Submission: Financial Services Board Conduct of Business Report

27 February 2017
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Financial Advisory and Intermediary Services Act, 2002

 

 

Comment to

 

Registrar of Financial Services Providers

 

regarding

 

draft proposed Conduct of Business Report

 

made known

by Financial Services Board

on 6 December 2016

for comment

 

 

 

 


 

Executive summary

 

The proposed Conduct of Business Report would unjustifiably require financial-services providers to supply proprietary and confidential business knowhow and trade secrets.

 

The proposed requirement that financial-services providers supply this information is beyond the powers conferred by the Act on the Registrar and would be invalid.

 

proposed Conduct of Business Report should therefore not be proceeded with.

 

Invitation to comment on proposed Conduct of Business Report

 

On 6 December 2016 notice was given on the website of the Financial Services Board (“the Board” or “the FSB”)[1] that the Registrar of Financial Services Providers (executive officer of the Board[2]) intends to replace current Compliance Reports with a proposed Conduct of Business Report[3] pursuant to the Financial Advisory and Intermediary Services Act, 2002 (“the FAIS Act” or “the Act”).[4]

 

Interested parties were invited to comment on the proposed Conduct of Business Report, by way of written submissions to be submitted by 28 February.[5]

 

 

Overview of comments

 

The FAIS Act requires an authorised financial-services provider or its compliance officer to submit reports regarding matters determined by the Registrar.

 

The proposed Conduct of Business Report would require a provider to supply information beyond what the Registrar is authorised by the Act to demand.

 

The proposed Report would unjustifiably require a provider to supply proprietary and confidential business knowhow and trade secrets.

 

The Act authorises the Registrar to require information only for the purposes of the Act and relating only to his functions and powers under it.

 

The Act’s provisions authorising the determining by the Registrar of Fit-and-proper Requirements and Codes of Conduct (and making by the Minister of Regulations) do not extend to matters the proposed Conduct of Business Report would purport to cover.

 

Though the Act authorises the Registrar to determine Fit-and-proper Requirements about a provider’s business matters, those requirements do not extend to confidential business information which the proposed Conduct of Business Report requires information about.

 

Similarly, the Act’s provisions authorising the Registrar to draft Codes of Conduct likewise do not empower the Registrar to draft Codes extending to provider’s proprietary and confidential business knowhow and trade secrets.

 

The Minister’s power to make Regulations is restricted to achieving the objects of the Act and also does not extend to what the Conduct of Business Report seeks to cover.

 

Finally, the Act requires a provider or its compliance officer to submit reports regarding matters determined by the Registrar for different categories thereof.

 

The Registrar has no power to discontinue his practice of requiring different Compliance Reports for different categories of providers and to introduce instead a consolidated Conduct of Business Report for all providers irrespective of category.

 

 

Act requires providers to submit reports about matters determined by Registrar

 

The provision of the FAIS Act under which the Registrar intends to replace the current Compliance Reports with a Conduct of Business Report states[6] that the compliance officer of an authorised financial-services provider[7] (“FSP” or “provider”) or, in his absence, the provider, must submit reports to the Registrar in the manner and “regarding the matters” as from time to time determined by the Registrar.[8]

 

 

Information the proposed Report would demand

 

The proposed Conduct of Business Report would require a financial-services provider to supply a wide range of information.

 

The proposed Conduct of Business Report would require a provider to supply information beyond what the FAIS Act authorises[9] the Registrar to demand.

 

The proposed Report would unjustifiably require a provider to supply proprietary and confidential business knowhow and trade secrets:

 

For example, the Report asks (among other things):

 

Does the FSP have an ownership interest in other entities? If yes, provide a list thereof with the nature and[10] percentage of the ownership interest.[11]

 

What is the source of capital funding of the business[?][12]

 

Are the activities of the foreign domiciled entity regulated? __Yes __No.

If yes, provide details of the regulator, i.e. name and jurisdiction of the foreign regulator and furnish the foreign entity’s license[13]/registration number.[14]

 

Do any of [the FSP’s] key individuals act as a key individual for other FSPs? __Yes __No. If yes, please provide details.[15]

 

Perhaps most egregiously, the Conduct of Business Report asks:

 

Management information

Do you maintain documented management information […] in relation to each of the following? If so, please briefly describe how you record and monitor the information, and how you use the information in regard to your business activities [:]

  1. New Business information (new concluded transactions for both new and existing clients)
  2. Disclosure records[16]
  3. Results of client file reviews (sampling / monitoring) (Quality of requirements[17])
  4. Customer feedback (over and above complaints) (Do you conduct customer service/satisfaction surveys)
  5. Financial information (Management Accounts & Bank Statements)
  6. Product replacements
  7. Total number of customers
  8. New business transactions concluded across all categories of business in the last reporting period.[18]

