Section 7(3) of the FAIS act states:
“an authorised financial service provider or representative may only conduct financial service related business with a person rendering financial services, if that person has, where lawfully required, been issued with a licence for the rendering of such financial service and the conditions and restrictions of that licence authorises the rendering of those financial services, or is a representative as contemplated in this Act.”
We look at three Enforcement Committee cases that illustrates the importance of complying with Section 7(3). This will also assist you to avoid making the same mistakes.
1. The Registrar of Financial Services Providers and Fin-U-Med Corporate (Pty) Ltd (Trading as Sport Solutions)
The following Order was made in September 2011:
Fin-U-Med was an authorised FSP which specialised in marketing and selling temporary insurance disability policies to professional rugby players.
During the period May to October 2009, Fin-U-Med had an arrangement with the South African Rugby Players Association (SARPA) whereby SARPA would market and sell these policies to its players. SARPA, therefore, providing these policies to its members, was in fact rendering intermediary services but did not have an FSB licence.
It was Fin-U-Med that was found to be in contravention of Section 7(3) of the FAIS Act and was ordered to pay a penalty of R100,000.
2. The Registrar of Financial Services Providers and Nestlife Assurance Corporation Limited
The following Order was made in May 2015:
Nestlife, a registered insurance company, collected premiums for policyholders on behalf of Mhlangaveza, a group funeral scheme administrator.
Mhlangaveza was not licensed to render intermediary services in terms of the FAIS Act nor was he a representative of an FSP.
Even though there was no formal written agreement between the parties, Nestlife’s action of collecting premiums on behalf of Mhlangaveza meant that Nestlife contravened Section 7(3) of the FAIS Act and was therefore ordered to pay a penalty of R100,000 plus costs.
3. The Registrar of Financial Services Providers and Jacobus Gous
The following Order was made in February 2015:
Gous was the Key Individual of Impact Corporate Brokers.
On 15 April the licence of another FSP, Joy Finance, was withdrawn by the registrar and debarred from applying for a new licence for a period of five years. Gous entered into a strategic alliance with Joy Finance who was not licensed to render financial services.
Gous admitted that his actions constituted a contravention of Section 7(3) and agreed to a penalty of R200,000.
Why are these Enforcement Actions important to you and your practice?
- Business arrangements with third parties;
- Referrals to other Financial Service Providers;
- Due diligence obligation.
How to avoid making the same mistakes?
- Make sure that you know who you are doing business with.
- Business arrangements with third parties must be comprehensively documented so that each party involved understands their respective roles and obligations.
- Establish whether the roles, obligations and duties set out in the agreement constitute advice and/or intermediary services as defined in the FAIS Act.
- Make sure that the party you contract with in respect of any financial service to be rendered, is an approved FSP which is correctly licenced for the product categories as per their disclosure letter.
- If you refer a client to another FSP, make sure that that FSP is an approved financial services provider.
What can you do to ensure compliance with Section 7(3) of the FAIS Act?
- Conduct a “due diligence” on the third party that you wish to enter into an agreement with. Don’t take short cuts or accept information at face value.
- Document a comprehensive service level agreement.
- Keep a copy of the financial service provider’s licence.
- Contact the Financial Services Board for a background check on the third party.
- Make sure that the financial services provider is correctly licensed – check the FSB’s website.
- Implement a review process to ensure that the third party continues to meet the agreed terms and conditions set out in the agreement which should include a valid licence.
Neglecting to do your homework before entering into any form of business arrangement could inadvertently result in a contravention of the legislation. Not only could this impact on the financial status of the business in the event that a penalty is imposed, but could also have reputational implications for you as a Key Individual and the brand of the FSP. Establish clear, documented business processes upfront and stick to them as this will help you follow all the necessary steps and .