In 2000 the Policyholder Protection Rules [PPR] were added to the Long-term and Short-term Insurance Acts in South Africa. For the first time Insurance Companies were required to appoint compliance officers, as the Banks have had for many years.

The PPR was however a bit different from the banking situation in that it focused on fair consumer practices and compulsory disclosures to prospective clients of insurance products.

It is significant that both the Life Offices Association of South Africa [LOA] and the South African Insurance Association [SAIA] respectively representing the long-term and short-term industries, came to the party.

Under the PPR the ‘fair consumer practice’ was aimed at advising prospective clients of information that the insurance companies were obliged to provide to prospective clients in order for clients to make an informed decision on the product that they were interested in.

In this developing environment of consumer protection, Robbie Stutterheim, the controlling member of Compliance Systems Development, was appointed by its then employer, Anchor PSG Life, as then Head of Training, to head up a compliance function.

The choice was partly due to Robbie having served as the Deputy to the Executive Officer of the Life Underwriters Association of South Africa [LUASA] a broker affiliated industry body, during the time that the new Financial Advisory and Intermediary Services Act [FAIS] was being developed, and debated amongst all concerned parties, including the Financial Services Board [FSB] being the official regulator of Financial Services in the RSA.

At that time South Africa also implemented the National Skills Development Act. During 2000 to 2003, Robbie was actively involved in setting training and assessment standards for the industry through the Sector and Education and Training Authority [INSETA].

During 2000 to 2003 Robbie presented many informative sessions at national industry seminars throughout the RSA on implementing the Skills Development and Financial Services Acts.

Compliance Systems Development came about when Robbie was approved by the Financial Services Board [FSB] during November 2003, as an outsourced compliance officer for financial serves providers who, in terms of the FAIS Act, had to have compliance officers. It started operations on 1 January 2004 and has since advised its clients on compliance with the FAIS Act as well as the Financial Intelligence Center Act [FICA].

Whilst this article will be very critical of the FSB’s reasons for and conduct in their current process of levying penalties against FSPs under the FAIS Act, the following must be stated categorically:

• In terms of the FAIS Act the FSB is the Regulator of financial services providers and have to apply the Act to ensure that FSPs comply with the Act. I have no problem with this!
• The Act does allow the FSB to impose penalties on FSPs for contraventions of the Act and or not meeting certain requirements of the Act. I also have no problem with this!

What I do have a problem with is that it seems that the FSB has no idea what its regulatory role should be and why, and under what circumstances penalties (read 'fines') should be applied under the Act. To shed some light on this one has to consider the purpose of the Act.

THE PURPOSE OF THE FAIS ACT

Since 1994 as the then deputy director of LUASA that has now merged with the IBC and other bodies to form the FIA, I have closely followed the development and implementation of the FAIS Act. I have always understood that the FAIS Act had a specific purpose, namely the protection of the customer (end-user) against unscrupulous activities of insurance brokers and other investment advisors.

This purpose of the Act is supported by subsequent legislation that had the same purpose like for instance the National Credit Act, that was generally referred to as 'Acts of best practice' designed to protect the customer's interests. So what one may well ask?

I acknowledge that the FAIS Act and regulations thereto prescribe certain personal characteristics and competency standards that “good” financial service providers should meet to ensure that one has FSPs in the industry that will uphold the best interest of the customer.

WHAT ARE THESE REQUIREMENTS?

The most important of these relate to the financial viability, business continuation arrangements, operational ability, knowledge and experience and characteristics of honesty and integrity.

Again, I have no problem with these requirements! What I do have a serious problem with is the application of compliance supervision as it is currently applied by the FSB.

In applying compliance monitoring the FSB use what they call a risk based approach. That is all well and fine.

But to then require a husband and wife brokerage to meet stringent business continuation requirements that are straight from King III and applicable to corporate governance is ridiculous! The FSB fails to understand how a large part of the intermediary (broker) fraternity works in the insurance industry. They fail to understand that contracts of insurance are between the insured and the insurer. They fail to understand that when a brokerage ceases to exist that the insurer will no doubt advise the insured accordingly and suggest alternative arrangements like placing their policies directly with them or obtain the services of another broker. Obviously the requirement needs to be completely different in the case of an asset manager who handles client funds. Then the documentation of business continuation arrangements is of cardinal importance. Yet the FSB requires from short-term brokers to have a formal, documented risk management plan, the same as it would require of asset managers.

But let us not get side-tracked! This article is about the FSB's current penalty campaign against FSPs!

THE CURRENT IMPOSITION OF PENALTIES AGAINST FSPs

The FSB is currently sending letters to FSPs advising of penalties levied against them for not submitting annual compliance reports or annual financial statements. Whilst it is a requirement to submit these returns it is also logical that FSPs may be penalized or fined for not doing so! There is however, a twist to the tail here!

Advising FSPs about non-compliance.

A penalty as I understand it is a punitive measure imposed on a person for having transgressed or not having met any legal requirement. My understanding is that such penalty should be imposed at the time of the transgression or non-compliance. The FAIS Act is quite clear on the time allowed for submitting compliance reports and financial results; i.e. closing dates for submission of these returns.

My thinking then is that the FSB, as the Regulator should be in a position to immediately advise a FSP of its intention to impose such a penalty (fine) if the FSP has not complied with the requirement as at the stipulated date. To now impose penalties on closing dates of more than three years ago only indicates to me that the FSB was unable to do so.

Financial Statements

I have a client who has admitted that she had forgotten to submit the 2006 financial statements notwithstanding my continued reminders to do so. They have however submitted the 2007 and 2008 financial statements since then the question is this

If financial viability is a measurement or requirement of a FSP's fit and proper status and the 2007 and 2008 financial statements indicate sound financial viability, why is the 2006 financial statement now relevant? And I am not convinced that the FSB in fact reminded the FSP that the financial statements were still outstanding as they claim to have done. My client would have at least referred such a reminder to me.

Why now impose a penalty of an amount per day for a period in excess of 800 days?

Compliance reports

In 2006 we had tremendous problems with the FSB's compliance report software in submitting the annual compliance reports electronically. Not only I but many of my colleagues had untold problems with reports going through 'empty'.  I have even had a serious confrontation with Mr. Anderson on this issue and eventually saved all my reports on a UBS device (memory stick) and visited the FSB where they captured the info.

Now it turns out that all my clients who are getting notices from the FSB regarding non-submission of annual compliance reports is related to the 2006 report.

What worries me though is why only now? The FSB should by now be analyzing he 2008 reports (report date 31/05/2008) yet I still get queries on 2007 compliance reports?

THE TRUE REASON FOR IMPOSING THE PENALTIES?

It is an accepted fact that the FSB is not a government institution but a Regulator instituted by an Act of Parliament. It therefore is not funded by government and has to generate its own funds. I can therefore understand the levying of licensing fees and annual levies, and even penalties or 'fine', but then it must be fair and not be based on deficiencies in the FSB's systems and procedures. The current 'penalty campaign' will in most quarters be seen as revenue generation.

And to be quite honest if it does the FSB has only itself to blame!

Robbie Stutterheim