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Financial Advisors

Someone who ‘brokers’ a deal is the guy who puts it together. He brings two parties to contract with each other for the supply of various products or services. A ‘stock broker’, for example, is the professional who will buy and sell shares on the Johannesburg Stock Exchange for you. An insurance broker is someone who will find a company to give insurance for you on whatever you want – your house contents, your car, and so on – and also provide retirement funding, disability income insurance and so on. They are really agents of a sort – in the same way that a land broker is the same as an estate agent.

Although the services of a broker often feature in connection with financial transactions, the title has nothing to do with being ‘broke’ – i.e. bankrupt. Actually, the word ‘broker’ comes from the Old French word for a type of spiky tool used for piercing, ‘broche’. That was used to tap into wine casks in order to sell the wine off in smaller quantities, and so the person who did this, and retailed the wine was called the brocheur. That then became someone who bought to sell over again, a second-hand dealer; or who bought for another, hence a jobber, middleman, and agent.1 In time, English adapted the word into ‘broker’.

Nowadays, we know these agents of financial services and products as ‘financial advisors’. Their profession is regulated very closely, because in effect they take money from the public (their clients) in order to invest in retirement annuity policies, insurance policies, and many other more sophisticated types of financial ‘instruments’. It goes without saying that high standards of ethical conduct and honesty are required.

The statute which governs the profession is the Financial Advisory and Intermediary Services Act 2002. It is administered by the Financial Sector Conduct Authority – formerly known as the Financial Services Board (FSB). This is referred to below as ‘the Authority’, and this term includes the Registrar of the Financial Sector Conduct Authority, who performs its functions.

A. Financial service providers

There are some definitions in the Act which relate to a Financial Services Provider and which are rather complicated. The following is the basic picture.

A Financial Services Provider is a person who, as a regular feature of its business, furnishes advice and/or renders an intermediary service.

  1. It is necessary to be authorised (ie. licensed) by the Authority to be able to act as a financial services provider and also to act as a representative of a financial services provider. It is an offence to do otherwise.2

  2. Even so, a financial services provider can only conduct business through a ‘representative’,3 or a person who is himself licensed by the Authority.4

  3. Where an application for authorization has been granted by the Authority, a licence will then be issued. The financial services provider to whom the licence has been issued must:
    • prominently display a certified copy in every one of its premises;
    • reflect the fact of the licence in all documentation, advertisements and so on;
    • ensure that the licence is available for inspection by any person requesting proof under some law or for the purpose of entering into a business relationship with the provider.

    It is an offence to contravene any of these requirements.5

  4. Where a financial services provider is a juristic person (that is, a corporate body, an association, trust or partnership), it must ensure that every trustee, director, partner or member (who is not considered to be a ‘key individual’6) complies with the qualities of honesty and integrity as contemplated by the Act, and commits an offence if it fails to do so.7

  5. If a new director, member, trustee or partner is appointed, the financial services provider must inform the Authority within 15 days, and furnish such information as the Authority may require. It is a criminal offence not to do so.8

  6. A financial services provider is obliged to ensure that, at all times, its representatives, and its key individuals, comply with the ‘fit and proper’ requirements (and any requirements relating to the reappointment of debarred representatives).9

  7. It is also necessary for a financial services provider to take whatever steps are reasonably necessary to ensure that its representatives comply with all applicable codes of conduct as well as laws on the conduct of business. It is a criminal offence to fail to do this.10

  8. Where a representative or a key individual (of such a representative) no longer, or does not meet, the fit and proper requirements, or those required for reappointment, the financial services provider must debar that person from rendering financial services. It commits a crime if it fails to do so.11

  9. Similarly, if the financial services provider is satisfied that the representative has contravened, or has failed to comply with any provision of the Act in a material manner, it must debar the representative. It commits a crime if it fails to do so.12

  10. If the financial services provider does not have a compliance officer,13 it carries the obligation to submit reports to the Authority as required from time to time. If it fails to submit such reports as are required, it is guilty of an offence.14

  11. Even if it does have a compliance officer, whose function (and obligation) is to submit such reports, the provider concerned commits a crime if it does not ensure that the reports are submitted as required.15

B. Representatives

A ‘representative’ in terms of the Act is someone who renders a financial service to a client of a financial services provider, and which service requires judgment or which, in response to a general enquiry, leads to a specific transaction in respect of a financial product.

  1. It is a crime to act (or offer to act) as a representative unless you have been appointed by an authorised financial services provider.16

  2. It is a crime to act as a representative for someone who is not an authorised financial services provider and is not exempted from the provisions of the Act.17

  3. When a representative renders a financial service to clients, before doing so he must provide certified confirmation that:
    • he has a contract or mandate to represent the provider in question; and
    • that the provider accepts responsibilities for the representative’s activities.

