On 22 June 2020, the President issued a Proclamation regarding the commencement of certain sections of the POPI Act, these refer to: sections 2 to 38; 55 to 109; 111 and 114(1), (2) and (3), which will all take effect on 1 July 2020. These sections deal with, inter alia, the purpose of the Act, the application and exclusion provisions, the lawful processing of personal information and exemptions thereof, sections relating to the Information Officer, prior authorisation, codes of conduct issued by the Information Regulator, provisions regulating direct marketing by means of unsolicited electronic communications, enforcement, complaints, offences and penalties.
The Proclamation also states that sections 110 and 114(4,) will come into effect on 30 June 2021. These sections deal with the transfer of the enforcement of the Promotion of Access to Information Act (PAIA) from the South African Human Rights Commission (SAHRC) to the Information Regulator.
It is important to note that section 114(1) of POPIA provides a grace period of 1 year to be fully compliant with the Act – therefore all entities must be fully compliant with the provisions of POPIA by 1 July 2021. The grace period should be used to put compliance processes in place.
Click here to read the Proclamation.
POPIA was signed into law in 2013 but did not take full effect at the time. Various developments have since taken place such as the appointment of the Information Regulator in 2016 and final POPI Regulations which were published in 2018.
The act aims to protect personal information, falling into the broader Constitutional right to privacy. POPIA seeks to regulate every step of the processing of personal information from how personal information must be handled when it is collected until the time it is destroyed. But what exactly should be considered as personal information and what does processing mean?
Personal information broadly means any information relating to an identifiable, living, natural person or where applicable, an identifiable, existing juristic person (companies, CC’s etc.) and includes, but is not limited to:
Processing means anything that can be done with the Personal Information including collection, usage, storage, dissemination, modification, or destruction.
It is crucial for every individual that processes personal information to understand the requirements of POPIA. Business owners, Directors and Key Individuals need to understand the principles of POPIA from both an internal and external perspective i.e. external being how client information is processed while internal refers to HR processes and how employees personal information is processed. Adequate security measures and POPIA related policies and procedures will need to be implemented in order to maintain confidentiality and integrity of personal information in line with POPIA. Daily activities of Financial Service Providers include the processing of personal information such as gathering information when it comes to onboarding a client, processing client information to do a financial needs analysis or performing an intermediary task – financial advisors will need to act with due skill, care, and diligence when it comes to processing client’s personal information.
POPIA also speaks to the Treating Customers Fairly (TCF) principles. With reference to TCF Outcome 1 Consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture, the POPI Act can be regarded as an additional tool to give effect to the fair treatment of clients in that client’s personal information will be used in a responsible and ethical manner.
Non-compliance with the requirements of the POPI Act may lead to the Regulator imposing an administrative fine or even imprisonment. Non-compliance may also result in serious reputational damage for a business.
Below are some important factors to consider to get started on becoming POPIA compliant ahead of the 1 July 2021 deadline:
The POPI Act imposes obligations on all business in South Africa, not just FSPs. If you would like a proposal on how we can assist your business with POPI compliance, please contact your nearest Masthead Regional Office or your Masthead Compliance Officer.
On 26 June 2020, the FSCA published FSCA Communication 35 of 2020 (FAIS) confirming publication of the following final amendments:
Masthead provided input and commentary on the proposed amendments, which can be read in the Consultation Reports which we have referenced below. Members can also access Masthead’s Regulatory Commentary by accessing the website for members.
We have summarised the amendments below.
The process of making certain changes to the General Code of Conduct has now come to an end with the final amendments published on 26 June 2020. Some of the provisions come into effect immediately while other provisions only start 6 or 12 months from date of publication (i.e. 26 December 2020 or 26 June 2021).
The key sections that come into effect immediately and which, therefore, require careful attention are:
There are several existing definitions which have been amended and quite a few new definitions inserted which FSPs need to come to grips with, e.g. “replace or replacement”, “variation”, “white labelling” and “loyalty benefit”.
The FSCA has clarified that FSPs that offer products or services that are not regulated by the FSCA cannot give the impression that they are. This is not a new requirement – however, those FSPs that deal in unregulated products or services or operate in areas that fall outside of FAIS, need to pay attention.
