This document contains an in-depth summary of everything that is required for the RE5 representatives examination. With these notes, no other textbook will be required. Using these notes alone, I passed my RE5 exam with 92%. It covers the required legislations from the code of conduct, FAIS act, FS...
TASK 1: Demonstrate an understanding of the FAIS Act as a regulatory framework
QUALIFYING CRITERIA 1: Describe the FAIS Act and Subordinate Legislation
The Financial Advisory and Intermediary Services (FAIS) Act was introduced in 2002 and was
effective as of 30 September 2004. All institutions and persons who wish to render financial
services have to obtain authority from the regulatory before rendering such services to the public.
The main aim of the act is to protect consumers of financial products against such institutions
when it comes to the rendering of financial services. The responsible body of the FAIS Act is the
Financial Sector Conduct Authority (FSCA) which is headed by a commissioner. Before this, it was
known as the Financial Services Board (FSB) and was headed by a registrar. When referring to the
office of the FSCA, it includes both the FSCA and the commissioner.
The FAIS Act is thought to be a market conduct regulation, meaning that the FAIS act regulates the
business of all financial service providers (FSPs) that give advice or provide an intermediary service
to clients. This is done by setting a minimum standard for FSPs to adhere to. The FAIS Act follows a
functional approach, meaning that the act regulates certain functions across institutions, such as
insurance companies, brokerages and banks. An institutional approach on the other hand focuses
on specific institutions such as the banks act that only regulates banks. The function of providing
financial services across various institutions is one that is regulated by the FAIS act. There are 2
clear purposes of the FAIS act:
• To protect consumers (e.g., ensuring the insurance industry does not charge consumers
inflated premiums)
• To professionalise the financial services sector
Nobody should act as an FSP without a license, and equally, nobody should act as a representative
without being appointed by an FSP. Authorised FSP may only conduct financial services related
business with an FSP that is licensed. If an unauthorised FSP or representative concludes a
transaction with a client, such transaction will lack authority and is thus not valid and not
enforceable in law.
The subordinate legislations help regulate the conduct of FSPs and include:
• The general code of conduct for FSPs and representatives
• The determination of fit and proper requirements for FSPs
• General
o Board Notices
o Guidance notes
The FAIS act and its subordinate legislations talk about role players. Some of these role players are
and include:
• Financial Services Conduct Authority: they are responsible for market conduct, market
efficiency and integrity, and consumer education. They regulate the non-banking side of
financial services, such as insurance, and it is headed by a commissioner.
• Financial Service Providers: These are financial institutions authorised by the FSCA to sell
financial serviced. To be authorised means they are licenced. Financial services that can be
provided include intermediary services and/or giving advice. An FSP may be a legal entity, or
a 1-man owned business operating in his/her own name. FSPs are fully responsible for
implementing and maintain compliance with the FAIS act and the relevant codes of
conduct. Note that some financial services companies do not have to be licenced under the
FAIS act. For example, FSPs who lend money may need to be authorised credit providers
under the national credit act.
, • Key Individuals: They are employed by FSPs to ensure compliance with the FAIS act and are
responsible for management and oversight of the business. Every FSP needs a key
individual, however, the owner may be an FSP, and can act as a key individual.
• Representatives: They are employed to sell financial services to clients. For the purpose of
the FAIS act, representatives include call centre agents; brokers; consultants; financial
planners/advisors; investment advisors; insurance agents.
Reps must be able to provide proof to clients that they are able to act on behalf as FSPs and
are not people that can provide clerical, technical, admin, legal or related services. This
relates to instances where advice is not given to clients, especially if:
o No judgement is required
o The information provided does not lead a client to a transaction
o Information provided is factually objective (e.g., describing a products features)
• Compliance officers: These are employed/contracted by FSPs to help with compliance
matters as required by BAIS act. Compliance forms a part of FSP risk management
processes, and these processes are supervised by compliance officers.
o If an FSP has more than 1 key individual, or 1+ representative(s), they must appoint a
compliance officer
o For a 1-man business, the owner who also acts as the key individual may oversee their
own compliance. The owner does not become a compliance officer but can report
directly to the FSCA on compliance matters without obtaining a CO.
• FAIS Ombud: They resolve complaints submitted by clients about FSPs and/or reps. This
service is free to clients.
QUALIFYING CRITERIA 2: Financial Services and Financial Products
The FAIS act regulates the conduct of its key individuals and reps who give advice and/or provide
intermediary services to clients.
• Advice refers to when a financial service provider, key individual or reps who are agents
and brokers give financial advice to clients. In terms of the FAIS act, we also refer to:
o A recommendation on a financial product
o Guidance on a financial product
o The proposal of a financial product to a client that results in the client making an
informed decision; the decision can be to
▪ Buy or invest in a financial product
▪ Change, replace or cancel a financial product
Overall, where a client makes a decision that changes their financial position based on an
FSP’s recommendation, guidance or proposal, that input from the FSP is considered under
the FAIS act to be advice.
