Author: Gary Moore

Date: 20 November 2017

The provisions of the Financial Advisory and Intermediary Services Act, 2002[1] which provide for the determining of “fit and proper requirements,” and for the granting of exemptions therefrom, violate the Rule of Law.

The Act stipulates[2] that the Registrar of financial-services providers[3] (i.e., the executive officer of the Financial Services Board[4]) must,[5] by Gazette notice—

Classify financial-services providers into different categories; and

determine fit-and-proper requirements for each category of providers.[6]

The Registrar must likewise, in each category of providers, also determine[7] fit-and-proper requirements for—

Providers’ key individuals;[8]

providers’ representatives;[9]

the representatives’ key individuals; and

compliance officers.[10]

The Registrar may also determine fit-and-proper requirements in general.[11]

The Act provides that fit-and-proper requirements may include (but are not limited to) appropriate standards relating to—

Personal-character qualities of honesty and integrity;

competence, “including”—

experience;

qualifications; and

knowledge tested through examinations determined by the Registrar;

operational ability;

financial soundness; and

continuous professional development.[12]

That provision of the Act is tersely framed, and amplifies (rather than fetters) the Registrar’s powers and duties to determine fit-and-proper requirements. The provision, in effect,[13] leaves the Registrar with wide discretion when determining fit-and-proper requirements. The provision thus violates the principles of the Rule of Law that legal liability should be resolved by application of law rather than the exercise of discretion, and any discretions should be narrowly defined.[14]

The Registrar has determined the following fit-and-proper requirements and criteria:

Fit and Proper Requirements for Financial Services Providers, 2008;[15]

Qualifying Criteria and Qualifications for Financial Services Providers, 2008;[16] and

Continuous Professional Development Requirements, 2008.[17]

The said Fit and Proper Requirements, 2008 define categories of financial-services provider and list subcategories,[18] and determine standards relating to personal-character qualities of honesty and integrity, experience, operational ability and financial soundness.[19]

(Regarding continuous professional development, the Fit and Proper Requirements state that the Registrar could determine[20] continuous professional-development-requirements separately,[21] and the Registrar accordingly determined the said Continuous Professional Development Requirements, 2008.[22]

(Regarding qualifications, and knowledge tested through examinations, the Fit and Proper Requirements state that the Registrar would publish separately[23]

Qualifying criteria, against which examinations will be set and the Registrar will evaluate and recognise qualifications for inclusion on the list of recognised qualifications;[24] and

a list of recognised qualifications[25] in respect of categories of financial-services provider and the listed subcategories,[26]

and the Registrar accordingly published the said Qualifying Criteria and Qualifications for Financial Services Providers, 2008.[27] The qualifying criteria are extensive and far-reaching.[28]

The Act stipulates that a provider, key individual and representative must continue to comply with the fit-and-proper requirements.[29] A compliance officer must also comply.[30]

The Act states that the Registrar may,[31] on application or his own initiative, exempt any person or category of persons on “reasonable grounds” from[32] any requirement determined,[33] if “satisfied” that application of the measure to an applicant will cause the latter[34] financial[35] hardship or prejudice, and that granting the exemption will not conflict with the “public interest.”[36]

These criteria, that the Registrar may exempt of persons “on reasonable grounds” from fit-and-proper requirements if “satisfied” that granting the exemption will not conflict with the “public interest” are vague and subjective, and in effect discretionary. The criteria violate the Rule of Law principles that the law should be clear and predictable, that questions of legal rights should ordinarily be resolved by application of law rather than the exercise of discretion, and that discretions should be narrowly defined.[37]

The Registrar has exempted financial-service providers in general, from (for example) the duty to be satisfied that their representatives comply with[38] the Fit and Proper Requirements relating to experience and qualifications, on condition[39] that the representative is properly supervised, and obtains the required experience and qualifications in six years.[40]

The Registrar has also granted numerous exemptions of particular persons from (for example) the first-level regulatory examination,[41] on condition that they successfully complete the examination in a specified period.[42]

The Registrar may[43] amend fit-and-proper requirements[44] and exemptions,[45] and he may delegate his powers to the Deputy Registrar of financial-services providers[46] (a deputy executive officer of the Board[47]). The Deputy Registrar has effected amendments to the fit-and-proper requirements and exemptions.[48]

 

[1] Financial Advisory and Intermediary Services Act 28 of 2002.

