AMENDMENTS TO FIT AND PROPER REQUIREMENTS

 

The proposed amendments to Fit Proper are currently being finalised by the FSB and include updated definitions regarding financial products and product categories as well as new competency requirements.

 

DEFINITIONS

 

·         Automated advice has been added to cover the ever growing ‘Robo Advice’

 

·         Financial product has been extended to include any product issued by a foreign product supplier and products with a foreign currency denomination.

 

·         Class of business and class of business training are defined as new competency requirements. Current product subcategories are broken down further to class of business.

 

·         Participatory interests in Hedge Funds, Structured Deposits, and Securities and Instruments are defined within new product categories. Forex investments and foreign currency deposits are newly defined product categories.

 

·         Long-Term Insurance B1-A means B1 products which require no or minimal underwriting.

 

·         Long-Term Insurance B2-A means long-term insurance subcategory B2 which provide for the premiums to be invested in an investment portfolio managed by the product supplier with no option by the policyholder to request a change or amendment to that portfolio.

 

·         Tier 1 and Tier 2 product subcategories are introduced with Tier 1 being the more complex products and Tier 2 being the simple products.

HONESTY, INTEGRITY AND GOOD STANDING

 

Applicable to all FSPs, Key Individuals and Representatives.

 

Good standing has been included in the character qualities and extends to boundaries as previously set out. In looking at the good standing of an entity, focus is placed on the corporate behaviour as well as the behaviour of directors and Key Individuals.

COMPETENCE

 

Compliance to the competence requirement will now be principle based. It will no longer entail merely meeting the minimum requirements of ticking a box.

 

The FSP will be responsible for evaluating and reviewing the competence of both Key Individuals and Representatives.  A competence register will now need to be kept and maintained to ensure that competence is evaluated.  This must take into account technical knowledge, skills and expertise, and changes in the market and legislation. Training will thus have to be provided to ensure competence. The FSP has an obligation to notify the registrar of any non-compliance regarding competency.

 

Product categories are now divided into Tier 1 and Tier 2 products

 

 EXPERIENCE

 

Experience must be adequate, appropriate, and current in respect of a particular financial product and/ or category.  This applies to FSPs, Key Individuals and Representatives.

 

Experience lapses if it falls outside of the five-year experience rule.  This now also applies to Key Individuals who must have experience in the categories and product categories for which they are registered and not just management experience in the industry. For Key Individuals in Cat II, IIA, III and IV, the amendments require that they have rendered financial services in terms of the relevant category and product categories.  This has been amended to allow for management only and is aimed at preventing the lapsing of experience.

 

 QUALIFICATIONS

 

Qualification must be on the list of recognised qualifications and must be relevant to the categories and product categories for which financial services are being rendered. Representatives rendering services for funeral policies and friendly societies are exempt.  Direct markets who render services by means of a script and who are registered with FSPs that meet the requirements do not need a qualification.

 

 REGULATORY EXAMINANTIONS

 

Product categories are now divided into Tier 1 and Tier 2 products.

 

Regulatory Exams are not applicable to:

 

·         a Category I FSP, its key individuals and representatives that are authorised, approved or appointed to render financial services only in respect of the financial products: Long-term Insurance Subcategory A and/or Friendly Society Benefits

 

·         a representative of a Category I FSP that is appointed to perform only the execution of sales in respect of a Tier 1 financial product provided that the requirements are meant for direct marketing and/ or scripted sales.

 

·         a representative of a Category I FSP that is appointed to render financial services only in respect of a Tier 2 financial product.

CLASS OF BUSINESS TRAINING AND PRODUCT SPECIFIC TRAINING

 

This forms part of the Competence Requirements but excludes Tier 2 representatives, Tier 1 representatives who perform only the execution of sales by means of a script.

 

The responsibility lies with the FSP to ensure that Key Individuals and Representatives are proficient, understand and have completed training on:

 

·         the class of business in which the financial product falls

 

·         the financial product, including amendments to that product

 

Key Individuals and Representatives must have been assessed on the class of business and product specific training.  Product and Product Specific Training can be provided by any person for a Category I FSP.  Class of Business training must be provided by an accredited training provider and class of business training does not apply to

 

·         representatives and Key Individuals rendering financial services in terms of Funeral policies/ Friendly Societies

 

·         Cat I Representatives – Tier 2 products

 

·         Cat I representatives only performing execution of sales (all products)

 

 RECORD KEEPING AND REPORTING REQUIREMENTS

 

·         All training must be recorded in the register within 15 days of the training taking place.