• Intermediary services do not always involve advice. It is any service other than giving
advice performed by an FSP, key individual or representative on behalf of a client or
product supply. This service still needs to be from a clients instruction after making an
informed decision. For example, a client wanting to buy a financial product and needing
help to complete the transaction (such as buying listed shares and asking a representative
to buy it on their behalf). In such a case, the client is acting on their own free will and only
requires the rep to process the transaction further. Intermediary services involve a service
that results in the following:
o Dealing in financial products on behalf of a client: buying, selling, managing, keeping
safe of servicing a financial product
o Collecting premiums from client that are related to financial products
, o Receiving, submitting, processing or settling claims on behalf of a product supplier
from a client
o However, if an FSP, key individual or rep recommends, guides or proposes a client to
buy a financial product like shares, this would fall under advice
• Products that FSP’s can render services on include:
o Securities and instruments: this refers to products like shares in a company (equity),
debentures, money market instruments, warrants and options, derivatives, and
bonds. These give the buyer a claim or a choice to potential future financial gains that
are linked to those securities and instruments. When a client buys shares in a
company, they receive a confirmation in the form of a share certificate which
confirms their right as an owner/shareholder. These assets are intangible and not
physical, unlike when you buy a car and have something to show for the money. The
potential gains on these financial products are dividends for shares and interest for
debentures.
o Participatory interest and unit trusts: here, clients monies are pooled together to buy
different investments that are held as a unit. Each client that invests will share the
risks and rewards of the investment in the proportion of their investment. Unit trusts
are managed by FSPs called discretionary FSPs/fund managers.
o Long Term and Short Term Insurance Products: long term products cover lasting
events in life, such as death, disability and retirement. This is such as a life cover that
pays out when a client dies. Short term insurance cover personal possessions or assets
on a short term basis, such as a car or house insurance.
o Pension Fund and Friendly Societies: pension funds are set up to cater for employees
for when they reach their retirement age. A client would contribute towards this via
their employer by deductions from their salary. When clients retire, they can access
the money they have saved. There are several types pf retirement funds: pension
funds, provident funds, and retirement annuities (RAs). A friendly society/burial
society is a stokvel with its operations managed by a board of trustees.
o Foreign Currency Denominated Investments: this is when an FSP makes an
arrangement on behalf of a client to buy a product or investment that is available
outside of the republic of South Africa. In this case, the South Africa rand will have to
be converted into the currency of the country where the investment is. Another
example would be where a client buys shares of a foreign country using foreign
currency.
o Long Term and Short Term Deposits: This is defined in the Banks act, but is classified
as a financial product. Banks perform many functions, one of which is receiving
deposits from clients on a long term period. This function falls within the FAIS Act.
Another service banks offer is providing loans and other forms of credit. Note that this
function falls under the national credit act rather than the FAIS Act.
o Health Service Benefits: These are provided under medical aid schemes. Note that
medical aid is a form of insurance where a client pays a monthly contribution or
premium in exchange for financial cover of medical costs at an unforeseen future
debt. This is especially important if you want access to private medical care.
When it comes to licence categories, there are 5 categories:
• Category 1: FSPs who only give advice and render financial services, and are not in the
following specialist categories. If business activities of FSPs do not fall under one of these
specialist categories, then license 1 will apply.
, • Category 2: Discretionary FSPs/Fund Managers. These are people who invest funds on
behalf of clients at their own discretion. This can take place either locally or internationally.
In this category, there is no bulking or pooling of clients funds.
• Category 2a: Hedge-fund FSPs. These functions in the same way as discretionary FSPs but
the funds invested are pooled funds.
• Category 3: Administrative FSPs. These buy and sell financial products in bulk and reconcile
their books on a daily basis. They do this for their clients who can either be category 2 FSPs
or natural persons.
• Category 4: Administrative functions that are only considered for intermediary services.
They intermediate between the insurance companies and the assistance business FSPs like
funeral parlours and undertakers. They always have a binding agreement with insurance
companies to perform the intermediary function.
Note that all categories except category 1 are specialist categories. The categories mentioned do
have subcategories and an FSP applying for a FAIS licence will need to apply for the specific
subcategories.
QUALIFYING CRITERIA 4: Describe the Role and Function of a Compliance Officer
There are 2 types of compliance officers that can be approved by the FSCA. The first is an internal
compliance officer, a natural persons. This is someone that offers their services to the FSP that has
employed them. The second is an external compliance officer or a practice (either a natural
persons or a legal entity). These compliance officers can offer services to multiple FSPs.
A compliance officer must be approved by the FSCA, and this can only be done once the fit and
proper requirements set out of them in the FAIS act are met. Once they have been approved,
compliance officers must be appointed by FSPs to help with the compliance requirements
according to the FAIS act. The roles and responsibility of compliance officers can be explained as
follows:
• Oversee the compliance function as far as the FAIS act is concerned: An FSP must ensure
that it establishes compliant functions, processes and controls. Once this is done,
compliance officers should recommend improvements and train where weaknesses are
identified. Part of the oversight role is to check that non-compliance issues that have been
identified are rectified.
• Monitor compliance of FSP with FAIS: This relates in particular to compliance procedures
which FSPs and reps should follow in order to ensure compliance. A compliance officer must
create procedures and systems that allow monitoring of compliance to take place. This
refers to processes and controls. In the role, compliance officers will agitate the following:
o Identify weaknesses and unreliable areas in an FSPs business that may lead to future
non-compliance
o Ensure compliance procedures and controls are implemented and are effective. This is
to ensure controls are serving their purpose
o Constantly test and review controls
• Identify issues of non-compliance within FSPs and bring those to the attention of FSPs: This
is done by preparing written reports on a regular basis. Compliance officers must also
physically visit the premises of FSPs from time to time to inspect operations.
• Train FSPs on how to rectify non compliance
• Communicate with the registrar: This is done by means of an annual compliance report.
Compliance officers must prepare regular reports which include updates on compliance
matters, recommended improvements and training on compliance controls Compliance
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