In September, the Financial Sector Conduct Authority (FSCA) initiated regulatory action against a financial service provider (FSP) for their failure to adhere to Section 13(1)(c) of the Financial Advisory and Intermediary Services (FAIS) Act.
We examine the case, which resulted in an enforceable undertaking agreement between the FSCA and the FSP, Universal Insurance Administrators (UIA).
Compliance obligations under Section 13(1)(c):
In 2015, Section 13 of the FAIS Act was amended to include Section 13(1)(c), which stipulates that individuals can only offer services under the name of the FSP for which they are authorised Representatives.
Furthermore, on 24 June 2015, a Guidance Notice expanded on the interpretation and application of Section 13(1)(c ) and its amendments, adding that Representatives, including juristic Representatives, are not permitted to collect premiums in their own bank accounts. All premiums must be collected in a bank account under the name of the FSP they represent.
FSCA vs UIA:
UIA, an authorised Category I FSP, offers its products through partnerships with microlenders, governed by formal agent and juristic Representative agreements. During a routine inspection in 2016, the FSCA discovered that the microlenders were collecting premiums and loan repayments from clients directly into their own bank accounts, rather than a designated UIA account, thereby contravening Section 13(1)(c ) of the FAIS Act.
The FSCA informed UIA of their finding, requesting that they immediately rectify it and notify the FSCA of the remedial actions taken. UIA proposed solutions to the FSCA, but these were rejected by the supervisory body.
A meeting was held between the FSP and FSCA in June 2022, during which it was noted that FSCA had no record of UIA collection of premiums. UIA maintained that they weren’t collecting any premiums because other than the premiums collected by their juristic Representatives, this was done by a collection agency. However, the fact that UIA appointed juristic Representatives to complete this task meant that, in effect, they were collecting premiums on behalf of the FSP in contravention of Section 13(1)(c) because these microlenders weren’t paying these monies into a bank account registered under UIA’s name.
After some debate, and even a failed application by UIA to exempt their juristic Representatives from Section 13(1)(c), UIA acknowledged the non-compliance and conceded to the FSCA’s enforceable undertaking agreement.
In the agreement, UIA pledged to:
- Ensure that they and all their juristic Representatives are compliant with Section 13(1)(c) within two years.
- Report progress on the above to the FSCA on a quarterly basis.
- Ensure that clients are aware that the financial products are being offered by UIA by, amongst others:
– having all juristic Representative display UIA’s licence, as well as their own Section 13 certificate, in their offices;
– branding all marketing material with UIA markings; and
– disclosing to clients the relationship between UIA and its juristic Representatives.
- Remain fully in control of the electronic systems and processes used to collect and report on premiums.
- Continuously, through the electronic processes, identify and manage business and compliance issues.
In terms of the undertaking, if UIA fails to adhere to this agreement, the FSP and its Key Individuals could incur administrative penalties, regulatory actions, or face the Financial Services Tribunal.
Key takeaways
The FSCA’s enforcement action decision underscores that compliance with the FAIS Act is non-negotiable for both FSPs and their appointed juristic Representatives. FSPs are accountable for their appointed Representatives’ actions and must closely monitor their activities. Failure to do so will result in consequences for the FSP.
The case also highlights the importance of adhering to the core tenets of the Treating Customers Fairly (TCF) Outcomes. This includes, amongst others, ensuring that clients receive clear information; are appropriately informed before, during and after the point of sale; and know whom they are dealing with.
Furthermore, the case emphasises that ignorance of the law in not a valid defence in cases of non-compliance. In times of uncertainty, seeking guidance from compliance professionals like Masthead is highly advisable, as it enables proactive measures to be taken before issues arise.