A new sub-section explains when an FSP may not describe itself or the financial services which it renders as independent. FSPs that own or are owned in whole or in part by a product supplier or FSPs that earn fees other than commission from product suppliers, for example binder fees, or where there is some other material conflict, need to read this section carefully as it may impact how they can describe themselves.
The section that deals with what you can and cannot do when comparing different financial products, product suppliers, providers or representatives is now followed by a section that requires FSPs to apply the same principles when using comparisons in advertisements to these types of financial product or product supplier comparisons. This includes things like ensuring that you only compare products or services that are similar in characteristic, ensuring that not only price but also benefits are compared, being careful not to focus on price to the exclusion of suitability or delivery on client expectations, using current, complete and accurate information.
The amendments introduce a number of requirements relating to advertisements specifically when using forecasts, illustrations, projected benefits, past performance data, etc. These requirements must also be applied when using this type of information in the provision of a financial service to a client.
This section used to apply to all FSPs other than direct marketers. The proverbial playing fields have been levelled and this requirement now applies across the board to all FSPs. While in principle the requirements are largely the same, the amendments serve to clarify the type of information to be taken into consideration before giving advice, such as the affordability of the client, their ability to bear risk, the extent to which they understand risks, and also extends to employee benefits/group schemes where the advisor must consider the collective needs and circumstances of the members.
Previously, if a client did not give an advisor enough time or information to conduct an analysis, the advisor had to meet certain obligations, such as warning the client about the limitations in the advice. There is no longer any reference to being “unable to conduct such an analysis” – the amendments clarify that when performing an analysis there may be circumstances that vary the extent or depth of the information needed to provide appropriate advice and that these circumstances can be taken into consideration. It goes further to require that where an analysis is performed in any of the circumstances set out in the amendments, the client must be warned of the limitations in the advice in light of such circumstances and take care to ensure that it is appropriate, particularly any aspects that were not considered in light of the circumstances – although similar to what was previously required, there are some differences to be cognisant of, which may require a shift in the approach currently being taken.
The FSCA is now able to determine the format of a record of advice. For now, this only provides the FSCA with the power to do this – no prescribed format accompanied the amendments.
The sections and some of the changes which come into effect after 6 months or 12 months from date of publication (i.e. 26 December 2020 or 26 June 2021) are as follows:
There have been some enhancements to ensure that clients fully understand and agree to fees payable and the services they can expect in return for those fees. The financial interests which can be offered by an FSP to its representative have also been expanded to incorporate measurements relating to fair customer outcomes. The changes will require FSPs to re-look at their Conflict of Interest Management Policy, the way they remunerate representatives and any fee arrangements with clients, to ensure that these are aligned with the amendments. This section will take effect from 26 December 2020.
This requires that where feasible, there should be a written agreement between the client and the provider which deals with the specifics relating to the client’s monetary obligations in terms of amount, frequency, payment method, services to be provided, termination arrangements etc. This section will take effect from 26 December 2020.
The section on advertising has been completely overhauled and aligned, where possible, with other regulation such as the Long-term and Short-term Insurance Policyholder Protection Rules (PPRs). This section will require FSPs to have a close look at their Advertising Policy and Procedures and to make appropriate changes by the end of the year when it takes effect on 26 December 2020.
There have been some slight changes to this section which, in the main, align with the fact that direct marketers are no longer excluded from sections 7, 8 and 9 and, therefore, those sections now apply and do not need to be separately addressed under this section. These changes will take effect from 26 December 2020.
Like the changes on advertising, the requirements relating to complaints have been replaced with a completely new section which is aligned with the PPRs as far as possible. While there is still some time before these requirements kick in (some in 6 months and others in 12 months), FSPs need to start looking at their complaints management framework and identify necessary adjustments to bring it into line with the new requirements.
FSPs will need to spend some time digesting the new requirements and consider their impact on different policies and procedures in the business.
Click here to read the Amendment of the General Code of Conduct for Authorised FSPs and Representatives.
Click on the links below to read previous articles relating to the proposed amendments to the General Code of Conduct.
Click here to read the Consultation Report relating to the proposed Amendments to the General Code of Conduct and Short-term Deposits Code of Conduct.
The main purpose of the amendments to this Code is to align the provisions relating to advertising, marketing, and complaints management with the changes to the General Code of Conduct. These changes come into effect 6 months after the effective date of the Amendment of the General Code of Conduct.
