‘Independence’ is a differentiating factor for many financial services providers. However, with changes in legislation, some FSPs may no longer describe themselves or their financial services as ‘independent’.
A subsection that was added to Section 3 of the FAIS General Code of Conduct (GCOC) which came into effect on 26 June 2020, states that an FSP cannot use the term ‘independent’ if:
- the FSP is a significant owner of any product supplier, such as an insurer, in respect of whose products the FSP renders financial services;
- a product supplier is a significant owner of the FSP; or
- the FSP receives any financial interest from a product supplier other than the fees or commission authorised under the Long-term Insurance Act (LTIA), Short-term Insurance Act (STIA) or Medical Schemes Act (MSA); or
- a relationship exists between the FSP and the product supplier that may be a material conflict of interest.
Ownership
An FSP is deemed a significant owner of a product supplier or product provider’s associate if it can control or materially influence that financial institution’s business or strategy. It is also considered a significant owner if the FSP can appoint 15% of the members of the financial institution’s governing body, or if the FSP’s consent is required – either alone or with related or inter-related persons – to appoint these members. Ownership also exists if an FSP holds a qualifying stake in the financial institution.
On the other hand, a product supplier in whose products an FSP renders financial services, is deemed a significant owner of that FSP if it can control or materially influence the FSP’s business or strategy. If the supplier can appoint 15% of the members of the FSP’s governing body, or its consent is needed – either alone or with related or inter-related persons – to appoint these members, the supplier is also considered a significant owner. In addition, the supplier is a significant owner of the FSP if it holds a qualifying stake in the FSP.
The ‘ownership’ qualification prevents product suppliers that render financial services in respect of their own products from calling themselves ‘independent’. FSPs that are owned by a product supplier may also not call themselves independent. Likewise, FSPs cannot use the term ‘independent’ if they offer the products of a supplier that holds a material stake in the FSP’s governance structure.
Additional remuneration
If an FSP receives any remuneration from a product supplier other than legislated commission or fees authorised under the LTIA, STIA or MSA, it may not refer to itself as ‘independent’. This means that if the FSP receives fees for services for which it does not receive legislated commission or fees, or for rendering a service to a third party, it may also not call itself ‘independent’.
FSPs that receive additional administration, binder, outsourcing or “other” fees are therefore no longer perceived as being independent and may not refer to themselves as such.
Relationships
If an FSP has another relationship with a product supplier in respect of whose products it renders financial services and that gives rise to a material conflict of interest, the FSP may not use or refer to the term ‘independent’. This applies to the FSP and its financial services.
A relationship that could affect the ability to make independent decisions or judgment is, for example, when a close relative such as a spouse works for a product supplier. This person stands to benefit if the FSP places business with that product supplier.
If your FSP operates on its own without the abovementioned elements, you may continue with business as usual, and maintain and even promote your independent status. Independence may also be promoted as a positive distinguishing feature as it relates to Treating Customers Fairly: by virtue of your independent offering, you place your clients’ interests at heart.
Going forward, product suppliers will need to ensure they correctly reflect their status of independence. They will need to check more closely the information on their business cards, the language used in conversation, and the wording in their marketing materials, advertisements, proposals and other client documentation and correspondence.
If you consider describing your FSP, your offering or services as ‘independent’, be sure to carefully study the provisions of the Code to ensure you do not fall foul of them.
If you have any queries regarding the independence of your FSP, please contact your Masthead Compliance Officer or get in touch with us.