Sep 2,2013 / News / Legal Brief

Werksmans Attorneys would like to keep you updated on developments pertaining to investment funds, fund management, regulation and fund litigation matters.

This update was compiled by the Werksmans Investment Funds team and deals with a recent exemption for investment administrators granted under the Pension Funds Act, as well as, a synopsis of a recent precedent-setting case successfully litigated by Werksmans on behalf of a financial services provider.

Should you have any queries after reading the update or should you require assistance with investment fund issues in your company, do not hesitate to contact any member of our dedicated team listed below.

EXEMPTION PROVIDES WELCOME RELIEF TO INVESTMENT ADVISORS

The Financial Services Board has, with immediate effect, exempted all discretionary and non-discretionary financial services providers (so-called “investment administrators”) from the provisions of Section 13B of the Pension Funds Act .

This means that investment advisors and investment managers who hold Category I or Category II licences under the Financial Advisory and Intermediary Services Act (“FAIS”) are no longer required to hold a separate licence to provide services to pension funds.

The exemption provides welcome relief to financial services providers battling to reconcile duplicate regulations.

The following points should, nevertheless, be noted:

  1. Section 13B has not been repealed. Rather a relatively broad exemption has been granted from its provisions.
  2. The exemption only applies to “investment administration”. It does not cover “benefit administration”.
  3. The purpose of the exemption is to avoid duplication of regulation. It would appear therefore that the exemption cannot be relied upon by someone who is not already regulated under FAIS.
  4. Although there is some debate surrounding the point, it would seem that the exemption only applies to South African Category I and Category II financial services providers who hold FAIS licences. Any foreign person who acts as an investment manager who receives money, executes mandates (either discretionary or otherwise) or manages investments on behalf of pension funds, will still require Section 13B approval.

RECENT SUPREME COURT OF APPEAL (“SCA”) DECISION CLARIFIES THE FAIS DEFINITION OF “INTERMEDIARY SERVICE”

Werksmans recently acted for a financial services provider (the “FSP”) and were ultimately successful in the SCA on a separated issue. It related to whether the FSP, who was licenced in terms of FAIS only to furnish advice, had acted outside of its licence by providing what were alleged to be intermediary services.

The SCA, in ruling that the FSP had not acted outside of its licence clarified the FAIS definition of “intermediary service”. This precedent-setting decision of the SCA is a welcome relief to the financial services industry, in that it elucidates what is a grey legislative area.

In its judgment, the SCA sets out a reasoned process to determine whether financial services constitute advice or intermediary services, as defined in FAIS, a summary of which is detailed below:

  1. The correct question to be asked is not whether an FSP is providing services other than furnishing advice, but whether such services constitute intermediary services;
  2. The word “intermediary” refers to one who acts as a go-between and the definition of “intermediary service” in FAIS contemplates a person who is interposed between a client, on the one hand, and a product supplier (i.e. a person who issues financial products) on the other hand;
  3. The definition of “intermediary service” in FAIS contemplates acts that directly result in the consequences referred to in the definition. This means that a FSP’s actions must directly result in a client/product supplier possibly entering into, offering to enter into or entering into a transaction in respect of a financial product with a product supplier/client and/or result in the FSP managing or administering or otherwise dealing with financial products or receiving, processing or submitting claims as contemplated in sub-section (b) of the definition of “intermediary service” in FAIS.

 

  1. Act 24 of 1956.
  2. Act 37 of 2002.