 

·         Information must be retained for a period of 5 years

 

·         The FSP must be able to retrieve the information within a reasonable time period.

 

 CONTINUOUS PROFESSIONAL DEVELOPMENT

 

FSPs, Key Individuals and Representatives must establish and maintain competence.  The FSP must establish and maintain policies and procedures to ensure that the CPD requirements are met.  These must include:

 

·         How the FSP, Key Individuals and Representatives will maintain and update relevant knowledge and skills and attain and develop new knowledge and skills.

 

·         Training Plans for each CPD cycle which ensure skills and knowledge are current, address needs and skill gaps and continually improve the professional standards of the FSP, Key Individuals and Representatives.

 

A CPD register must be kept and updated within 30 days of the completion of a CPD cycle. The register must reflect the CPD activities and the number of hours.  There must be evidence that the CPD activities were completed.

 

Minimum CPD hours:

 

·         a single subclass of business within a single class of business must complete a minimum of 6 hours of CPD activities per CPD cycle

 

·         more than one subclass of business within a single class of business must complete a minimum of 12 hours of CPD activities per CPD cycle

 

·         more than one class of business must complete a minimum of 18 hours of CPD activities per CPD cycle

OPERATIONAL ABILITY

 

Additional requirements for Automated or Robo advice are now included under operational ability.

 

Appointment of Representatives are the responsibility of the FSP and the KI. Juristic representatives are now included in operational ability and will need to adhere to the same requirements as the FSP. Juristic representatives will need to be registered as an FSP.

 

Key Individuals hold full responsibility and there are stricter requirements for Key Individual appointments to ensure that the ‘rent-a KI’ trend is stopped. Where a Key Individual is approved or appointed on more than one FSP, or Juristic Representative, they must be able to demonstrate that they have the operational ability to to effectively and adequately manage or oversee the financial services related activities of all the FSPs or juristic representatives for which the key individual was approved or appointed.

FINANCIAL SOUNDNESS

 

The financial Soundness requirements now include Juristic representatives. Juristic representatives will also need to submit financial statements.  All FSPs and juristic representatives will need to submit liquidity calculation to the registrar on an annual or bi-annual basis.

 

An early warning requirement has been implemented.  An FSP must notify the Registrar in writing immediately when:

 

·         the assets of the FSP or that of its juristic representative exceed the liabilities by less than 10%;

 

·         the current assets of the FSP or that of its juristic representative exceeds the current liabilities by less than 10%;

 

·         in respect of a Category IIA and III FSP and juristic representatives of that FSPs, the additional assets of the FSP or that of its juristic representative exceeds the minimum requirement by less than 10%;

 

·         the FSP or its juristic representative does not meet any of the requirements as laid out in the Fit and Proper Requirements

 

·         the FSP becomes aware of an event or situation that may or will result in the effect of any of the above.

 

If any of the above situations arise, the FSP may not directly or indirectly make any payments by way of a loan, advance, bonus, dividend, repayment of capital or other distribution of assets to any director, officer, partner, shareholder, related party or associate without the prior written approval of the Registrar.

 

The notification to the registrar must be signed off by the CEO, controlling member, managing or general partner, trustee as per the relevant entity.

 

If the FSP is registered for more than one category of FSP, the most onerous of the financial soundness requirements must be met.

 

 GENERAL

 

The new Fit and Proper requirements will result in Amendments to the General Code of Conduct

 

Transitional Arrangements regarding Product and Product Specific Training:

 

·         Persons authorised, approved or appointed prior to the implementation of the new Fit and Proper Requirements are not required to do product specific training.

 

·         Training on class of business – if appointed prior to 1 January 2015 training is not required on subclasses of products.

 

Compliance officers – An exemption will be introduced regarding the minimum number of visits of a compliance officer to the business premises.  The number of onsite visits will be reduced.

 

Amendments will be made to the debarment process.

