Four regulatory reforms you should know about
JOHANNESBURG – It has been quite difficult to keep up with the flurry of regulatory reforms in the financial services industry.
Apart from the introduction of tax-free savings accounts next year and the fact that certain retirement reform regulations have been postponed, a number of other changes are also in the pipeline.
Here is a quick overview of four of these reforms.
1. Treating Customers Fairly (TCF)
Treating Customers Fairly (TCF) is not an act or legislative amendment, but an initiative by the Financial Services Board (FSB). It ties in with what the financial services industry should already be doing in terms of the Financial Advisory and Intermediary Services (Fais) Act, explains Justine Wyatt, head of legal at Sygnia.
TCF aims to rectify the asymmetry between customers and the providers of financial services as the latter party know much more about the products they are selling than customers do.
Section 2 of the Fais General Code of Conduct compels financial service providers to “at all times render financial services honestly, fairly, with due skill, care and diligence, and in the interests of clients and the integrity of the financial services industry”.
TCF sets six fairness outcomes for financial services providers which “boils down to treating customers fairly”, Wyatt says.
These include instilling a culture of fair treatment in their organisations, offering appropriate products and services to customers, providing clear information, offering suitable advice, meeting performance and service expectations and ensuring that customers do not face unreasonable post-sale barriers (for example difficulty in switching between products or providers).
In practice, a material failure to deliver one or more of the TCF outcomes will already constitute a breach of the Fais General Code and the FSB would be allowed to take action.
But the FSB feels that the industry is not doing enough and that is why it is moving forward with the TCF initiative, Wyatt says.
There is no formal implementation date and financial services providers should already have started incrementally incorporating the principles of TCF in their businesses.
2. Protection of Personal Information Act (Popi)
The Protection of Personal Information Act (Popi) governs how businesses collect, store, distribute and destroy the personal data of their clients, employees and suppliers and tries to ensure that personal information is protected.
Although the Popi Act was promulgated on November 26 last year, its commencement date still has to be announced, Wyatt says.
Companies will have one year from the commencement date to comply with the regulations.
The act provides for the appointment of a regulator and non-compliance could lead to fines and imprisonment, she notes.
“It is a piece of legislation that does need to be taken fairly seriously.”
Wyatt says financial service providers would only be able to collect information from their clients in order to provide them with advice or to sell products. The client’s sex or race would therefore not be relevant in the context of pure investment type products where no underwriting is required.
While some commentators are worried about the impact this will have, Wyatt says as long as the company has the client’s permission it would still be able to use the information for other purposes.
Information should be stored in a secure place and access should be limited.
Wyatt says this requirement is not only applicable in the client context, but for staff information as well.
3. Amendments to the Collective Investment Schemes Control Act (Cisca)
The overhaul of the Collective Investment Schemes Control Act (Cisca), which governs unit trust funds, has progressed quite far but has come to a grinding halt, says Wyatt.
Some minor changes to Cisca will come through in the Financial Services Laws General Amendment Bill next year but the full overhaul is on hold until the FSB and National Treasury finalise the roll out of the new Twin Peaks model, which will be set out in the Financial Sector Regulation Bill next year.
Some of the changes to Cisca include the regulations around hedge funds, which will likely be implemented towards the end of this year or the beginning of 2015.
Wyatt says once these regulations take effect there will be two groups of hedge funds in the unit trust space – retail investor hedge funds and qualifying investor hedge funds.
The retail investor hedge funds will be similar to unit trusts and will be open to the public.
Most hedge funds would be able to do business as a qualifying investor hedge fund without significant changes, whereas there might be a lot of structural and legal entity changes required in the retail investor hedge fund space, Wyatt says.
The minimum investment into qualifying investor hedge funds is R1 million. These funds will target high net worth and institutional investors.
Liquidity will be 30 days for retail funds and 90 days for qualifying funds.
In the qualified investor hedge fund space there will be no restriction in terms of asset classes allowed while there will be some restrictions in the retail investor hedge fund space, she says.
Other changes to Cisca include new capital adequacy requirements, which were issued in a board notice this year. This will be effective from February next year.
Wyatt explains that unit trust funds will need R1 million as seed capital until their assets under management reach R50 million. If the assets fall below this threshold and the seed capital was withdrawn, the full R1 million has to be paid into the fund again.
4. Foreign Accounts Tax Compliance Act (Fatca)
The Foreign Accounts Tax Compliance Act (Fatca) is a piece of US legislation that aims to reduce offshore tax evasion and requires foreign financial institutions like banks and insurance companies to report the account details of their American clients to the US Inland Revenue Service (IRS).
Wyatt says Fatca is just the first of many similar pieces of legislation to be introduced and the South African Revenue Service (Sars) is gearing up for many countries to impose similar types of legislation on South Africa.
In terms of the legislation, a foreign financial institution has to register as such before the end of December and has to identify whether it has any American clients, she says.
Wyatt says the requirements are only applicable to American clients with investments in excess of $50 000, but this is “quite low”.
Clients with retirement funds and living annuities will be exempted.
Wyatt says Sars and industry are lobbying for further exemptions but currently any bank account, unit trust, endowment or sinking fund would be caught in the net and would have to be reported to the IRS.
