FSPs can and do contract with Key Individuals (KIs) through ‘rent-a-KI’ agreements. It is important to understand the process, as well as the requirements that must be met by the KI you appoint on this basis.
FSPs appoint rent-a-KIs for various reasons. For instance, your FSP might not meet all the competency requirements, such as qualifications in RE1 and RE5, and need more time to do so. You might want to add a new category to your FSP licence to gain experience and need a KI with the relevant qualification to do so. Or you might want to contract with a KI to ensure business continuity if the main KI can no longer fulfil the role.
It is important that the KI with whom you want to contract has the operational ability to assume this role in your FSP. FSPs have been provisionally suspended where their rent-a-KI appointees have not fulfilled the required management and oversight duties or actively taken part in the oversight role in the business.
Section 42 of Board Notice 194 of 2017 describes the operational ability of KIs:
- A key individual must have the operational ability to effectively manage and oversee the financial services related activities of the FSP or juristic representative and the financial services in relation to the financial product for which the key individual was approved or appointed.
- A key individual, where he or she is –
(a) approved or appointed as a key individual of more than one FSP or juristic representative; or
(b) approved or appointed as a key individual of an FSP or juristic representative and appointed as a representative of an FSP other than the first mentioned FSP,
must be able to demonstrate to the Registrar, in a form and manner which may be determined by the Registrar, that he or she has the required operational ability to effectively and adequately manage or oversee the financial services related activities of all the FSPs or juristic representatives for which the key individual was approved or appointed. - An FSP must, on a regular basis, assess the operational ability of its key individuals to adequately and effectively perform their functions, taking into account individual circumstances, the nature, scale, range and complexity of the FSP’s financial services related activities and whether the key individuals are approved as key individuals or appointed as representatives of other FSPs.
Proving operational ability
KI applicants are required to prove their operational ability to the FSCA registrar prior to authorisation. This is especially important where KIs are approved on more than one licence. This addresses the rent-a-KI scenario where someone is appointed as a KI but does not have the ability or capacity to fulfil the legal obligations required of a KI.
At application stage, the FSCA will ask applicants questions such as, ‘For how many FSPs are you an appointed KI? What are the categories of the FSPs? How many representatives and juristic representatives per category of FSP do you oversee? How many business premises, business units and branches per province or in other countries do you manage or oversee per FSP and representative? How many do you intend to manage or oversee?’
The FSCA also looks at the nature, scale, range and complexity of the financial service activities of the FSPs that seek to contract with a KI. Typical questions the FSCA might ask during its due diligence are, ‘How will the key individual be able to operate optimally, efficiently, effectively and with consistency in multiple FSPs? How will the KI split the work between the FSPs? How will the hours be spent on each FSP? What is the capacity and level of involvement of each FSP?’
In addition, the FSCA requires confirmation signed by an FSP in respect of which approval is sought, as well as the person seeking approval as KI. It must state that the applicant has the ability, capacity and decision-making power to actively and effectively manage or oversee the FSP’s activities in rendering financial services.
Based on the answers, the FSCA evaluates applicants’ operational ability to act as KI on more than one licence. The regulator also determines if the applicant KIs have the resources and time to fulfill their responsibilities for the FSPs that seek their services.
What is acceptable?
A recent decision by the Financial Services Tribunal provides some insight in terms of what the registrar deems acceptable:
An FSP sought to enter into an agreement with a KI for a period of a year. In his application to be appointed as KI, the applicant stated he would spend 11 hours per month performing his duties as the FSP’s KI and 90% of his working time at two other FSPs that ‘belong’ to him. The FSCA was not satisfied that the applicant would, in the circumstances, be able to fulfil the statutory duties of a KI in relation to the FSP’s requirements. Furthermore, he would not have the necessary operational ability as required by the FAIS Act.
The decision highlights that:
“The role of a KI is a critical, key and full-time ‘hands-on’ function with the necessary decision-making powers and authority closely related to or inherent in the management and ownership structures of the FSP. The KI functions are therefore such that they cannot be performed on an occasional part-time basis. It is on this basis that the concerns were raised around the applicant’s perceived inability to adequately, effectively and properly manage and oversee the activities as alluded to above.”
In a 2010 decision, the Appeal Board noted that:
“KIs are the very heart and soul of the licenced entities. There must always be natural persons who will have to carry out the statutory obligations in terms of the FAIS Act. The ‘key individual’ takes on personal responsibility for all decisions made by staff members and will have to put measures in place in order to fully comply with the FAIS Act. … The ‘key individual’ can therefore not be separated from the FSP. They are the life force of the FSP. The very responsibility and activities of the FSP are due to the key individuals, management and conduct therein.”
Rent-a-KIs would be seen as failing to perform their duties in respect of the FAIS Act if they do not oversee the statutory obligations of an FSP or ensure the correct processes are implemented in the business. They need to know the operations and processes of the FSP and accept personal responsibility for the financial services that staff members provide to clients.
The FSCA will not tolerate or be lenient where KIs fail to perform their duties. As an FSP, and especially if you use the services of a rent-a-KI, it is vital to regularly assess the operational ability of your KI to adequately and effectively perform his or her functions.
Please note: Masthead does not offer a Rent-a-KI service. We do however offer compliance advisory services to help FSPs who want to ensure that the KI they have identified, is appropriate. We also provide KI training for the FSP. Get in touch with us to find out more.