 

 

 

AMENDMENTS TO FIT AND PROPER REQUIREMENTS

Consumer Credit Insurance

CCI under review

Consumer Credit Insurance (CCI) has become a huge market within the financial services industry. After an in-depth review of the CCI market, National Treasury released a report highlighting certain issues including:

  • Lack of transparency in total cost of credit: CCI is usually bundled with the credit offering and the inclusion of add-ons such as warranties and ‘club’ membership fees which makes full disclosure and price comparison difficult.
  • High premiums and different pricing: premiums are generally higher when a risk is insured under a CCI policy.
  • Product comparison is difficult: product features vary vastly on CCI which makes it extremely difficult to adequately compare products.
  • CCI cover does not meet the needs of the target market: certain product models offer benefits that not all customers qualify for and therefore cannot claim against (retrenchment benefit for self-employed clients)

The fact that credit providers are permitted to insist on CCI cover being purchased as a mandatory pre-requisite for granting credit, means that CCI customers are essentially “captive” clients. The bundled, ancillary nature of CCI (as discussed below) implies that consumers do not “shop” for CCI. Where consumers do shop around, this is typically with a view to identifying the lowest available overall credit repayment instalment. Usually, having selected a credit offering, the customer then simply enters into the related CCI product offered by the credit provider.

Despite the fact that the NCA requires customers to be given freedom of choice regarding the CCI product they enter into there is little evidence of this freedom of choice being exercised. Furthermore, the NCA allows credit providers to offer optional CCI cover, either in addition to or as an alternative to the mandatory CCI cover required as a condition for granting credit. Evidence suggests that, in certain business models, a substantial majority of customers opt for the more expensive optional offering. This raises questions as to how informed such a product selection actually is.

Conduct of Business Reporting

Information Requests (3/2015) and (2/2016) have been issued under the Long Term and Short Term Insurance Acts which direct all insurers (except reinsurers or captive insurers[i]), to furnish information to the Registrars of Long and Short Term Insurance regarding CCI products currently being underwritten:

  1. Credit life insurance
  2. Cover against damage or loss of any moveable property (that is, any property other than property covered by a mortgage agreement.

This information must be provided in the form of a Conduct of Business Returns (CBR) Report.

Commission cap for credit life insurance and removal of ‘administrative work’

Phase 1 of RDR (implementation July 2016) includes commission cap for credit life insurance schemes with ‘administrative work’ removed. The initial implementation of this proposal looks to align remuneration for existing credit agreements with the RDR activity based approach by a clear distinction between commission and outsourcing fees.

This means that all existing credit life group schemes will be capped at 7.5% of each premium, regardless of whether any administrative work is done. Advisors will only be able to earn remuneration in relation to credit life policy administration if this forms part of a Binder agreement or through an outsourcing agreement.

As part of consultation on revised insurance law Regulations (March/ April 2016 with implementation July 2016), the FSB will consult on removing the specific 22.5% commission fee cap for existing credit life group schemes with administrative work. Insurers and advisors who currently have these 22.5% commissions in place have been urged by the FSB to review and revise their business models.

Meeting TCF outcome 6 – No post-sale barriers

Going forward, emphasis will be placed on ongoing servicing of both Long and Short Term products.  There is a concern that due to the nature of long term risk policies, post-sale servicing will not be easy to standardise as a result of differing products and distribution models. For example, in the case of products sold on a ‘non-advice/ single need’ basis (credit life, travel or cell phone insurance, it has been put forward that there is no need for ongoing post-sale service.  This will be addressed in a RDR proposals relating to outsourcing.  There is the feeling that premium collection may be necessary in the case of non-traditional bundled products such as travel or credit insurance, where the premium is collected together with payment for the primary transaction.

[i] Captive insurer only issues first party risks. For example, operational risk for i) a group of companies of which the insurer is part; ii) an associate of the group of companies referred to in i) or iii) a joint arrangement that a company which is part of the group of companies referred to above is a participant of.
Consumer Credit Insurance

RDR Proposals for Remuneration and Commissions

The following proposal are being discussed in March and April with the intention of them becoming effective in July of 2016. This will involve amendments to the FAIS General Code of Conduct, the Long Term Insurance Act and the repeal of section 8(5) of the Short Term Insurance Act.

  1. Commission on Life Policy

The FSB has agreed that it is not feasible to prohibit commission until such time as the advice fee framework is finalised.  Their biggest concern is that there is insufficient disclosure to clients when a replacement is done and that these replacements are incentivised by upfront commission.  Responsibility for replacements will lie with both the advisor and the Product Providers.

The definition of ‘replacement policy’ will be amended and will include the replacement of one policy with another, as well as the reduction of cover on one policy or increasing cover on another policy.  The obligations currently placed on advisors to inform the new PP at application stage remain although a new format for replacement advice records will be introduced.

