is currently conducting technical research, which includes the knock-on effect of remuneration caps, activity segmentation and possible overlaps of activities for which intermediaries are rewarded. This fits in with the RDR’s activity-based approach to remuneration and reinforces the current thinking.
If you have a clearly defined business model, you should be able to define all the activities, time and direct costs involved in delivering on your value proposition and communicate this with clients. If clients know the scope of your services, it is easier to attach value to the service being offered.
Many advisors currently rely on commission, particularly upfront, but some have introduced alternative revenue models, such as asset-based fees or time-based fees. An asset-based fee is determined by the size of an investment, while a time-based fee hinges on the amount of time spent on providing services or advice, either as an hourly rate or a fixed fee per service.
To illustrate this principle, imagine it is time for your next vehicle service. Each service has a specific fee, based on the number of kilometers your vehicle has travelled. You contact the service centre for a cost estimate of the service so you can budget accordingly. You also know that over and above the service fee, there are additional fees for specific items you choose to add, such as new brake pads or wiper blades.
In the same way, you can substitute ‘advice fee’ for the service fee, while the additional fees are the specific services a client contracts you to perform. Knowing what your time is worth per hour makes charging fees simpler to motivate and do. When clients know what they are paying for, they can ‘contract’ with you accordingly.
There are benefits to implementing RDR. The RDR objectives of enhanced professionalism will improve customer confidence and trust. Fee transparency will allow for fair competition for quality advice and services, and you will be incorporating the TCF Outcomes in your business. If customers can understand and compare the nature, value and cost of your advice and other services, your reputation will improve.
Masthead’s future-fit model supports annuitised revenue models that incorporate the TCF Outcomes. Based on the UK experience of RDR, advisors who centralised their business around the customer enjoyed success. To ensure your business remains future fit, set your pricing models in place sooner rather than later, keeping customer interests at the fore.
In this article we highlight two Appeal Board rulings to demonstrate the importance of understanding the role of the office of the Financial Advisory and Intermediary Services (FAIS) Ombud in performing its functions as described and mandated by the FAIS Act.
The main objective of the FAIS Ombud is to consider and handle FAIS related complaints in a manner that is fast, procedurally fair, informal and economical.
The mission of the FAIS Ombud is to promote consumer protection and contribute to the integrity of the financial services industry by resolving complaints in a manner that is impartial, economical, accessible and, at all times, equitable.
The FAIS Ombud strives to provide a fair and honourable service to ensure that financial customers have access to and are able to use affordable alternative dispute processes for complaints.
In resolving complaints, the FAIS Act and Rules require the FAIS Ombud to act independently and impartially. In doing so, the FAIS Ombud would normally resolve complaints through mediation or conciliation and, if these methods are not successful, the Ombud will issue a determination.
In the J.C. Mostert v L. Landman matter the Appeal Board ruled against the FAIS Ombud’s determination and referred the complaint back to the Ombud for further consideration.
Briefly the facts of the matter: The client (Landman) required the advice of a Financial Services Provider (Mostert) in assisting her to invest the proceeds of her late husband’s estate. The FSP made an investment of R650 000 on behalf of the client into the Sharemax Retail Park Holdings. The client complained to the Ombud based on the FSP’s poor advice to invest the monies in a high-risk investment such as Sharemax. The client was of the view that the FSP’s advice was flawed as the risk involving Sharemax was not suitable to her circumstances. The Ombud made an order in favour of the client and directed the FSP to pay an amount of R650 000 with interest to the client. However, the Ombud made this order based only on the version of the client and did not take the FSP’s version into consideration because the Ombud alleged that the FSP did not provide any response to the complaint. However, during the Appeal, the Appeal Board found that the FSP had in fact submitted a response to the complaint, and this was supported by proof of an affidavit.
As stated above, the office of the Ombud is bound by the FAIS Act and should act independently and impartially when discharging its function and dealing with complaints.
The Appeal Board needed to decide whether (1) the complaint had prescribed, and (2) the Ombud’s failure to consider the FSPs response meant that the determination should be set aside and be referred back to the Ombud for proper investigation, taking into consideration the versions of both parties.
After further consideration of this matter the Ombud concluded in her ruling that the initial responses received from the advisor were not considered due to an administrative error and she further stated that such responses contained submissions of fact and the law that are relevant to the issues in the complaint. The Appeal Board found that “the complaint was appropriately submitted and that it had not prescribed.” The Appeal Board set aside the determination and referred the case back to the Ombud for review and further consideration, due to the fact that the Ombud failed to meet the requirement of being “objective and impartial before making a determination.”
The Ombud has not yet finalised the matter, and we still await the outcome.
The Appeal Board considered an appeal against a determination by the FAIS Ombud.
Briefly the facts of the matter: Waterboer requested Audenberg  to invest a cheque of R215 000 on his behalf and requested Audenberg to choose an investment carefully, as he was not in a position to lose any money. Waterboer was nevertheless advised to invest in a high-risk syndication, City Capital SA Property Holdings, by Audenberg. Waterboer was later informed that City Capital had been provisionally liquidated, however Audenberg reassured him that he had lost none of his invested capital and had only lost the dividends payable to him.
