Financial Advisory and Intermediary Services Act (FAIS)
Introduction
This writing takes a closer look at the provisions of the Financial Advisory and Intermediary Services (FAIS) Act (the Act), passed in November 2002. Focus is specifically on how the Act will affect both consumers and various participants in the private health care sector when purchasing (or selling) health care funding products. The Financial Services Board (FSB) recently announced the 30th of September 2004 as the date that all financial advisors must be licensed. From this date, those affected will have to be registered as a Financial Service Provider (FSP) to continue operating in their current advisory capacity.
The Act: why and who?
Although the Act’s preamble briefly states its purpose as being the regulation of certain financial advisory and intermediary services, it also aims to:
- Protect customers from poor advice given by financial advisors;
- Boost the reputation, via regulation, of the financial services industry by eliminating unscrupulous broker activity; and
- Empower the prospective consumer by ensuring they receive minimum technical and risk information relating to a product. Customers will be better placed to make an informed decision concerning their potential (financial product) purchases.
The expansive categorization of financial products under the Act allows for advisory activity to be consolidated, rather than regulated on a piecemeal basis under separate laws.
Except for the private health care sector, financial advisors can rely on and become well acquainted with one charter when establishing what can and cannot be done when interacting with clients.
Who should register as a FSP?
Implementation of this Act will have a profound effect on a large number of financial services businesses. Besides the exemptions granted, those obviously impacted on are product suppliers (insurers, medical schemes and banks) and consulting and administrative organizations (investment management companies, insurances underwriters and brokerages). Examples of businesses that at first appear to be unaffected but may be captured are car rental services, furniture retailers and car dealerships. Their inclusion results from the ancillary services they may provide, such as short-term insurance cover on their products.
Some technical, but important jargon under the Act that requires further explanation are the term “FSP” and “Representative”.
The FSP is the individual or organization, scheme, administrator, fund, trust and any other legally constituted entity recognized and licensed by the FSB. It carries full responsibility for, and the consequences of, its activities to both the regulating authority and consumer. For a one-man operation, they will be the FSP. Larger businesses that have employees, tied agents, franchises, divisions and the like, need to apply much more thought when registering.
Certain operations could be ring-fenced to better monitor those actions that qualify under FAIS. The appointment of Key Individuals, deemed to perform managerial and overseeing functions over the Representatives, is a regulatory requirement. Representatives either give the advice or carry out the intermediary services for or on behalf of the FSP.
In the private health care sector, some medical schemes may need to register as the FSP. The need for a scheme to license accordingly depends on the structure and nature of advisory and administration functions. Depending on their size and whether they are self-administered, the Principal Offices (PO) COULD BE APPOINTED AS THE Key Individual while certain staff, for example those employed in the call centre, would be Representatives.
Establishing whether FAIS applies to a business may not in all instances be a simple “yes” or “no”. Undoubtedly, a thorough investigating is needed. Although not a substitute for these investigations, some pointers that readers could consider are listed below.
Firstly
Whether the giving of advice and/or the rendering of an intermediary service occurs in the course of business and is not the core business. Understanding the following definitions is therefore crucial. Although technical, they are repeated in part of explanatory purposes, advice being the first:
“any recommendation, guidance or proposal of a financial nature furnished, by any means or medium, to any client or group of clients…”
Advice does not include factual information. Some practical examples of factual information include stating the benefits available in a benefit option registered under a scheme and dealing with administrative queries or claims processes. On the other hand, making a recommendation to a member on the most appropriate benefit option or suggesting that they take out additional insurance for purposes of their health care needs would be advice. The distinction is important for two reasons.
To begin with, registration of a FSP may not be necessary. As an example, it may be more feasible for an administered scheme to restructure its operations and outsource the advisory function to their administrator. The value of advice given by a scheme infrequently, or on an ad-hoc basis by a limited number of internal staff may be considerable outweighed by the risks and responsibilities assumed as a FSP.