Product Provider will need to appoint a specific person to review advice records and confirm in writing that it complies with the disclosure standards.  Payment to advisor may not be made without this confirmation.  Where an advisor does not submit a record of advice, the Product Provider will have to report this to the Regulator. The new Product Provider must inform the old Product Provider of the replacement and provide them with the record of advice. This replaces the advisors’ duty to inform the old product provider.  The 30 day cooling off period only begins once the record of advice is sent to the old insurer.  Any findings by the new Product Provider in terms of client advice records submitted, must be submitted to the Regulator.  Product Providers will have to submit reports to the Regulator regarding replacements and the Annual Compliance Report will be updated to include replacement statistics.

  1. Commission Regulation Anomalies and early termination values on “legacy” insurance Policies

The Long Term Insurance Act is to be amended to ensure the same commission basis to variable premium increases on “legacy” investment products as is applied to new investment policies.

  1. Conflicted remuneration on Retirement Annuity transfers

This concerns the transfer of accumulated benefits from one RA fund to another.  There is concern over the combined impact of early termination charges on existing product and commission and charges on the new product.

Transfers of this nature will require specific disclosure obligations on advisors when recommending transfers and also covers transfer between living annuities.  The advisor must ensure that the client understands the impact of termination charges, commission and other charges on replacing the existing product.  This will necessitate that where applicable, retirement fund trustees and Product Providers monitor the adequacy of disclosures.

  1. Equivalence of reward

Currently ‘tied-advisors’ have an unfair advantage by earning remuneration and incentives above that allowed for ‘non-tied’ advisors, with some ‘tied’ advisors are able to offer similar products and supplier choice as ‘non-tied’.

The FSB also has concerns with regard to the implementation of benefit structures which appear to be aimed at circumventing the prohibition of sign on bonuses and are tending towards deviation from the principle of Equivalence of Reward.

The FSB will look at non-cash incentives, lump sum payments structured as retention bonuses, restraint of trade or any other disguised incentives to influence production, benefits that are provided to select individuals rather than advisors or groups of advisors.  Particular attention will be paid to arrangements made after the publication of RDR discussion document (November 2014) in a review of current remuneration models.

  1. Remuneration for selling and Servicing Short Term Insurance Policies.

Section 8(5) fees (Short Term Insurance Act) are viewed by the FSB as being inconsistent with RDR objectives.  This section has been repealed by the Financial Services Laws Amendment Act although the effective date has not yet been finalised. An appropriate fee mechanism will be put in place to replace section 8(5). Fees will need to be agreed to by the client and it must be clear to customers what services are being provided, resulting in more stringent requirements regarding disclosures.

  1. Short Term cover cancellations

Client consent is required regardless of whether it is a single replacement or an entire book.  However, if the cancellation is by the insurer, the original insurer must hold the risk for 30 days after the date where proof is received that the client is aware of the cancellation OR until the original insurer receives proof that the client has secured new cover (whichever is the shortest).

RDR Proposals for Remuneration and Commissions

Retirement Reform Delayed

Just as we are gearing up for the Retirement Reforms, it appears that minds have yet again been changed.  According to a report, the Minister of Finance called an urgent meeting on Monday 15 Feb, to discuss the provident fund annuitisation elements of the Taxation Laws Amendment Act, 2015 and it was apparently decided that this could now be postponed for up to two years. Tax deductions for will initially remain but if no resolution is reached within the next 2 years, the contribution deduction limit for provident fund members will be reduced.

 

A document summarising Treasury’s proposals is to be sent out. The Minister will then take these proposals to other Labour constituencies who were unable to be present at the meeting. If the proposals are acceptable then Cabinet will be consulted and they will be announced in the Budget Speech on 24th. Amendments to the Income Tax Act will then need to go through Parliament.

 

As soon as I have further confirmation, I will let you know.

Retirement Reform Delayed

RDR Phase I Update

Part 1

Last week we looked briefly at TCF, Twin Peaks and the FSR Act as a background to RDR.

In November 2014, the FSB published a discussion paper on Retail Distribution Review. Against the background of the Treating Customers Fairly approach to regulating conduct of business in financial services, the document proposed far-reaching reforms to the regulatory framework for distributing financial products to financial customers.

With 55 specific proposals put forward, fourteen have been identified as ‘Phase 1’.  With the tabling of the Financial Services Regulation Act late last year and the Act becoming effective later this year, the RDR Phase 1 proposals are expected to be implemented from July 2016.

