5 CRITERIA THAT AN FSP NEEDS TO DEMONSTRATE THAT IT IS FIT AND PROPER TO BE LICENSED BY THE FSCA.
Entities that struggle to strike success or reach their full potential, generally have one factor that hinders them from achieving the success that they desire – lack of coordinated structure around their day-to-day business activities. They may be performing everything in line with the requirements of the industry and in some instances having best business practices in certain key areas, however struggle to bring out everything as a coordinated unit.
Regulated environment
The financial services sector keeps its pulse alive through regulation – if there is a general non-compliance to regulations, the sector and the economy are potentially dead and staving off key interest from other nations. It is therefore necessary that the FSCA and SARB to have watertight regulations which service providers within the sector must adhere to. When provided with a license to operate as a financial services provider (FSP), you indicate that you adhere to all the requirements to operate in the industry.
How do you show you are license fit and proper?
The FSCA through its FAIS Act and Board Notice 194 of 2017 issued the 5 requirements to determine if an FSP is fit and proper:
- Honesty, Integrity and Good Standing
- Competency
- Continuous Professional Development
- Operational ability
- Financial Soundness
Key Individual and Representative
It is important to note that an FSP, in this case, is being regarded as a juristic person – i.e. a company or an entity of a similar nature. A company by itself cannot be compliant. Therefore, when referring to an FSP we are also including the natural persons who run the company. For an entity to be granted a license there must be a person who is regarded as the key individual – a person within the FSP who is responsible to manage and oversee the activities of the FSP relating to financial services. The other party also within an FSP is a representative (Rep) – this can either be a natural or juristic person (e.g. company) responsible to financial service clients on behalf of the FSP, the Rep sells financial products and assist in the intermediary services to clients.
In essence, the Key Individual is responsible to ensure that the 5 requirements to be fit and proper are met at all times.
1. Honesty, Integrity and Good Standing
Section 9(1) of the Board Notice 194 of 2017 lists 15 indicators of lacking the above – what would be a trigger to show that the Key Individual and/or the Rep is NOT practising honesty, integrity and not in good standing. Some of the key ones include: having been convicted of a criminal offence, such as fraud, forgery or theft; has been removed from an office of trust due to fraud, theft, forgery, etc.
The FSP will disclose compliance to all the requirements under section 9(1) to the FSCA when applying for a license.
2. Competency
There are 5 category licenses which an FSP may apply for. These 5 categories relate to 5 different categories of services. Therefore, the key individuals and representatives will require to demonstrate qualification and experience in the relation to the products in the category which they are applying for. If a period of 5 years lapses without the key individual or representative practising or working with the particular product, their competency in the product and category will be deemed unfit for licensing purposes.
Qualifications are generally required for products, except for funeral services and friendly societies. For those who require qualifications, they must write Regulatory Exams (RE) specific for their category. Chapter 3 of Board Notice 194 of 2017 provides details on what the requirements are.
3. Continuous Professional Development
After an FSP has received its licensing, there will be a need for relicensing – as part of the quality control aspects, the initial licensing requirements still need to be met. In addition to meeting the initial licensing requirements, the key individual and rep must indicate how they are keeping up to date with the latest category requirements and may be requested to provide proof of attending trainings or similar intervention in order for the relicensing to work. Chapter 4 of Board Notice 194 of 2017 covers this aspect.
4. Operational ability
In order to be licensed, an FSP must demonstrate that it has:
- adequate and appropriate human, technical and technological resources
- adopt, document and implement an effective governance framework
- fixed physical address
- communication facilities
- adequate storage and filing systems for safe-keeping of records
The FSP must demonstrate that it has the following effective and adequate systems of corporate governance, risk management and internal controls:
- Business plan
- Risk management policies
- Remuneration policy
- Business continuity policy
- Conflict of interest policy
- Financial recovery plan
- Disaster recovery plan
- Resolution plan
- Compliance management framework
5. Financial soundness
The essence of financial soundness is for the FSP to demonstrate that it has enough financial resources to handle third party cash or assets – without using third party cash and assets as its own. Therefore, the FSP’s assets must always exceed liabilities. Each category has different cash resources requirements which they must adhere to in order to be awarded a license.
Business continuity is key: the FSP must demonstrate that it has the relevant strategies, processes, systems and financial resources to cover its risk of exposure – i.e. be able to run its business from its own resources should things go wrong.