Click here to read the Amendment of Specific Code of Conduct for Authorised FSPs and Representatives conducting Short-term Deposit Business.
Amendments to the Fit and Proper requirements were published in the Government Gazette No. 43474 on 26 June 2020 and come into effect immediately. The amendments were primarily introduced to align the terminology in these requirements to the Insurance Act, the Long-term and Short-term Insurance Acts. However, in addition to these there are a few key changes that FSPs should be aware of.
There were several amendments to the definitions, for the most part, to align the terminology with the Insurance Act, and the Long-term and Short-term Insurance Acts.
Of interest is the amendment to the definition of a “CPD activity” which now clarifies that a Professional Body may only approve an activity that is verifiable. Unfortunately, qualifications are still excluded from the definition of a CPD activity, despite Masthead submitting that there are good reasons why qualifications should ‘count’.
There has also been an amendment to the definition of “annual expenditure” and “remuneration” in Part 3 that deals with financial soundness requirements specific to specific categories of FSPs and juristic representatives. The amendment removes the term “contractor” from these definitions as the intention was to limit the dispensation to variable remuneration only and not to extend it to variable charges or fees payable to third parties for services rendered. The amendment brings the definition back into line with the initial intention of the regulator. FSPs that must maintain liquid assets should consider whether the definition change affects their calculation of liquid assets.
The amendment to section 40(1)(a) has the effect that an FSP cannot appoint a person that is an unrehabilitated insolvent. In the Consultation Report the FSCA confirms that the prohibition only applies to the appointment of a representative, meaning that if a representative is sequestrated after their appointment, they can remain as a representative of the FSP providing that the FSP puts measures in place to deal with the risks that may arise as a result of the representative being sequestrated. This highlights the importance of asking the right questions and conducting appropriate checks prior to appointing a representative to your FSP to make sure that you do not inadvertently fall foul of this requirement.
Click here to read the Amendment of the Determination of Fit and Proper Requirements, 2017.
Click here to read the Consultation Report relating to the proposed Amendments to the Determination of Fit and Proper Requirements for Financial Services Providers, 2017.
Click here to read FSCA Communication 35 of 2020 (FAIS) relating to the Publication of final amendments to the General and Short-term Deposit Codes of Conduct as well as the Fit and Proper Requirements under the FAIS Act.
The first RDR consultation paper was released almost 6 years ago in October 2014 and contained 55 proposals affecting financial advice and the distribution of financial products.
In December 2019, the FSCA published an update and it is clear from this paper that there has been a lot of progress made even though there are still a number of proposals that have not been finalised. We have stated before, and would like to reiterate that it is pleasing to see that the regulators are not just pushing through with what they initially proposed – there are plenty of examples where they have, after receiving input from various sources, changed their thinking and in other instances they have decided not to move forward with some proposals.
Two of the RDR proposals relate to the long-awaited consultation papers on Advisor Categorisation and Investment-related matters. The first paper is about what advisors should be called and what they can do, while the second paper deals with the activities of investment management and the relationship between various entities in that space.
The industry was given until the middle of May 2020 to submit comments on these papers – as Masthead, we submitted feedback and think it is important to unpack the main points coming out of the proposals and consider how they may affect all or some advisors.
We will run a series of 4 articles that will deal with the key aspects of these two consultation papers. First, we’ll deal with the Advisor Categorisation and then we’ll cover the Investment-related matters.
(Masthead members can read the full RDR feedback submissions on Masthead Connect)
In this Part 1 on Advisor Categorisation we will look at the labels or titles that advisors will be allowed to use, and we will consider what products PSAs and RFAs can provide. In Part 2, we will look at proposed restrictions on licensing for both reps and KIs. We will also consider what happens if an advisor moves from one FSP to another and discuss the clients’ ability to “switch off” product commission. Lastly, we will refer to the regulator’s expectations of product suppliers.
In their early version of the RDR proposals the regulators proposed a three-tier model for financial advisors, namely tied, multi-tied and IFA. In their latest paper, the FSCA has committed to a two-tier model, with two categories of licensed advisors, namely (1) Product Supplier Agents (PSA) and (2) Registered Financial Advisors (RFA). On the one hand, a PSA is essentially a tied agent as we know it today and typically works for a product supplier. On the other hand, an RFA is what we would refer to as a broker, mostly working for themselves, although an RFA can be part of a financial services group of companies.