We will be looking at proposals included in Phase 1 in a series of articles.

In summary, the following proposals fall into Phase I:

  1. Amendments to the conflict of interest provisions to confirm representatives may not be appointed to more than one FSP for the same product category.
  2. Revised requirements for key individuals, in order to demonstrate that the KI has the necessary operational ability to carry out their responsibilities.
  3. Insurer tied advisors may no longer provide advice or services in relation to another insurer’s product.
  4. Restricted outsourcing to financial advisors AND certain functions permitted to be outsourced to financial advisors.
  5. General product supplier responsibilities in relation to receiving and providing customer related data.
  6. Product supplier commission prohibited on replacement life risk policies.
  7. Commission regulation anomalies and early termination values on “legacy” insurance policies to be addressed.
  8. Conflicted remuneration on retirement annuity transfers to be addressed.
  9. Equivalence of reward to be reviewed.
  10. Remuneration for selling and servicing short-term insurance policies.
  11. Conditions for short-term insurance cover cancellations.
  12. Binder fees to multi-tied intermediaries to be capped.
  13. Commission cap for credit life insurance schemes with “administrative work” to be removed.
  14. Outsourcing fees for issuing insurance policy documents.

In this article we will take a closer look at Advisor categorisation and the necessary amendments to the Fit and Proper Requirements for Key Individuals, the need for updating the conflict of interest provisions as regards representatives being appointed under more than one FSP and the provision of receipt and provision of client data.

  1. Advisor Categorisation

Although this is currently allocated to Phase III (early 2018), I have had numerous questions around this issue.  There is much debate around the advisor categorisation and whether to adopt a two- or three-tiered approach. Although still under consultation, it appears as if a two-tiered approach will be implemented.

  1. Product supplier agent (previously tied-agent) and
  2. A licensed advisor in their own right (sole proprietor) or a representative of a licensed advisor firm that is not also a product supplier.

An advisor or advisor firm will only be permitted to provide advice in one capacity and not both of the above.  Designations for the categories has yet to be decided.

The setting of any direct or indirect production or sales targets by product suppliers will likely be prohibited for all advisors other than the supplier’s tied advisors.

Should the relationship in any way impose restrictions on the advisor’s ability to provide or earn remuneration in respect of any other product supplier’s product, in respect of which the advisor would otherwise be able to provide advice, or if the relationship between the advisor and product supplier is directly or indirectly influenced by the product supplier in the recommendation of products, the advisor would not be considered to be independent.

Product supplier agents (previously tied advisors) will be permitted to provide advice on the products of one product supplier or product supplier group only. In the case of investment or savings products, this will include allowing the agent to also advise on products of “external” suppliers that are offered through an investment platform (LISP) administered by the primary supplier / group. RDR is considering allowing a product supplier agent to advise on one additional product supplier/ group per line of business.  Should this be approved, each product supplier would be responsible for any advice provided by the agent as regards their product.

Product provider agents may be permitted to exist as juristic entities but will have to adopt the branding and corporate identity of the principle product supplier. Should the juristic entities be allowed under RDR, they would need to meet the requirements of operational ability and financial soundness.  Product supplier agents (whether individuals or, if permitted, juristic entities) will not be licensed advisors in their own right but will operate under the product supplier’s licence.

All advisors that are not product supplier agents, will fall into the second tier – i.e. they will be categorised as “registered financial advisors”. These will be advisors that are either licensed to provide advice in their own right, as sole proprietors, or are registered representatives of a firm that is licensed to provide advice (where the firm is not also a product supplier).  They are subject to the mitigation controls as regards conflict of interest.

A registered financial advisor may only describe itself or its advice as “independent” if:

  • it has not entered into any binder agreement with any insurer
  • it does not earn any remuneration, directly or indirectly, from any product supplier for outsourced services provided on behalf of that product supplier
  • it does not hold any ownership or similar interest in any product supplier
  • no product supplier holds any ownership or similar interest in it

Where these criteria are met, the registered financial advisor or firm may use the term “independent” in its designation, or to describe itself or its advice. The designation “independent” will not however be a separate licence category.

Both registered product supplier agents and registered financial advisors may, in addition to any other required designations or descriptions, describe themselves as a “financial planner” – provided they meet the standards for financial planning to be developed in respect of the relevant RDR proposal.