Secondly, the FSP does not have to make all the required disclosures and keep records of the interaction with the (prospective) client if fact, versus advice, is given. The interchange and depth of information between the advisor and consumer will, from a regulatory perspective, differ substantially.
Admittedly, the distinction between advice and information is not always easily differentiated. Take for example the common practice of internal staff in the salaries or payroll departments. They often assist and advise employees on a regular basis with decisions regarding scheme benefit options, pension and provident plans and insurance arrangements. Unless these internal staff is registered either as a FSP or a Representative, they can no longer advise (but can give information) on these financial products. Existing human resource practices and staff education may therefore need to be corrected.
Because all forms of medium are covered, it is irrelevant whether advice is given by e-mail, telefax or telephone. Emphasis is on substance rather than form.
The second activity, intermediary service, is more complicated in its definition.
“any act, other than furnishing advice, performed by a person for or on behalf of a client or product supplier”
"the result of which is that a client may enter into, offers to enter into or enters into any transaction in respect of a financial product with a product supplier; or"
with a view to:-
buying, selling or otherwise dealing in managing, administering, keeping in safe custody, maintaining or servicing a financial product purchased by a client from a product supplier or in which the client has invested;
collecting or accounting for premiums or other moneys payable by the client to a product supplier in respect of a financial product; or
the receiving, submitting or processing the claims of a client against a product supplier,”
Evaluating of this definition cannot be done in isolation and should be read in conjunction with the definition of Representative. Although registration as a FSP may still be required because intermediary services are being rendered, the demarcation and registration of Representatives may be unnecessary. Considering the (direct and indirect) costs involved, training, education and experience requirements and the responsibility assumed by the FSP, this exemption could be a huge relief for some businesses.
Scheme administrators, banks and insurers who employ a significant number of administrative staff would benefit immensely from this section of the Act. Persons not deemed to be Representatives must meet either of the following to qualify:
- The services are of a clerical, administrative, technical, legal or accounting nature or they are rendered in a subsidiary or subordinate capacity AND the services do not require judgment on the part of the person rendering it; or
- The services are of a clerical, administrative, technical, legal or accounting nature or they are rendered in a subsidiary or subordinate capacity AND the services do not lead the client to any specific transaction relating to the financial product in response to general enquiries.
Secondly
Advice or intermediary services must be connected to financial products. To clarify the term financial product in the context of the Act, categories have been listed. Some examples are shares, long-term or short-term insurance policies, bank deposits and health service benefits. Advising scheme members of the different chronic or maternity management programs available under their scheme does not fall under FAIS. It is not a financial product on its own that is capable of being separately purchased. Rather, it would form part of the needs analysis undertaken fro a member when advising on the benefit option or scheme most suited to their circumstances. Subscription to a wellness program is also not considered a financial product of FAIS.
Correct categorization is important. FSPs are required, when applying for their license, to specify those products that they will advice (or render intermediary services) on. This does not mean that the FSP and Representative get to pick and choose the products they like best. Each category requires a minimum experience and education level, which the FSP verifies that its Key Individuals and Representatives meet. For product suppliers that will also qualify as a FSP, the (category) identification may be a lot easier and simplify the process. The same is not true for consulting firms and financial service companies that are strategically positioning themselves to be able to offer “one stop shop” service modules for their clients. Similarly, this applies to non-aligned financial service firms, who because of their specialized expertise in a field extend ancillary financial (product) solution to their client base. For example, engineering consulting firms may give advice on insurance solutions and recommend products to their clients because of their in-depth understanding and skills relating to the risks involved. Either way, careful consideration and planning may be needed by management to avoid sanctions for failing to comply with the provisions of FAIS.
