The Financial Sector Conduct Authority (FSCA) recently published FSCA FAIS Notice 21 of 2020 together with FSCA Communication 20 of 2020. These publications afford FSPs and Juristic Representatives an exemption from certain Financial Soundness Requirements.
The Communication advises that the exemption was deemed necessary in order to alleviate some of the financial pressures experienced by FSPs and juristic representatives as a result of the impact of the COVID-19 pandemic and national lockdown.
The Notice contains exemptions from various sections of the Determination of Fit and Proper Requirements (BN 194 of 2017). These sections in particular relate to section 45(2), 48(1) and 48(2) and are subject to certain conditions. The exemption is applicable for the period 1 April 2020 to 31 March 2021.
CAT I FSPs and their Juristic Representatives (Reps) that do not hold client assets or collect premiums – Section 45(2) of BN 194 of 2017
Under normal circumstances, Category I FSPs that do not hold client assets or collect premiums and any juristic rep of the FSP must ensure that their assets at all times exceed liabilities. However, the FSCA is now exempting these FSPs and juristic reps from this requirement subject to the condition that liabilities cannot exceed assets by more than 20%. An FSP or juristic rep that wishes to rely on this exemption also has to fulfil certain reporting requirements which we deal with below.
CAT I FSPs that hold client assets or collect premiums and CAT II, IIA, III and IV FSPs (including Juristic Reps of these FSPs) – Section 48(1) and 48(2) of BN 194 of 2017
Category I FSPs that hold client assets or that collects premiums or other monies and Category II, IIA, III and IV FSPs (including juristic reps of these FSPs) have several financial soundness requirements which they have to comply with. The Notice provides these FSPs and their juristic reps with some relief from these requirements, subject to certain conditions and reporting requirements, which we set out below.
- These FSPs (and their juristic reps) normally have to ensure that their assets always exceed liabilities, applying the definition for assets and liabilities set out in BN194 of 2017). However, in terms of the exemption, the liabilities of these FSPs and their juristic reps, can exceed assets as long it is not by more than 20%. In our reading of this exemption, Category IIA and III FSPs would not able to make use this specific exemption as they are still required to maintain additional assets (see below).
- The working capital requirement states that current assets must exceed current liabilities. However, these FSPs and juristic reps, in terms of the exemption, are able to allow their current liabilities to exceed current assets, however it must not exceed by more than 20%.
- Liquidity requirements differ for the various categories of FSPs. In general, the liquidity requirement is that liquid assets must be equal to or greater than a prescribed number of weeks of annual expenditure. In terms of the exemption insofar as it relates to liquidity requirements, FSPs can drop to 50% of the normal requirement. For example, a Category II FSP which is normally required to hold 8/52 weeks of annual expenditure in liquid assets, will now be allowed to hold 4/52 weeks of annual expenditure in liquid assets, providing the conditions are met.
- The additional asset requirement is only applicable to Category IIA and III FSPs and their juristic reps. This requirement states that assets of these FSPs/juristic reps must exceed their liabilities by at least R3 million. In terms of the exemption relating to additional asset requirements, FSPs/juristic reps can drop to 50% of the normal requirement. Because these FSPs/juristic reps, even with the exemption, must ensure assets exceed liabilities by at least R1.5 million, they will not be able to make use of the exemption allowing liabilities to exceed assets by a specified margin.
Conditions applicable to any FSP and juristic rep relying on an exemption
Where an FSP relies on any of the exemptions above, they are required to do the following:
- Within 7 days of reliance on the exemption the FSP must submit to the FSCA:
– Annexure 6 (Form A: Liquidity Calculation) of BN194 of 2017 to the FSCA (Liquidity Calculation). The Notice states that the Liquidity Calculation must be certified by the chief executive officer, controlling member, managing or general partner, or trustee of the FSP, as the case may be. Cat I FSPs that do not hold client assets or collect premiums will not be familiar with this form as it is not a current requirement for them and should contact their Compliance Officer if they require assistance.
– An Action Plan showing how the FSP plans to restore their financial soundness requirements to the normal required levels, including the steps that will be taken, and the timeframe required. The action plan must also set out the measures that the FSP will take to ensure business continuity and continued cash flow until the financial soundness position has been restored.
- Every 6 months (calculated from the date the Liquidity Calculation was first submitted), the FSP must submit to the FSCA:
– Management accounts, and
– Liquidity Calculation, updated accordingly.
- PROHIBITION: While FSPs are relying on this exemption, they may not make any payment by way of a loan, advance, bonus, dividend, repayment of capital or a loan (except for agreed upon loan repayments) or any other payment or other distribution of assets to any director, officer, partner, shareholder, related party or associate without prior written approval of the FSCA.
Note that where Juristic Representatives rely on any of the exemptions, they are also required to comply with the above conditions, with the only difference being that they must submit the necessary forms and information to their FSP instead of the FSCA and would need to obtain approval in terms of the prohibition mentioned above, from their FSP instead of the FSCA.
Masthead has summarised the Financial Soundness requirements and the extent of the exemptions in table format below. Should you require further assistance with complying with the requirements of this exemption contact your Masthead Compliance Officer.