    If he does not do so, the representative commits an offence.18

  4. A person may not act as a representative unless he meets the requirements of being fit and proper – these include honesty and integrity; competence; continuous professional development; operation ability; and financial soundness.19 He commits an offence by acting if he does not meet these requirements.20

  5. If a representative has been ‘debarred’ from rendering financial services, he commits a crime by doing so unless he complies with the Gazetted requirements for reappointment.21

  6. It is a crime for a representative to render financial services (or to contract in respect of financial services) on behalf of a provider for whom he does not have either a mandate or a contract of service.22

C. Compliance officers

  1. Every authorised financial services provider which has more than one key individual, or has one or more representatives, must have a ‘compliance officer’ to oversee and monitor the provider’s compliance with the Act. If the Compliance Officer does not submit reports to the Authority as required from time to time, he commits an offence.23

D. Records and reporting

  1. Unless it has been exempted by the Authority, every authorised financial services provider must keep records for a minimum period of five years concerning the following, and commits a crime24 if it fails to do so:
    • premature cancellations by clients of transactions or financial products;
    • complaints received;
    • whether such complaints have been resolved;
    • compliance with licence conditions and requirements;
    • cases of non-compliance with the Act;
    • reasons for such non-compliance;
    • representatives’ compliance.
  2. Annual financial statements (which address the required topics according to the Act) must be prepared by every authorised financial services provider, and:
    • it must have them audited and reported on by an external auditor approved by the Authority;
    • they must be submitted to the Authority within 4 months of the end of the relevant financial year (or such further time as the Authority may allow).

    It is a crime to contravene these requirements.25

  3. If the auditor detects or suspects any irregularity in the conduct or the affairs of the financial services provider, he must report it to the Authority in writing. He is guilty of a crime if he fails to do so.26

E. Undesirable practices

  1. The Authority can declare a particular business practice to be undesirable, for all categories of services providers, or a category of them, or just one provider. Once notification of the declaration has been published in the Gazette, it is a crime to carry on the practice concerned.27

  2. If a financial services provider does, for whatever reason, continue with the undesirable practice, the Authority can direct the provider concerned to rectify anything which was caused by or arose as a result. It is a crime not to comply with such a direction within 60 days.28

F. False representations

  1. Any person who makes any false, misleading or deceptive statement, or conceals any material fact in any application submitted in terms of the Act, commits a criminal offence.29

  2. It is a crime to give to an appointed auditor any information which is false or misleading, or to conceal any material fact.30

  3. It is a crime to give to a compliance officer any information which is false or misleading, or to conceal any material fact.31

  4. Any person who is not a representative mandated or appointed by an authorised financial services provider, but pretends to be appointed or mandated by another representative of the financial services provider is guilty of an offence.32

G. The ombud

The Office of the Ombud for Financial Services Providers is established in terms of the Act to consider and dispose of complaints in a fair and expeditious manner.33

  1. It is an offence to do anything in respect of the Ombud, or in respect of an investigation being carried out by the Office of the Ombud, that would constitute contempt of court.34

  2. It is also an offence to ‘anticipate’ – that is, to do or say anything in respect of – a determination by the Ombud (other than make representations to the Office) which is likely to influence the determination.35

  3. You also commit a crime if you wilfully interrupt any proceedings conducted by the Ombud.36

  1. https://english.stackexchange.com/questions/17150/etymology-of-the-word-broker. ↩

  2. Section 7(1) read with section 36(a). ↩

  3. See section B below. ↩

  4. Section 7(3) read with section 36(a). ↩

  5. Section 8(8) read with section 36(a). ↩

  6. A ‘key individual’ is a person who is in an ownership, trusteeship, managerial or other overseeing capacity of a financial services provider or a representative. ↩

  7. Section 8(10)(a)i read with section 36(a). ↩

  8. Section 8(10)(a)ii read with section 36(a). ↩

  9. Section 13(2)(a) read with section 36(a). ↩

  10. Section 13(2)(b) read with section 36(a). ↩

  11. Section 14(1)(a)iii read with section 36(a). ↩

  12. Section 14(1)(a)iv read with section 36(a). ↩

  13. See section C below. ↩

  14. Section 17(4)(a) read with section 36(a). ↩

  15. Section 17(4)(b) read with section 36(a). ↩

  16. Section 7(1)(b) read with section 36(a). ↩

  17. Section 13(1)(a) read with section 36(a). ↩

  18. Section 13(1)(b)i read with section 36(a). ↩

  19. As set in terms of section 6A of the Act. ↩

  20. Section 13(1)(b)(1A) read with section 36(a). ↩

  21. Section 13(1)(b)ii read with section 36(a). ↩

  22. Section 13(1)(c) read with section 36(a). ↩

  23. Section 17(4)(a) read with section 36(a). ↩

  24. Section 18 read with section 36(a). ↩

  25. Section 19(2) read with section 36(a). ↩

  26. Section 19(4) read with section 36(a). ↩

  27. Section 34(4) read with section 36(a). ↩

  28. Section 34(6) read with section 36(a). ↩

  29. Section 36(b). ↩

  30. Section 36(c). ↩

  31. Ibid. ↩

  32. Section 36(d). ↩

  33. The Ombud is based in Pretoria – see https://www.faisombud.co.za for the contact details. ↩

  34. Section 31(a). ↩

  35. Section 31(b)i. ↩

  36. Section 31(b)ii. ↩

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