[2] Financial Advisory and Intermediary Services Act s 6A (as inserted by Financial Services Laws General Amendment Act 45 of 2013).

[3] Financial Advisory and Intermediary Services Act s 1(1) sv “registrar” read with s 2(1).

[4] Financial Services Board Act 97 of 1990 s 1 svv “executive officer” read with s 13(1)(a).

[5] For purposes of the Act.

[6] Financial Advisory and Intermediary Services Act s 6A(1)(a)(i) and (ii).

[7] Financial Advisory and Intermediary Services Act s 6A(1)(a)(iii)(aa), (bb), (cc) and (dd).

[8] A “key individual” is any natural person responsible for managing or overseeing, either alone or together with other so responsible persons, the activities of the provider relating to the rendering of any financial service;

In the case of a corporate body (or trust) consisting of only one natural person as member, director or shareholder (or trustee), key individual” means that natural person:

Financial Advisory and Intermediary Services Act s 1(1) svv “key individual” pars (a), (b).

[9] A “representative” is any person, including a person employed or mandated by her, who renders a financial service to a client for or a provider, in terms of employment conditions or other mandate, excluding a person rendering (in a subsidiary or subordinate capacity) a clerical, technical, administrative, legal, accounting or other service which does not require judgment on his part or lead a client to a specific transaction in respect of a financial product “in response to general enquiries.” Financial Advisory and Intermediary Services Act s 1(1) sv “representative” pars (a), (b).

[10] A “compliance officer” is one or more persons, appointed by a financial-services provider that has more than one key individual or at least one representative, to oversee the provider’s compliance function, monitor the provider and its representatives’ compliance with the Act, and take responsibility for liaison with the registrar. Financial Advisory and Intermediary Services Act s 1(1) svv “compliance officer” read with s 17(1)(a).

[11] I.e., for providers, key individuals, representatives, representatives’ key individuals, and compliance officers. Financial Advisory and Intermediary Services Act s 6A(1)(b).

[12] Financial Advisory and Intermediary Services Act s 6A(2)(a), (b)(i), (ii) and (iii), (c), (d) and (e).

Different requirements may be determined for natural persons, and for partnerships, trusts or corporate or unincorporated bodies. Financial Advisory and Intermediary Services Act s 6A(3).

[13] Apart from stating that fit-and-proper requirements may include “appropriate” standards relating to matters which may be included.

[14] Lord Bingham (then Senior Law Lord), “The Rule of Law” (Sixth Sir David Williams Lecture 2006, Centre for Public Law, Univ. of Cambridge), first sub-rule.

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

[16] Determination of Qualifying Criteria and Qualifications for Financial Services Providers, 2008. Bd Notice 105 of 15 Oct 2008.

[17] Determination of Continuous Professional Development Requirements. Bd Notice 103 of 15 Oct 2008.

[18] Fit and Proper Requirements for Financial Services Providers, 2008: Part I para 1(1) svv “Category I,” “Category II,” “Category IIA,” “Category III” and “Category IV;” and sv “subcategory” read with para 4(1) table A in relation to Category I and with para 4(2) table B in relation to Categories II and III.

[19] Fit and Proper Requirements for Financial Services Providers, 2008: Part II, Part IV, Part VIII and Part IX.

[20] In the Gazette.

[21] By Gazette notice.

[22] Determination of Continuous Professional Development Requirements. Bd Notice 103 of 15 Oct 2008.

[23] In the Gazette.

[24] Fit and Proper Requirements for Financial Services Providers, 2008, par 3(1)(a) and (b).

[25] Subject to the qualifying criteria.

[26] Fit and Proper Requirements for Financial Services Providers, 2008, par 5(1).

[27] Determination of Qualifying Criteria and Qualifications for Financial Services Providers, 2008. Bd Notice 105 of 15 Oct 2008.