Thirdly
And without stating the obvious, there needs to be a client. Specifically excluded from FAIS is the general public. The activity needs to be intentionally directed at one or more identifiable persons, e.g. the board of trustees, members, etc. a marketing stint aimed at a niche target market buy employed to create an awareness of a product or advice or intermediary service, would not qualify under FAIS. Understandably, most branding and advertising initiatives, as well as educational forms and materials, would come to a grinding halt. On the contrary, a host or speaker who uses a public medium such as radio or a newspaper “advice” column directed at a caller’s or participant’s circumstances would however, need to be registered as, and follow the Act’s procedures relating to a FSP.
The issues raised above make it clear that although they are the majority, it is not just brokers who will be governed by the Act. It is worthwhile mentioning that exceptions have been given to particular persons. In the case of health benefits, advice given by trustees of a scheme is not considered advice for purposes of FAIS. Provided the do not act in a different capacity than that of trustees when advising, they will not be considered a Representative.
How has FAIS specifically affected the private health care funding industry?
One different emergency for the private health care industry, versus other financial sectors, is the regulatory framework. The Act makes specific provision for a representative from the Council for Medical Schemes to be a member of the Advisory Committee. The Committee’s responsibilities include advising upon and shaping subordinate legislation. Interestingly, no proviso was made for representation by another regulatory authority. The Council was adamant that it would not forego any control it had over health care brokers, even to another regulator like the FSB. The balance of Committee members are specialists from each sector of the financial services industry.
The Act also establishes two regulatory bodies to license and oversee FSPs: (1) the FSB as the regulatory authority of the industry and (2) the office of the Ombudsman to handle unresolved complaints of the consumer.
However, the Registrar of Medical Schemes will also carry out some functions of the FSB. Examples are:
The accreditation and issuing of licenses to act as a medical scheme broker;
Ensuring that minimum education and experience requirements prescribed under the Medical Schemes Act are met; and
Dealing with broker complaints by scheme members.
The practicality of two regulators overseeing broker activity is questionable. Firstly, regulatory costs are duplicated. Part of the Council’s expenditure budget is covered via the levy imposed on schemes, which in turn are built into the contributions paid by members. Secondly, the Act has allowed and budgeted for an Ombudsman’s office to focus specifically on consumer complaints brought under FAIS. By the Registrar of Medical Schemes continuing to deal with member broker related complaints, their opportunity to effectively deploy their personnel resources is somewhat diluted. There also seems to be no information sharing mechanism with the Ombudsman regarding how these complaint procedures and jurisdiction issues will be streamlined. Perhaps the current protectionism stances of the Registrar’s office will change once the Ombudsman’s office is fully operational and the outcome of legally sound and consistent judgments are apparent.
Also worth bearing in mind is that the Medical Schemes Act disallows a PO during their tenure to simultaneously be registered as a broker. In terms of FAIS, a Representative licensed for the health benefits category must also be accredited as a broker by the Council. By implication, a PO cannot give “health care” advice. This restriction does not extend to other FAIS categories. So for example, provided the PO’s license is categorized accordingly, they could advise on reinsurance arrangements.
Micro-regulation of the private health care sector and capping of broker payments coupled with FSP administrative and compliance requirements will make it extremely difficult for the one-man show or small brokerages to have a viable business. It is unlikely that they will in future concentrate solely on medial scheme products.
And the final result for consumers
The overall quality of advice and intermediary services rendered should improve and have beneficial results for recipients. Only experienced and suitably qualified financial advisors will be entitled to render the demarcated activities. A minimum “knowledge” standard will be established and this will encourage a shift from simply broking a deal to the more expansive consulting role, and added deterrent to advisors only wanting to dabble in the financial services industry. Two pieces of subordinate legislation that will largely contribute to this result are the general code of conduct and fir and proper requirements.
Conclusion
As mentioned previously, this Act serves to protect the client by ensuring that the FSP has taken into account all relevant factors pertaining to the needs of the client and that the client understands the product they are purchasing. The increased transparency also endeavors to improve the professional image of the financial services industry. Incompetent and unethical financial advisors will no longer be able to pull the wool over the consumer’s eyes – the unscrupulous will certainly be “FAISed” out.