 

The proposed Conduct of Business Report would also require a provider to provide the following information:

 

What conflicts of interest exist in your business…?[19]

 

Provide a list of product suppliers and percentages of the business you have placed with [sic] and remuneration received from [sic] for this reporting period.[20]

 

Please explain the nature of on-going services to your customers.[21]

 

How many replacement products did the FSP write during the reporting period?[22]

 

 

Proposed Report would demand information exceeding what FAIS Act authorises

 

The FAIS Act only empowers the Registrar to direct a financial-services provider to furnish the Registrar with specified information required “for the purposes of” the Act.[23]

 

It is true that a compliance officer[24] must submit reports to the Registrar regarding the matters determined[25] by the Registrar.[26]

 

But the Registrar may only determine matters, regarding which a compliance officer must submit reports, that relate to the Registrar’s functions and powers under the Act.

 

And a compliance officer need only submit reports regarding matters relating to the Registrar’s functions and powers under the Act.

 

Any doubt about the scope of a statutory provision must be resolved by construing it strictly, to give preference to its least onerous interpretation.[27]

 

If a statute is reasonably capable of two meanings, the courts give it the meaning which least interferes with liberty.[28]

 

 

Act’s provisions authorising subsidiary measures do not embrace what Report covers

 

It is true that the Act is defined to include[29] any Fit-and-proper Requirement[30] or Code of Conduct[31] determined or drafted by the Registrar, or Regulation made by the Minister.[32]

 

But the Act’s provisions authorising the making of these subsidiary measures are not wide enough to embrace what the proposed Conduct of Business Report purports to cover:

 

 

Fit-and-proper Requirements cannot include matters demanded by proposed Report

 

The Act’s provisions authorising the Registrar to determine Fit-and-proper Requirements for providers envisage, in the main that any such requirements would include[33] standards relating to honesty and integrity; competence;[34] operational ability; financial soundness; and continuous professional development.[35]

 

Even though these powers in the Act, authorising the Registrar to determine Fit-and-proper Requirements, extend to business matters (probity, competence, operational ability and financial soundness),[36] the scope of those matters is too narrow to extend to the following information (which the Registrar would purport to demand from a provider in the proposed Conduct of Business Report):

 

An FSP’s ownership interests;

Sources of capital funding;

Key individuals’ functions for other FSPs;

Methods of use in its business of management information, including—

New-business information and transactions for clients old and new,

disclosure records,

quality reviews and customer feedback,

management accounts, bank statements and other financial information,

product replacements,

total customer numbers, and

new business transactions concluded;

What conflicts of interest exist;

Lists of product suppliers, and percentages of business placed with and remuneration received from them;

The nature of on-going services for its customers;

Quantity of replacement products written.

 

 

Codes of conduct also cannot include matters demanded by proposed Report

 

Similarly, the Act’s provisions authorising the Registrar to draft Codes of Conduct likewise do not empower the Registrar to draft Codes extending to the last-mentioned matters:

 

A Code must be drafted to ensure: Clients can make informed decisions and their reasonable needs regarding financial products will be appropriately and suitably satisfied, and for those purposes authorised providers and their representatives are obliged by the Code to[37]

Act honestly and fairly and with due skill, care and diligence in the interests of clients;[38]

seek appropriate available information from clients about their financial situation, financial-product experience and objectives about the financial service required; and

act circumspectly and treat clients fairly where interests conflict.[39]

 


 

A Code must contain provisions about—

The making of adequate disclosures of relevant material information[40] in client dealings;

adequate appropriate record-keeping;

avoidance of fraudulent and misleading advertising;[41]

safe-keeping, separation and protection of clients’ funds and transaction documents;

suitable guarantees or professional-indemnity or fidelity-insurance cover[42] and mechanisms for their adjustment by the Registrar;

control or prohibition of incentives given or accepted by a provider; and

other matters necessary or expedient to regulate for better achievement of the Act’s objects.[43]

 

The focus of a Code of Conduct is a provider’s dealing with its clients.[44] Such Codes do not deal with the provider’s proprietary and confidential business knowhow and trade secrets.

 

Accordingly, and just as the Act’s provisions authorising the Registrar to determine Fit-and-proper Requirements do not extend to many of the matters that the proposed Conduct of Business Report would purportedly cover, even more are the Act’s provisions authorising the Registrar to draft Codes of Conduct too narrow in ambit to justify the Registrar’s determining in the proposed Report that FSPs should supply information about those matters.