[28] See Determination of Qualifying Criteria and Qualifications for Financial Services Providers, 2008: Annexure1: Qualifying Criteria:

Sec 1: First level regulatory examination: FSPs (sole proprietors) and Key Individuals in Categories I, II, IIA, III and IV;

Sec 2: First level regulatory examination: FSPs (sole proprietors) and Key Individuals in Categories II and IIA;

Sec 3: First level regulatory examination: FSPs (sole proprietors) and Key Individuals in Category III;

Sec 4: First level regulatory examination: FSPs (sole proprietors) and Representatives;

Sec 5: Second level regulatory examination: Long-term Insurance subcategory A, Friendly Society Benefits and Category IV;

Sec 6: Second level regulatory examination: Short- and Long-term Deposits;

Sec 7: Second level regulatory examination: Long-term Insurance subcategory C and Retail Pension Funds;

Sec 8: Second level regulatory examination: Participatory Interests in Collective Investment Schemes;

Sec 9: Second level regulatory examination: Securities and Instruments;

Sec 10: Second level regulatory examination: Short-term Insurance: Personal Lines;

Sec 11: Second level regulatory examination: Short-term Insurance: Commercial Lines;

Sec 12: Second level regulatory examination: Health Care Benefits;

Sec 13: Second level regulatory examination: Pension Benefit Funds;

Sec 14: Second level regulatory examination: Category IV;

Sec 15: Second level regulatory examination: Long-term Insurance subcategory B1;

Sec 16: Second level regulatory examination: Long-term Insurance subcategory B2.

[29] And comply with the fit-and-proper requirements relating to continuous professional development. Financial Advisory and Intermediary Services Act s 8A(a) and (b).

[30] Financial Advisory and Intermediary Services Act s 17(1)(b). This document does not address requirements for compliance officers.

[31] By notice on the Board’s official website.

[32] Inter alia.

[33] Or indeed from any provision of the Act: Financial Advisory and Intermediary Services Act s 44(4)(a) read with s 1(1) svv “this Act.”

[34] Or clients of the applicant.

[35] Or other.

[36] Or prejudice the interests of clients, or frustrate achievement of the objects of the Act. Financial Advisory and Intermediary Services Act s 44(4) read with s 44(1)(b) and (c)(i), (ii) and (iii).

[37] Bingham, “The Rule of Law” (supra), first and second sub-rules.

[38] Financial Advisory and Intermediary Services Act s 13(2)(a)(i). See above.

[39] Inter alia.

[40] Exemption in respect of Services under Supervision in terms of Requirements and Conditions. Bd Notice 104 of 15 Oct 2008.

See also:

Bd Notice 97 of 30 Sep 2003:  Exemptions of Investment Managers and Linked Investment Services Providers, and their related Functionaries, from certain Fit and Proper Requirements;

Bd Notice 135 of 14 Nov 2003:  Exemption of Authorised Financial Services Providers and Representatives Conducting Short-term Deposit Business from Certain Fit and Proper Requirements and the General Code when rendering Financial Services relating to Money Market Funds.

[41] Prescribed by the Fit and Proper Requirements (read with the Qualifying Criteria and Qualifications for Financial Services Providers).

[42] Bd Notice 262 of 19 Dec 2013: Exemption of particular persons from the level-1 regulatory examination, No. 9 of 2013 (listing 84 persons).

See also, for example, Bd Notice 31 of 13 Mar 2014:  Exemption of particular persons from qualification requirements, 1 of 2014.

[43] By Gazette notice.

[44] From time to time, and a person affected must comply within a period determined by the Registrar. Financial Advisory and Intermediary Services Act s 6A(4).

[45] Interpretation Act of 1957 s 10(3).

A general exemption from fit-and-proper requirements can (like fit-and-proper requirements themselves) be described as legislative in character, of the nature of a rule made under a statute, and is thus capable of being amended or withdrawn in the same manner. See Retail Motor Industry Organisation and ano v Minister of Water and Environmental Affairs and ano [2013] 3 All SA 435 (SCA) pars [30]–[32].

[46] Financial Services Board Act s 20(3) read with Financial Advisory and Intermediary Services Act s 2(3).

[47] Financial Services Board Act s 13(1)(a), (3)(b) and (5).

[48] See, e.g., Bd Notice 260 of 19 Dec 2013, “Amendment of Fit and Proper  Requirements and Accompanying Measures, 2013.”

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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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