The principle that the extent of product supplier responsibility for customer outcomes should be aligned to the extent of product supplier influence over advice, will be retained.

The responsibilities of any product supplier who has a binder, outsourcing or ownership relationship with a registered financial advisor in relation to any advice provided on its (or its group’s) products will be more rigorous than the responsibility imposed on product suppliers where these relationships do not exist.

  1. Advisors may not act as representatives of more than one juristic intermediary (advisor firm).

Two exceptions to this proposal have been highlighted:

  1. Where an FSP would like to add product categories to the license but do not have persons that meet the necessary Fit and Proper requirements, an advisor may be placed as a representative on the license of another FSP under supervision in order to gain the necessary experience
  2. In the case of a financial services group comprising of multiple FSPs providing advice on different categories, in order for a particular advisor to offer advice across the range of products or services offered by the group, the advisor may need to be appointed as a representative of more than one of the FSPs concerned.

Under these exemptions, a representative of an FSP will only be permitted to also act as a representative of another FSP in respect of product categories for which the first FSP is not licensed.  Exemption ii will also result in a single legal entity only being permitted to hold only one FSP licence.

The above exemptions are not at this stage the only exemptions that will be allowed and the Regulator has made provision for the application of motivated exemptions in addition to the above. The Regulator will be making amendments to the Conflict of Interest provisions ensuring disclosure and transparency as to which entity is responsible for the advice given to a client

There are serious concerns as to the practice of ‘rent a Key Individual’ where the KI is merely appointed to meet the Fit and Proper requirements and is not involved in the daily oversight and management of the FSP. This will be addressed by means of revised Fit and Proper Requirements for Key Individuals and increased supervision of the level of involvement of the Key Individual in question.

  1. General product supplier responsibilities in relation to receiving and providing customer related data

Not much comment was received as regards this issue and thus it will be implemented as is.

In order to achieve the shared responsibility for fair customer outcomes required by the TCF framework, an appropriate level of information sharing and co-operation between advisors and product suppliers will be essential. Standards of conduct will ensure that product suppliers will have adequate access to customer data held by intermediaries, to enable them to monitor TCF outcomes for customers. This includes customer data held by binder holders or other outsourced service providers.

Conduct standards relating to appropriate levels of customer information that product suppliers will be required to provide to IFAs or multi-tied advisors, when authorised to do so by customers, will also be put in place.

A fair balance needs to be achieved between enabling advisors to access sufficient information to enable effective customer advice and service on the one hand, and on the other hand recognising that product suppliers need to reasonably satisfy themselves that advisors interacting with their existing customers have the requisite product knowledge and are acting in the customer’s best interests.

The FSB has proposed a requirement that where a product supplier receives a request for customer information from an advisor with whom the supplier does not have an intermediary agreement, and the release of such information is authorised by the customer, the product supplier may elect to either:

  • Comply with the request; or
  • Decline to provide the requested information to the advisor concerned, but must then provide the client with the information together with a fair and objective explanation of why the information has not been provided directly to the advisor.

In Part 2 we will look at the remuneration and commission updates.

RDR Phase I Update

Twin Peaks, TCF and Financial Sectors Regulation Bill

 

Robyn Clark

Market conduct regulation aims to prevent, and manage when prevention is not successful, the dangers that arise from a financial institution conducting its business in ways that are unfair to customers or undermines the integrity of financial markets and confidence in the financial system.

In March 2011, the Financial Services Board published “Treating Customers Fairly: The Roadmap” which outlined the 6 outcomes of Treating Customers Fairly (TCF) and gave an introduction to proposed changes in the industry regulation by means of the Twin Peaks Model and the Financial Sector Regulation Bill.

Treating Customers Fairly has become entrenched as part of the culture of most FSPs.  TCF has been described by Treasury as ‘an important step in strengthening market conduct objectives in the financial sector’ and as a ‘framework for tougher market conduct oversight’.

The Financial Sector Regulation Bill, tabled in October 2015 and which is due for enactment later this year, gives effect to the decision to shift to a Twin Peaks Model of financial sector regulation for South Africa. The aim is to shift from a fragmented regulatory approach to a more comprehensive and complete one.

The Twin Peaks model will be implemented in two phases.  The Financial Sectors Regulation Bill establishes two new regulatory Bodies:

  1. A Prudential Authority within the South African Reserve Bank which will supervise the safety and soundness of Financial Institutions, and
  2. A Financial Sector Conduct Authority (FSCA) the FSCA will supervise how financial services firms conduct their business and treat customers.