 

 

Nor can regulations extend to matters demanded by proposed Report

 

The Minister’s powers to make Regulations is similarly too narrow to embrace what the proposed Conduct of Business Report would purport to cover:

 

The Act authorises the Minister to make[45] regulations[46] relating to—

Compliance arrangements and monitoring systems and record keeping;[47]

Powers of the Registrar to call for information,[48] including the powers of the Court to issue orders on application by the Registrar to enforce obligations in that regard;[49] and

Generally, any matter expedient or necessary to prescribe for better achievement of the Act’s objects, the generality of this not being restricted by the foregoing.[50]

 

While the provisions empower the Minister to make regulations relating to compliance arrangements, monitoring systems and record keeping, such regulations must relate to arrangements for compliance with the Act,[51] systems for monitoring such compliance, and keeping of records relating to such compliance.

 

And while the provisions empower the Minister to make regulations relating to powers of the Registrar to call for information, any such regulations must relate to the Registrar’s powers to call for information about such compliance.

 

The Regulations cannot require providers to perform obligations which do not relate to compliance with the Act[52] and keeping of records relating to such compliance.

 

It is true that the Act authorises the Minister to make regulations relating to, generally, any matter expedient or necessary to prescribe for the better achievement of “the objects of [the] Act,” the generality of this not being restricted by the foregoing.[53]

 

But, in the absence of clear wording, these provisions do not authorise the making of regulations obliging a provider to disclose its business knowhow and trade secrets.

 

(Indeed, the Regulations[54] merely provide that a financial-services provider must ensure that a compliance function exists as part of the risk-management framework of the business, supervised by a compliance officer where required by the Act or otherwise under its control, and that the compliance function be exercised with the diligence, care and competency reasonably to be expected.[55]

 

(The Regulations merely require a provider to furnish the Registrar with such information regarding shareholders, directors[56] and senior employees, or regarding operations, as the Registrar may[57] reasonably require.[58])

 

 

 

Registrar must determine different reports for different categories of compliance officer

 

The Act requires the compliance officer of a provider[59] to submit reports regarding the matters determined by the Registrar “for different categories” of compliance officers.[60]

 

And the Act states the Registrar[61] must classify financial-services providers into different categories, determine Fit-and proper Requirements for each category of provider, and

in each category of providers determine Fit-and proper Requirements for[62] compliance officers.[63]

 

The Fit-and-proper Requirements[64] deal with categorisation of providers.

 

The Registrar has annually to date determined different Compliance Reports for different categories of financial-services providers, most recently in 2016 as follows:

Compliance Report for Category I providers without a compliance officer;[65]

Compliance Report for Category I provider with a compliance officer;[66]

Compliance Report for Category II and IIA providers (Bi-Annual); [67]

Compliance Report for Category III providers;[68]

Compliance Report for Category IV providers;[69]

Compliance Report for Foreign providers;[70]

Compliance Officer Handover Report;[71]

Key Individual / Sole Proprietor Handover Report.[72]

 

Because the Act requires submission of reports regarding matters determined for different categories of compliance officer, it is respectfully submitted that the Registrar has no power to discontinue his present practice of requiring different Compliance Reports for different categories of providers, or to introduce instead (as now proposed) a consolidated Conduct of Business Report for all providers irrespective of the category in which they each fall.

 

 

Conclusion

 

The proposed Conduct of Business Report’s requirements that financial-services providers supply their proprietary and confidential business knowhow and trade secrets is beyond the powers conferred by the Act on the Registrar and would be invalid, and should not be proceeded with.

 

The Registrar acknowledges that the content of the proposed Report differs significantly from previous reports, and says this is—

 

…mostly because as a result of the changing regulatory landscape and the focus on outcomes based regulation...[73]

 

It is submitted that any such changing regulatory landscape or focus on outcomes-based regulation would, for the proposed Conduct of Business Report to be valid, first require appropriate amendments of the Act, for reasons set out above.

 

———ooo0ooo——

 

About the Free Market Foundation

The Free Market Foundation (FMF) is an independent non-profit policy organisation founded in 1975 to promote and foster an open society, the rule of law, personal liberty and economic and press freedom as fundamental components of its advocacy of human rights and democracy based on classical liberal principles. It is financed by membership subscriptions, donations and sponsorships. The Foundation is a registered Non Profit Organisation and a Public Benefit Organisation with Section 18A(1)(a) approval.

 

Prepared by

Gary Moore

Free Market Foundation

 



[2] Financial Advisory and Intermediary Services Act 37 of 2002 s 2(1) read with Financial Services Board Act 97 of 1990 s 1 sv “executive officer.”

[4] Financial Advisory and Intermediary Services Act s 17(4)(a).