The regulator’s strong view is that advisors will either be PSA or RFA … they cannot be both. So, a PSA cannot “sit in two entities” and entities licensed to provide financial advice will have to indicate clearly which adviser category they will operate in and be licensed accordingly. These PSA/RFA terms are working titles and the regulator is inclined towards including a descriptor of what the advisor does.
So, a business card could potentially have the following labels and descriptors:
The use of the word “independent” cannot be used to describe a PSA. It can only be used by RFAs as long as there is no actual or potential influence exercised by a product provider over an RFA. In simple terms RFA FSPs or their reps will not be allowed to describe themselves as “independent” where:
These terms do not relate to licence categories but are rather labels that describe what the FSP/advisor does. The thinking is that both PSAs and RFAs can call themselves financial planners as long as they meet the standards set down in regulation. The FSCA is proposing that only CFP-qualified advisors will be allowed to use the designation “financial planner” and only CFP-qualified advisors will be allowed to say that they provide “financial planning” or “financial plans”. The regulators say that non-CFP advisors will need to use different terms/words to describe their services and recommendations. Therefore, if the name of your firm/FSP includes the words “… Financial Planning”, unless you and ALL your advisors are CFP-qualified, you will not be allowed to use that name.
We are concerned with the position that so-called “non-CFP advisors” should not be allowed to call themselves “financial planners” and particularly may not be allowed to use the terms “financial plan”, “financial planning”. We think that the term or description “financial planning” or “personal financial planning” is not unique to, or the sole preserve of a single body. Even more so, “financial plan” can have a very wide set of meanings and since there is not a single and common definition, we do not agree with the proposal to limit the use of the terms to a small group.
Lastly, in relation to these terms, the regulator is proposing that … other derivatives of “financial planner”, “financial plan”, and “financial planning” should also be reserved for use by qualified CFPs. They have not defined what these derivative terms are, but at this stage we think such a restriction or proposal is far too wide to be a reasonable regulatory rule or principle.
The regulators have set out some clear rules, particularly where there are PSA and RFA channels in Financial Services Groups of Companies. For instance, each channel needs to be run in a separate legal entity and should be managed as a separate and discrete business. Further, these channels need to identify, manage and mitigate any conflicts of interests.
PSA advisors will only be allowed to provide advice and non-advice intermediary services in respect of financial products of the product supplier under whose licence they operate and the products in the product supplier’s group of companies.
PSAs will not be able to advise on products that fall outside their “home group” – there will be no gap-filling. However, in order for the client to get access to a suitable product solution or product brand, PSAs will be able to refer clients to product suppliers outside their own group of companies or to an RFA advice channel in terms of a referral agreement These agreements would need to be at the FSP, business-to-business level (not at advisor level) and PSAs would be allowed to be paid for such referrals, but they must disclose the fee arrangements and how much they are being paid.
RFA advisors may advise on a range of product suppliers and products where their FSPs have broking agreements.
Where the RFA brokerage forms part of a group of companies though, the regulator will monitor closely to ensure that advisors and/or management do not bias their advice and product solutions towards home group products. For example, they will also look at what products are sold and whether RFA channels are being incentivised to promote group products.
The impact of these proposals may differ depending on the way in which an FSP is structured. While these are just proposals, they may change as a result of the consultation process, and it will also be some time before we see anything formally introduced through regulation, advisors should be thinking about how their business could be affected or how they would like to position themselves or their business in the future.
This concludes Part 1 of our series on RDR Developments relating to Advisor Categorisation. Keep a look out for Part 2 in our next issue of Mastering Compliance.
Masthead members can read the full RDR feedback submissions to the regulator on Masthead Connect. The documents submitted are:
Log in here and follow this path to access the documents: For Members > MHFAA > Regulatory input by Masthead.
The 2019 Annual Report of the Ombudsman for Short-term Insurance (OSTI) released end May 2020 shows that the Ombud received 10 367 formal complaints for the 2019 period which was an increase from 9779 complaints in the previous year, 2018. The OSTI closed 9 167 complaints in 2019 while 9474 complaints were closed in 2018.
A closer look at the 9167 complaints that were closed shows that the majority of these complaints were in respect of motor vehicle claims at 49% followed by homeowners/building claims at 20%, commercial claims at 8% and household content claims at 6%, with the balance of 17% of complaints being non-claim related or related to other types of cover.
