The Financial Sector Conduct Authority (FSCA) recently published Guidance Notice 1 of 2020 (FAIS) which provides clarity and guidance on the lapsing of licences issued in terms of the FAIS Act and the related duties of financial services providers (FSPs), Key Individuals, or other persons in control of the affairs of the FSP.
The FSCA has identified a recurring trend where FSPs or responsible persons fail to comply with section 11(2) of the FAIS Act and/or abuse section 11(1)(d) of the FAIS Act by voluntarily surrendering licences in an attempt to avoid compliance with provisions of the FAIS Act and/or administrative actions. The FSCA is of the view that these abuses are often informed by a lack of understanding or misinterpretation of the FAIS Act. As a result, the FSCA issued this Guidance Notice on the application of section 11 of the FAIS Act.
Grounds for the lapsing of a licence
Section 11(1) of the FAIS Act lists several grounds for the lapsing of a licence. It states that a licence lapses where:
- A sole proprietor becomes permanently incapable of carrying on any business due to physical or mental disease, serious injury, death, or is finally sequestrated.
- A FSP is finally liquidated or dissolved
- The business of the FSP has become dormant
- Any other case where the FSP or sole proprietor voluntarily and finally surrenders their licence to the FSCA
Requirements for the lapsing of a licence
It is important to note that when any of the above grounds listed in section 11(1) occur, the licence is not automatically lapsed. Instead, the sole proprietor, key individual or other persons in control of the affairs of the FSP have certain duties that must be complied with. These duties are:
- To advise the FSCA in writing of the lapsing of the licence together with the reasons for same (section 11(2) of the FAIS Act)
- Immediately notify all affected clients and take reasonable steps to ensure that any outstanding business is completed promptly or transferred to another provider (section 20(b) of the General Code of Conduct)
- Provide proof of compliance. The FSCA may require proof of compliance with the requirements of the General Code of Conduct upon receipt of a notification of the lapsing of a licence.
Voluntary closure of business
Where a licence is voluntarily and finally surrendered as contemplated by section 11(1)(d) of the FAIS Act, there must be compliance with the provisions of section 38(d) of the FAIS Act, which deals with the voluntary closure of business of an FSP. This process entails:
- That a notice must be lodged with the FSCA regarding the voluntary closure of business
- The FSCA must thereafter declare that satisfactory arrangements have been made to meet all liabilities under transactions entered into with clients prior to sequestration, winding-up or closure, as the case may be.
Closure of the business of an FSP will not have legal force if the FSCA declares such closure as contrary to the FAIS Act. Examples of the closure of business contrary to the FAIS Act include closure as an attempt to avoid possible consequences of intended administrative action and any obligation under the FAIS Act.
Effect of non-compliance
Where the requirements to lapse a licence have not been complied with, the lapse will be discounted and the FSP will remain a regulated entity subject to the FSCA’s regulatory oversight.
It should further be noted that if the lapsing of a licence is valid (such as by the death of a sole proprietor) but there has been non-compliance with a provision of the FAIS Act (e.g. section 11(2) of the FAIS Act or section 20(b) of the General Code of Conduct as discussed above), the FSCA may still take administrative action in respect of such non-compliance by imposing an administrative penalty or issuing a directive. The responsible person must arrange for compliance with these sections.
FSPs, key individuals, or other persons in control of the affairs of the FSP are advised to take care to comply with the relevant requirements pertaining to the lapsing of licences.