The Financial Services Board will be transformed into the FSCA to become a dedicated market conduct regulator. The FSCA will be tasked with promoting fair treatment of customers and potential customers, providing customer education and promoting financial literacy of customers and potential customers and maintaining financial stability. The FSC Bill requires co-operation between regulatory bodies including the Prudential Authority, SARB, National Credit Regulator, Financial Intelligence Centre and Council for Medical Schemes.  The Financial Sector Conduct Authority may not regulate and supervise credit agreements except with the concurrence of the National Credit Regulator, but may regulate and supervise financial services provided in relation to a credit agreement. In essence the FSR Bill leaves the existing sector specific financial law intact, although it does provide additional supervisory and enforcement powers to the regulators, in addition to those available in existing industry-specific law, to provide them with the necessary tools and scope of responsibility to function effectively in the existing regulatory framework without being hamstrung by gaps in existing laws.

The second phase will be the overhaul and harmonisation of law under which FSCA operates.  As it pertains to market conduct specifically, the second phase contemplates structural change through the repeal of current sector specific laws and the introduction of a new streamlined and overarching financial sector legislation – the Conduct of Financial Institutions Act (“COFI”). Once the relevant primary legislation has been repealed and replaced as necessary, the focus will turn to similarly harmonising relevant subordinate legislation.

Proposed as the CoFI Act, will replace current range of industry facing laws, and apply legislation consistently across financial sector.

In light of the above, I thoroughly enjoyed Allan Greenblo’s commentary:

http://www.fin24.com/BizNews/allan-greenblo-whos-the-boss-fsb-leadership-crisis-sars-wars-returns-20160204

Twin Peaks, TCF and Financial Sectors Regulation Bill

Retirement Reforms

In 2012 Treasury started a reform in the retirement industry and papers were drafted to improve private retirement. These reforms are due to take effect on 1 March 2016.

The Current Retirement System

Currently there are three basic forms of retirement funds in the South African system: Pension Funds, Provident Funds and Retirement Annuities.  Employer contributions to pension and provident funds are currently a non-taxable fringe benefit, and are a deductible business expense up to certain limits for personal income tax purposes.  There is however no current tax deduction for member contributions to provident funds.

Pension and retirement annuity fund members are required to annuitise a portion (usually two thirds, with one third still available as a lump sum) of their retirement fund saving or interest upon retirement. Thus, provident fund members usually receive their retirement benefit as a lump sum upon retirement.  This often results in the benefit not being re-invested for retirement purposes.

The Reforms

The new reforms will limit the tax deduction per annum to 27.5% or R350 000 (whichever is lesser) of the greater of the taxable income or remuneration. The reforms are intended to:

  1. Allow provident members a tax deduction for their own contributions. This will result in an increase in net income from salaries.
  2. The higher tax deduction limits for contributions allow for better savings culture.
  3. Extend the requirement to purchase an annuity to provident fund members.
  4. Applies the same deduction across all retirement funds
  5. The new limits will apply on taxable income or remuneration and not on pensionable salary
  6. Vested rights are protected for provident fund members. Although the effective date is 1 March 2016, members will not need to annuitise immediately.

Taxation Laws Amendment Act 2013

  1. Same tax dispensation for all contributions into retirement funds (retirement annuities, pension funds and provident funds)
  2. Annuitisation of benefits from provident funds (vested rights protected)
  3. Threshold to purchase an annuity increased from R75 000 to R150 00)
  4. Tax free lump sum at retirement increased from R315 000 to R500 000 (2014)

Taxation Laws Amendment Bill 2015

The proposed amendments to the Taxation Laws Amendment Bill, 2015 revert back to the amendments for retirement funds contained in Taxation Laws Amendment Act with a higher threshold to purchase an annuity of R247 500

There is no forced preservation

From 1 March 2016 there will be forced annuitisation of provident funds. But:

  • This will only apply to contributions made after 1 March 2016. All provident funds will therefore have two accounts-pre-1 March 2016, and all growth thereon, which stays under the old rules, and post 1 March 2016 money and growth thereon which falls under the new rules
  • Anyone aged 55 on 1 March 2016 will not have to annuitise, as long as they stay in the same fund. If the member decides to transfer to another fund, they would be required to annuitise two-thirds of any future contributions to the new fund.

Source – National Treasury Paper November 2015

Retirement Reforms