[6] FAIS Act s 17(4)(a).

[8] FAIS Act s 17(4)(a). By notice on the official web site.

[10] Where applicable.

[11] FSB website (ibid), Draft conduct of business report, question 1.1.4.c.

[12] Draft conduct of business report, ques. 1.1.5.a.

[13] Sic.

[14] Draft conduct of business report, ques 1.1.6.

This question about whether the activities of the foreign domiciled entity are regulated is additional to the following question (ques. 1.1.7):

Do you conduct financial services business in a foreign jurisdiction? __Yes __No If YES, are the activities regulated in the foreign jurisdiction?

[15] Draft conduct of business report, ques. 1.1.13.

[16] “([I]n terms of sections 3A, 4, 5 & 7 of the General Code of Conduct).”

[17] “([I]n terms of sections 8 & 9 of the General Code of Conduct).”

[18] Draft conduct of business report, ques. 1.2.1.

[19] Draft conduct of business report, ques. 1.5.2.

[20] Draft conduct of business report, ques. 2.1.4.

[21] Draft conduct of business report, ques. 2.3.2.

[22] Draft conduct of business report, ques. 2.4.7.

[23] FAIS Act s 4(2).

[24] Or in his absence the provider.

[25] From time to time by notice on the official web site set up by the Board. FAIS Act s 1(1) sv “official web site.”

[26] FAIS Act s 17(4)(a). And the provider must ensure the reports are submitted: s 17(4)(b).

[27] Fundstrust (Pty) Ltd (in liquidation) v Van Deventer [1997] 1 All SA 644 (A) at 656.

[28] R v Sachs [1953] 1 All SA 382 (A) at 384.

[29] FAIS Act s 1(1) sv “this Act.”

[30] FAIS Act s 1(1) svv “this Act” and “fit and proper requirements,” read with s 6A.

[31] FAIS Act s 1(1) svv “this Act” and “code of conduct,” read with s 15.

[32] FAIS Act s 1(1) svv “this Act” and “regulation,” read with s 35.

[33] Albeit not be limited to.

[34] Including experience and qualifications, and knowledge tested through examinations determined by the Registrar.

[35] FAIS Act s 6A(2)(a), (b)(i)–(iii) and (c)–(e).

[36] See Determination of Fit and Proper Requirements for Financial Services Providers, 2008. Bd Notice 106 of 15 Oct 2008 (Gazette 31514).

[37] Among other things.

[38] And industry integrity.

[39] FAIS Act s 16(1)(a), (c) and (d).

[40] Including disclosures of actual or potential own interests.

[41] And canvassing and marketing.

[42] Where appropriate.

[43] FAIS Act s 16(2)(a), (b), (c), (d), (e), (eA) and (f).

[44] See, for example, General Code of Conduct for Authorised Financial Services Providers and Representatives. Bd Notice 80 of 8 August 2003 (Gazette 25299).

[45] After consulting the Registrar.

[46] By Gazette notice.

[47] FAIS Act s 35(1)(c).

[48] From any person to which the Act applies.

[49] FAIS Act s 35(1)(d).

[50] FAIS Act s 35(1)(e).

[51] And Fit and Proper Requirements determined and Codes of Conduct drafted in terms of the Act.

[52] And Fit and Proper Requirements determined and Codes of Conduct drafted in terms of the Act.

[53] FAIS Act s 35(1)(e).

[54] Financial Advisory and Intermediary Services Regulations, 2003. Govt Notice 879 of 13 June 2003.

[55] Regulations, 2003, reg. 5(1) and (2).

[56] Or trustees.

[57] From time to time in writing.

[58] Regulations, 2003, reg. 19.

[59] Or in his absence the provider.

[60] FAIS Act s 17(4)(a).

[61] By notice in the Gazette.

[62] Inter alios.

[63] FAIS Act s 6A(1)(a)(i) and (iii)(dd).

[64] Determination of Fit and Proper Requirements for Financial Services Providers, 2008. Bd Notice 106 of 15 Oct 2008.

[65] Bd Notice 49 of 2016.

[66] Bd Notice 50 of 2016.

[67] Bd Notice 84 of 2016 (replacing Bd Notice 51 of 2016).

[68] Bd Notice 85 of 2016 (replacing Bd Notice 52 of 2016).

[69] Bd Notice 53 of 2016.

[70] Bd Notice 54 of 2016.

[71] Bd Notice 55 of 2016.

[72] Bd Notice 56 of 2016.

[73] Financial Services Board, “Invitation to comment on proposed conduct of business report,” para 2.



Comments on Submission: Financial Services Board Conduct of Business Report