Fit and Proper Requirements
The proposed fit and proper requirements relating to financial soundness include amendments to the existing requirements and brand new requirements which FSPs may have to comply with. We identify and discuss the proposed changes and the impact that the “new” requirements may have on FSPs.
The proposed fit and proper requirements relating to financial soundness will apply to all persons ( i.e. natural persons, partnerships, trusts, corporate or unincorporated bodies) who apply for authorisation to become an FSP or who are already authorised FSPs. The current requirements are only applicable to FSPs while the proposed amendments will also apply to juristic representatives, where applicable. It is proposed that the financial soundness requirement not be applicable to Banks registered under the Banks Act and insurers who are registered under the Short-term or Long-term Insurance Acts as they already have to fulfil financial soundness requirements under those Acts.
Those FSPs which are required to maintain a certain level of liquid assets must, currently, first calculate their annual expenditure in line with the definition.
While the definition of “annual expenditure” is maintained in the proposed provisions, there are some minor adjustments.
- Currently, FSP’s to whom this provision applies are able to deduct, amongst other things, 50% of commissions or fees paid to representatives for services rendered that did not form part of their remuneration.
- The new proposals, in this regard, allow for all remuneration that is linked to a percentage of the FSP’s revenue or a percentage of the revenue generated by an employee, representative or contractor of the FSP to be deducted from annual expenditure.
We don’t anticipate that this will have any major impact on FSPs who are already subject to the liquid asset requirement.
The definition of “liquid assets” for those FSPs to which this will apply, has been extended in the proposed requirements to not only include “cash and assets equivalent to cash” as currently defined, but also to allow FSPs to invest in slightly “riskier” collective investment schemes and shares. However, if the proposals go ahead as planned, there will be certain limitations in respect of these “riskier assets” imposed, such as only allowing an FSP to use 70% of the market value of collective investment schemes (other than money market unit trusts), to be used in the calculation of liquid assets. This should provide greater flexibility to those FSPs which are required to maintain liquid assets.
General requirements applicable to categories of FSPs
A new inclusion in the general requirements is that FSPs and juristic representatives must maintain financial resources which are sufficient for the type of business and particularly to ensure that there is no risk that its liabilities cannot be met. This is a very broad requirement and we would hope to see some clear guidelines provided. However, financial risk is something that all FSPs should consider as part of their normal risk management process to ensure that these risks are identified and addressed in such a way as to minimise the impact should they occur.
There is no change to the requirement that assets exceed liabilities, except that this will now also apply to juristic representatives.
The management systems and processes which all FSPs and juristic representatives, except for Category I FSPs which do not hold or receive client funds or premiums, will have to have are clearly prescribed in the proposed amendments and will need to enable management to adequately assess the nature and level of risks to which it is or may be exposed as well as the risk of not meeting its obligations.
Another proposal which could have an impact even on existing FSPs, is if an FSP or juristic representative is subject to “pending proceedings” which could result in being declared insolvent or provisionally insolvent or being placed under liquidation, they would not be able to continue as an FSP or juristic representative. In addition, any FSP or juristic representative which persistently fails to manage its financial obligations or to provide a satisfactory credit record will not be able to continue to operate as such.
Requirements applicable to specific Categories of FSPs
The proposed requirements are divided into two parts. Part I includes the application and general requirements of financial soundness and Part II includes the requirements applicable to specific categories of FSPs.
Liquid Asset Reporting
The specific requirements set out in Part II are applicable to a Category I FSP that holds client assets and collect premiums, a Category II, IIA, III and IV FSP and a juristic representative. The proposed additional assets, working capital or liquid asset requirements are very similar to what is currently in place, except that these will now also apply to the juristic representative.
Under the proposals, not only will these FSPs and juristic representatives have to comply with the applicable solvency requirement, they will also be required to submit “Form A: Liquidity Calculation” to the FSB on a bi-annual basis in the case of Category II, IIA, III FSPs and their juristic representatives, and annually in the case of a Category I FSP which holds client assets or collects premiums. The form will require the FSP or juristic representative to provide a breakdown of its liquid assets and its annual expenditure, taking into consideration those expenses which can be deducted, for the current and previous reporting periods. The proposed liquidity requirement for Category IV FSPs will be defined as “liquid assets equal to or greater than 4/52 weeks of annual expenditure” where it currently is 8/52 weeks of annual expenditure. In the case of Category II, IIA and III FSPs and juristic representatives the form will have to be submitted within 7 days after every half financial year-end and Category I FSPs that hold client assets and collect premiums will be required to submit the form on an annual basis together with their annual financial statements. While the actual requirements do not look to change that much, there is an additional reporting obligation which affected FSPs and juristic representatives will have to incorporate into their processes.
Early Warning Reporting
A completely new requirement which is included in the proposed amendments is the ‘early warning requirements’ whereby the applicable FSPs and juristic representatives will have to submit, in writing, an immediate notification to the Registrar when:
- assets exceed liabilities by no more than 10%;
- current assets exceed current liabilities by no more than 10%;
- the additional assets requirement applicable to Category IIA and III FSPs and their juristic representatives exceeds the minimum requirement by not more than 10%; or
- when becoming aware of an event or situation that may or will result in the effects mentioned above.
The notification will have to be certified by the CEO, controlling member, managing or general partner, or trustee of the FSP. Further, if any of these “early warning” requirements dooccur, then the FSP or juristic representative “may not directly or indirectly make any payments by means of a loan, advance, bonus, dividend, repayment of capital or other distribution of assets to any director, officer, partner, shareholder or associate, without the prior written approval of the Registrar.”
In order for an FSP or its juristic representatives, as may be applicable, to comply with “early warning” reporting, they will need to maintain up-to-date and comprehensive financial records to enable any of these situations to be immediately flagged to management. Affected FSPs, if the proposals become legislation, will have to review their processes to make sure that they can comply.
Masthead has sent its comments to the FSB on the proposed fit and proper requirements and we will keep you updated of any developments by the Regulator.