Waterboer lodged a complaint with the Ombud after he was informed that his investment of R215 000 was worth R79 857 at 52c a share, which was R135 143 less than his original investment. Audenberg confirmed that the outcome of a risk analysis indicated Waterboer was a moderate risk investor despite his claim that he was a conservative investor. The Ombud said a responsible FSP, acting in their client’s interests, would have appreciated that Waterboer had no capacity to risk his life savings and would have looked for investments that preserve his client’s capital. The Ombud ordered Audenberg to repay Waterboer the money he invested on their advice in City Capital, as Waterboer could not have made an informed decision about the investment because of a failure by Audenberg to appropriately advise the client.
In the Audenberg matter, the Appeal Board expressed concern about how the office of the Ombud handled this case. The complainant lodged the complaint with the Ombud on 28 April 2010. Audenberg addressed the matter on 29 July 2010 and also followed up with the Ombud, the last being on 5 May 2011. The first action from the Ombud was on 8 January 2014. The Ombud did not inform Audenberg that the matter was still pending, and they were kept in the dark. Only on 15 September 2015, did the Ombud make a determination to repay Waterboer, and to add insult to the injury it took the Ombud ten months to deal with the application for leave to appeal. This is not the first instance where the Appeal Board had to point to the failure of natural justice in the office of the Ombud and unjustifiable delays in processing matters. The other problem with the Ombud’s finding is that the Ombud failed to have regard to the fact that the company was under provisional liquidation for a while, but has long since been trading in a solvent position, and thus did not take all the facts into consideration when making the decision. The Ombud simply failed to follow-up or test the information that came from Audenberg, creating the impression that whatever a complainant says must be true and what the FSP says must be untrue.
The Appeal Board pointed out failures of natural justice in the office of the Ombud, and unjustifiable delays in processing of some matters. It also raised its concern about the failure of the office of the Ombud to comply with its statutory duties and stated that this may lead to the setting aside of determinations, which would be to the detriment of complainants. Still, the Appeal Board upheld the complaint, and ordered Audenberg to repay Waterboer.
Most of the complaints that the FAIS Ombud deals with are resolved by means of settlement, and very few of the FAIS Ombud’s decisions are taken on appeal. But, considering the findings of the Appeal Board in these two cases, it raises the question as to how many other cases, which have not been appealed, would also have been overturned.
These two cases highlight the importance of recognising the FSPs rights in terms of various legislation such as the FAIS Act, the Promotion of Administrative Justice Act  and the Constitution to have a dispute resolved by the application of law by means of a fair hearing.
Considering the above, it is our opinion that if your documentation is in order and you receive a complaint, you will be able to successfully defend that matter. The type of documentation should include a record of your discussions (e.g. info gathering, needs, concerns), evidence of the suitability of a financial product/advice for that client, and a record of sharing this info and acceptance of this by the client.
To read the full cases, click on the links below:
The Fit and Proper requirement to implement a Competence Register came into effect on 1 May 2018.
FSPs must be able to report to the Registrar if asked to do so, and therefore must establish a Competence Register where they must keep a record of all qualifications, regulatory exams, class of business and product specific training (provided both internally and obtained externally) and CPD.
The Competence Register must be updated with all class of business and product specific training completed by the FSP, its Key Individuals and Representatives within 15 days after the training occurred and retain all information and documentation relating to the training for at least 5 years.
For a schedule of timelines outlining the various requirements that need to be implemented and complied with before each deadline date, click here.
On 26 April 2018, the Financial Sector Conduct Authority (FSCA) released a statement that Naresh Suresh Tulsie will take over from Noluntu Bam as the new Ombud for Financial Advisory and Intermediary Services (FAIS), effective 1 May 2018. The FSCA noted that Mr. Tulsie will be responsible for promoting consumer protection and fostering the integrity of the financial services industry by resolving complaints in a manner that is fair, impartial, expeditious equitable and economical. Read the full Press Release here.
The proposed changes to the General Code of Conduct (GCoC) published during November 2017 applies to all authorised Financial Services Providers (FSPs), Key Individuals and Representatives and any changes will therefore have a direct impact on FSPs.
Although the proposed amendments have not yet come into effect, they cover several areas. This article aims to assist FSPs to plan and be prepared when the provisions come into effect. A brief overview of the proposed changes to Advertising, relevant to FSPs that advertise their business and services is provided.
The GCoC has always contained provisions relating to advertising, but these requirements have now been extended and aligned to the requirements set out in the new Long-term and Short-term Insurance Policyholder Protection Rules. The objective is:
The changes listed above are still in draft format and the registrar is considering input from industry. Masthead has submitted commentary on the proposed amendments to the GCoC.
Once the final amendments have been published, FSPs will have to review their existing policies and procedures relating to advertising and ensure that they are aligned. We also recommend that FSPs remember to take the Long-Term and Short-Term Insurance Policyholder Protection Rules into consideration.