Author: Gary Moore

Date: 7 June 2017

The Financial Advisory and Intermediary Services Act, 2002[1] regulates the furnishing to clients of defined types of “advice”[2] about financial products.[3] It also regulates the rendering of defined types of “intermediary service”[4] for[5] clients[6] concerning financial products.

Such advice or intermediary service is a “financial service”.[7] A person who[8] provides advice or an intermediary service is a “financial service provider.”[9] No one may be a financial services provider without a licence.[10]

Some categories of advice are expressly excluded[11] from advice governed by the Act. But no categories of intermediary service are expressly excluded.[12] (The purported exclusions are not true exclusions of any category of intermediary service, but in substance exemptions of some intermediary-service providers in certain circumstances,[13] and should properly have appeared in the Act’s provision containing similar exemptions.[14])

Though no category of intermediary service is expressly excluded, the Supreme Court of Appeal ruled that some services fall outside the Act’s definition of intermediary service in certain circumstances:

The case[15] concerned an investment company.[16] The company contracted to provide a provident fund with services[17] many of which constituted “advice”: It undertook to recommend,[18] for the fund’s approval, investment strategies to meet the fund’s financial aims.[19] (An independent asset manager would effect investments approved by the fund.)

Other services the company would provide were not advice. In issue was whether they were “intermediary services”:[20] The company would draft a detailed mandate for the asset manager, implement the mandate and the asset-allocation model and investment strategy, negotiate contractual issues with the asset manager on behalf of the fund, manage the transition from current portfolios, monitor and evaluate performance of the investments and asset manager, and correct any underperformance or take appropriate corrective action.[21]

The court held the first defined type of intermediary service (an act the result whereof is a client may enter, offers to enter or enters a transaction concerning a financial product with a supplier[22]) contemplates acts that “directly result” in such a consequence.[23] The ordinary meaning of “intermediary” is a “go-between” standing between client and product supplier to effect transactions; the court found the asset manager was that go-between.

The court held the services the investment company contracted to provide were not intermediary services as defined.[24] The company was not to bring about transactions (the asset manager did that):[25] The company had to compile and convey the mandate and instructions to the asset manager and take steps to ensure it complied with its mandate.[26]

This judgment[27] highlights the Act’s vague scope. (If the fund gave the investment company discretion to determine what products to buy, and the company instructed the asset manager accordingly, arguably the company’s acts would directly result in the transaction.)

This uncertainty about which intermediary services require licensing violates the Rule of Law principle that laws should indicate with some certainty what is required.[28]

[1] Financial Advisory and Intermediary Services Act 37 of 2002 (the “Act”). Irrelevant material is omitted.

[2] Any recommendation, guidance or proposal of a financial nature, in respect of a purchase of or investment in a financial product, or conclusion of any other transaction aimed at incurring a liability or acquiring a right or benefit in respect of a financial product. Act s 1(1) sv “advice” pars (a)–(c).

That the advice does not result in a transaction is not material. Act s 1(1) sv “advice” item (ii).

[3] Shares in companies, share warrants, share-subscription rights, debentures, money-market instruments, participatory interests in collective investment schemes, long- or short-term insurance policies, pension-fund benefits, foreign-currency-denominated investment instruments, bank deposits, and health-service benefits provided by medical schemes. Act s 1(1) sv “financial product” (a)(i)–(v), (b)–(d)(i),(e)–(g) read with Financial Markets Act 19 of 2012 s 1(1) sv “securities”.

[4] The performance of any act—

The result of which is a client may enter or enters a transaction concerning a financial product with a supplier;

Or with a view to—

buying, selling or dealing in (whether on a discretionary basis or not), managing or administering a financial product which a client purchased from a product supplier or invested in; or

collecting or accounting for premiums or moneys payable by the client to a product supplier regarding a financial product. Act s 1(1) sv “intermediary service” pars (a) and (b)(i) and (ii).

[5] Or on behalf of.

[6] Or a “product supplier”, i.e., someone who issues a financial product. Act s 1(1) sv “product supplier”.

[7] Act s 1(1) svv “financial service” and “financial services provider”.

[8] As a regular feature of his business.

[9] Act s 1(1) sv “financial service” and “financial services provider” (a), (b), (c).

[10] Act s 7(1)(a) read with s 8(1) and s 1(1) svv “authorised financial services provider”, “licence”.

Anyone not complying is liable to up to a R10m fine or ten years’ imprisonment or both. Act s 36(a).

[11] Factual advice on the procedure to enter a transaction regarding a financial product, or its description; and objective information about a product. Act s 1(3)(a)(i)(aa), (bb) and (dd); or

an analysis or report on a financial product without recommending, guiding or proposing any transaction as appropriate to a client’s investment object, financial situation or needs. Act s 1(3)(a)(ii).

[12] From intermediary services governed by the Act.

[13] The rendering, by a bank acting as mere conduit, of the intermediary service comprising any act with a view to collecting or accounting for premiums or moneys payable by a client to a product supplier in respect of a financial product. Act s 1(3)(b)(i) read with s 1(1) sv “intermediary service” par (b)(ii). See fn 4 in fin.

The rendering, by a product supplier authorised by law as a financial institution, of any intermediary service the rendering of which is regulated by that law. Act s 1(3)(b)(ii).

[14] Act s 45(1)(i)–(iv), (b)(i)–(iv) and (c) (“Exemptions”).

[15] TriStar Investments (Pty) Ltd v Chemical Industries National Provident Fund [2013] ZASCA 59 (SCA) per Nugent JA (Lewis, Tshiqi and Petse JJA and Swain AJA concurring).

[16] Which was licensed under the Act to provide advice, but not intermediary services.

[17] The fund then contended it was not bound by the arrangement. It alleged the contract was void because it required the company to render intermediary services, which the company was not licensed to do.

[18] After meeting the fund’s representatives, reviewing its assets, ascertaining its financial aims and constructing an investment model.

[19] TriStar Invs v Chemical Inds Natl Prov Fund supra par [11].

[20] That should have been licensed.

[21] TriStar Invs v Chemical Inds Natl Prov Fund supra par [12].

[22] See fn 4.

[23] And to construe it as including acts “indirectly” having that result would “lead to absurdities”. TriStar Invs v Chemical Inds Natl Prov Fund supra par [13].

[24] Thus, the company did not need a licence to provide them. Hence the contract was not unlawful. TriStar Invs v Chemical Inds Natl Prov Fund supra par [15].

[25] TriStar Invs v Chemical Inds Natl Prov Fund supra par [14].

[26] The court also considered the second defined type of intermediary service (an act with a view to managing or administering a product purchased: see fn 4). The court noted it contemplates someone who manages or administers the products. The court held the services the investment company contracted to provide was not to manage or administer financial products. It was to manage and administer no more than the mandate of the asset manager. TriStar Invs v Chemical Inds Natl Prov Fund supra pars [13], [14].

[27] While in principle providing a welcome narrowing of the ostensibly broad application of the Act. See e.g. P Kruger, “Intermediary service definition revisited,” 23 May 2013, Moonstone, http://www.moonstone.co.za/intermediary-service-definition-revisited/.

[28] The Rule of Law requires that laws be clear and certain. B Tamanaha, “A Concise Guide to the Rule of Law”, Sep 2007, Legal Studies Research Paper Series, St John’s Univ School of Law, Queens, NY.

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Gary Moore

Gary Moore BA LL.B. (Witwatersrand) LL.M. (UC London) is a South African lawyer and Senior Researcher at the Free Market Foundation.

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