Masthead believes that when introducing any regulation (whether new or revised) it should be (1) easy to implement, (2) easy to administer once implemented, (3) cost effective for users, and (4) easy to access, broad-based. We are also mindful of the need for legislation to accommodate and support small businesses which are well positioned to provide financial services to the broader population. Masthead will submit commentary to the FSB regarding the proposed changes to the GCOC with these principles in mind.
The FSB published proposed changes to the General Code of Conduct (GCOC) towards the end of 2017 and invited interested parties to comment before the end of February 2018. The GCOC applies to all authorised financial services providers (FSPs), KIs and Reps and any changes will therefore have a direct impact on FSPs.
The proposed amendments cover several areas, with the main reasons for the changes being to:
- provide the industry with clarity about or to extend existing requirements;
- give effect to certain RDR proposals;
- align similar requirements with other legislation administered by the FSB;
- support National Treasury’s objective of ensuring greater access of customers to financial services.
In this article we provide you with a brief overview of the proposed changes. Details of the proposals will be unpacked in later issues of our newsletter.
- What is a Replacement?
Up until now, neither the FAIS Act nor the GCOC specifically defined the types of transactions or changes to a product that constitute a replacement. The proposed amendments include a definition for replacements and variation.
- When must a provider act honestly, fairly, with due care, skill and diligence?
The existing GCOC requires a provider to render a financial service honestly, etc. Essentially, this limited the requirement to those activities that are defined as a financial service, i.e. advice and intermediary services. The proposal expands on this, requiring an FSP, in general, to act in this manner which in turn will support the requirement to have a culture of treating customers fairly.
- Be clear about which products and activities are regulated by the FSB
An FSP (or any person) cannot create an impression that it, its activities or its products are regulated or supervised by the FSB, when in fact this is not the case. For example, an authorised FSP (with a licence) that sells an unregulated product, must make it clear that the product is not approved or regulated. Clients have a right to know.
- When is an FSP prohibited from describing itself as ‘independent’?
An FSP where any direct or indirect ownership interest exists with a product supplier or where there is an arrangement with a product supplier that constitutes a conflict of interest, will not be able to describe itself as ‘independent’. This supports the RDR proposals.
- Measurement of the quality of client treatment in relation to financial interests
In terms of the conflict of interest requirements, an FSP cannot offer a Rep a financial interest for giving preference to quantity of business to the exclusion of quality. The proposed changes enhance this requirement to ensure a consistent interpretation of the Regulator’s expectation, which must include a measurement of the delivery of fair outcomes for customers when considering offering any financial interest to a Rep.
- Change to conflict of interest requirements to allow enterprise development contributions
To promote and facilitate transformation in the financial services industry, it is proposed that the conflict of interest requirements be changed to allow for contributions to qualifying beneficiaries, which are currently prohibited.
- Additional disclosure requirements regarding remuneration
Advisors will have to disclose their remuneration to clients “prior to the conclusion of any transaction” which is a change from disclosing this “at the earliest reasonable opportunity”. It makes sense that this information is available to the client beforehand, so that they can take this into consideration before making a final decision. Advisors will also have to provide the client with details of what services will be provided in exchange for such payment and their rights and the consequences of termination. The agreement reached with a client in relation to remuneration should be included in a written agreement. This prepares the way for standards for advice fees in the RDR proposals.
- Suitability of advice extended to members, employees, natural persons to whom a benefit is provided
An advisor will have to consider the needs and circumstances of underlying members or employees when giving advice to an employer, pension fund, medical scheme, friendly society or other entity. This will mean that FSPs that offer employee benefits, for instance, will have to review their advice process to ensure that this requirement is met.
- When must advisors decline to make a recommendation?
The proposed amendments make it very clear that when an advisor is unable to identify or offer a suitable product to meet the needs and circumstances of a client, the advisor must decline to make a recommendation and suggest to the client that advice be sought from another FSP. This situation may arise where an advisor is limited in what they are able to offer, either in terms of the FAIS Act or due to any contractual arrangement.
- A suitability analysis can be tailored to the specific circumstances of the client interaction if certain conditions are met (limited advice)
This amendment recognises that the extent of a suitability analysis may vary depending on what has been explicitly agreed with a client, the specific request of a client, the surrounding circumstances which may only require a specific focus or where a client has explicitly declined to provide the information requested by the advisor. However, when an analysis is performed in these situations it may be limited, and the client must therefore be warned that the advice is limited and the client will need to ensure that the product suits the needs and objectives that were not considered in this process. Although very similar to the existing requirements, there are some differences which advisors must take into consideration.
- The FSB may prescribe the format and matters to be addressed in a record of advice
The proposals include a provision which will enable the Registrar to prescribe what must be included in the record of advice as well as the format. The FSB’s view is that this may improve the quality of these records and may reduce costs.
- Direct Marketers
Direct marketers will no longer have a separate set of disclosure requirements and will have to disclose information to clients to the same extent as any other FSP. Information about a financial service must also take place prior to conclusion of a transaction so that a client can make an informed decision. The definition of a ‘direct marketer’ has also been aligned to the Policyholder Protection Rules in the Long-term and Short-term Insurance Acts.
- Advertising and Complaints
The advertising and complaints requirements have been extended and aligned to the requirements set out in the Long-term and Short-term Insurance Policyholder Protection Rules. The objective is to raise the standards for advertising and marketing to ensure good outcomes for customers and to ensure a transparent and fair complaints process is followed by FSPs.
The changes mentioned above are proposals at this stage, as the FSB must first consider input from industry and interested parties. However, while there may be some changes to the final version, this draft provides FSPs with a good idea of what is to come so that they can plan ahead and be prepared when the time comes.