Analysis of the claims
Motor Vehicle Claims
A deeper analysis of Motor Vehicle claims reveals that 73% of these complaints were for accidental damage. Warranty and mechanical breakdown claims comprised 8%. Theft and hijack claims also comprised 8%. This trend remains consistent with previous years. The Report stated that the primary cause for motor vehicle complaints related to claims settlement calculations while the secondary cause for these complaints was rejections based on the insured’s alleged non-disclosure or misrepresentation of underwriting details at the sales stage.
Homeowners insurance claims
54% of complaints considered by the OSTI under homeowner’s insurance related to claims for damage caused by acts of nature, largely storm related. The primary cause for complaints, at 30%, was the rejection of claims on wear and tear, gradual deterioration and lack of building maintenance being the proximate cause of the damage. The secondary cause for complaints related to rejections based on no insured event having operated.
Household content insurance claims
Theft and burglary claims amounted to 67% of complaints considered by OSTI under this category. Claims settlement calculations remain the primary cause for complaints, as in the previous year. The disputes mainly related to issues of underinsurance, replacement values and proof of ownership in respect of the claimed items. The secondary cause for complaints was rejections where the insurer’s underwriting criteria for the insured event were not met. Examples include minimum security requirements, such as a burglar alarm with armed response, burglar bars, and burglar gates not being complied with by the insured.
Commercial insurance claims
The majority of commercial complaints considered by OSTI related to motor vehicle (32%) and building (23%) claims. The primary cause for the complaints was rejections based on gradual deterioration, wear, and tear and lack of maintenance. The secondary cause for complaints was the claims settlement calculations followed by rejections on the ground that the insurer’s specific conditions of cover were not met, such as a valid professional driver’s license, a vehicle’s roadworthiness, alarm warranties and fire safety measures.
‘Other’ & non-claim related policy complaints
The remaining complaints relate to various insurance products – including personal accident, water loss, travel insurance, all risks, mobile device cover, legal expenses, hospital, and medical gap cover. The OSTI states that the general policy-related disputes include policy amendments/endorsements, policy cancellations/lapses, premium increases/rebates, and service-related complaints. The office of the OSTI found that the primary cause for complaints under this category is the quality of the communications that take place between the insurer and the insured during underwriting and over the operation of the policy
We recommend that FSPs who deal in short-term insurance products take time to read the Ombud’s full report. This can be used as the basis to review the advice process followed, bringing client’s attention to important information in policy documents, and ensure compliance with insurers’ conditions of cover.
The Financial Sector Conduct Authority, the Prudential Authority and the National Payment System Department of the South African Reserve Bank have recently published Joint Communication 7 of 2020 which sets out the minimum precautionary measures to be taken by financial institutions and payment institutions in light of the easing of lockdown levels amidst COVID-19.
The Joint Communication states that greater responsibility is now placed on institutions to ensure that the working environment is safe. Institutions should also exercise great care to protect their customers, employees and members of the public that they come in contact with. These institutions are also encouraged to assess their own risks and circumstances and, where necessary, to implement stricter requirements.
Financial institutions must comply with the Occupational Health and Safety Directives issued by the Minister of Employment and Labour in terms of the Regulations regarding the precautionary measure in workplaces.
Click to read the Consolidated Direction on Occupational Health and Safety Measures in certain Workplaces issued on 4 June 2020.
Joint Communication 7 of 2020 also sets out guidance to financial institutions, some of which state that financial services must continue via remote means wherever possible. In instances where face to face meetings are unavoidable, it is advised that these meetings are held at premises where appropriate health measures and social distancing can be implemented. Financial institutions are further advised that they should not hold meetings at the homes of clients or visit financial customers at home for purposes of providing financial services to them. Where there are exceptional circumstances that require the meeting to take place at the client’s home, the Joint Communication contains specific protocols that should be followed.
Financial institutions that make use of travelling nurses for purposes of medical underwriting are advised that they should arrange that examinations take place at premises where appropriate health measures and social distancing can be implemented. The Joint Communication states that home visits by travelling nurses are not recommended, but if no alternative is available then a nurse may visit a customer at home for purposes of medical underwriting and they must follow strict safety measures as contained in the Joint Communication specifically for travelling nurses.