Earlier this year the Financial Services Board ("FSB") made new rules aimed at regulating potential and actual conflicts of interest faced by financial services providers. The new rules apply to all authorised financial services providers ("FSPs") licensed under the Financial Advisory and Intermediary Services Act, 2002 ("FAIS") and to their representatives. The new rules are incorporated into the existing General Code of Conduct for Authorised Financial Services Providers and Representatives promulgated under FAIS and take effect in three phases – certain of the rules took effect in July and October of this year and the balance of the rules will take effect in April 2011.
Broadly speaking, the new rules require FSPs (i) to avoid and, where this is not possible, mitigate any conflict of interest with a client or the representative of a client; (ii) make detailed written disclosures to clients of any conflict of interest and the measures taken to avoid or mitigate the conflict; and (iii) adopt and implement a written conflict of interest management policy. Previously, FSPs were only required to disclose to clients actual or potential conflicts of interest in relation to financial services rendered by them and to take reasonable steps to ensure the fair treatment of clients. Relevant common law requirements applying to the performance of mandates generally are not affected by the new rules and apply in conjunction with the new rules.
Avoid if "possible"
It is uncertain how the FSB (and ultimately the courts) will interpret the obligation of FSPs to avoid conflicts of interest if "possible". Specifically, the question arises whether factors such as the likelihood that a client will suffer damage due to the conflict of interest; the potential size of such damage; the availability and effectiveness of mitigation measures and/or informed consent by the client will be relevant to determining whether an FSP is in fact obliged to avoid a conflict of interest altogether (as opposed to merely disclosing it to the client and adopting appropriate mitigation measures). This issue is especially important since the FSB noted in a September 2009 press release that the mere disclosure of conflicts and the adoption of "superficial" mitigation measures will not be regarded as constituting compliance with the new rules. Actual avoidance will therefore be required in certain circumstances.
Limitation on the offering or receipt of "financial interests"
The new rules contain a list of permitted payments and receipts between FSPs on the one hand and financial product suppliers, other FSPs and the associates of such persons (collectively defined as "third parties" in the new rules) on the other. This list excludes certain payments and benefits commonly offered or received by FSPs in the past. Broadly speaking, an FSP or its representative who offers or receives "financial interests" (as defined in the new rules, including cash payments and payments in kind such as vouchers, gifts, services, advantages, benefits, discounts, sponsorships, travel, hospitality and accommodation, but excluding income derived from ownership interests) may only do so if such financial interest falls in one of the following categories, namely:
- commission authorised under the Long-Term or Short-Term Insurance Acts or the Medical Schemes Act;
- fees authorised under the Long-Term or Short-Term Insurance Acts or the Medical Schemes Act if those fees are reasonably commensurate to the service being rendered;
- fees or commission for the rendering of a financial service where such fee or commission is specifically agreed to by a client in writing and may be stopped at the discretion of the client;
- fees or remuneration for the rendering of a service to a third party where such fee or remuneration is reasonably commensurate to the service being rendered;
- financial interests received from the same third party with an aggregate monetary value in any calendar year of not more than R1 000, received by an FSP or representative who is a sole proprietor or received by a representative for that representative’s direct benefit or received by an FSP who, for its benefit or that of some or all of its representatives, "aggregates" the financial interest "paid" to its representatives; and
- other than as contemplated above, a financial interest for which consideration that is reasonably commensurate to the value of the financial interest is paid by the FSP or representative at the time of receipt of such financial interest.
Conflict of interest management policy
The new rules require that each FSP must adopt, maintain and implement a conflict of interest management policy, train employees and representatives in respect of the implementation of the policy, publish the policy in "appropriate media", make the policy available for inspection by the public and file compliance reports with the FSB in relation to the implementation of the policy. The conflict of interest management policy must inter alia contain mechanisms for the identification of conflicts of interest; prescribe measures for the avoidance, mitigation and disclosure of conflicts; set out processes, procedures and internal controls to facilitate compliance with the policy; stipulate consequences of non-compliance by the FSP’s employees and representatives; and contain lists of the FSP’s associates, ownership interests in third parties and ownership interests in the FSP by third parties. This policy must be adopted by the board of directors of the FSP (if the FSP is a company) or its governing body (if the FSP is not a company) and has to be in place by mid-April 2011.
The new rules materially change the manner in which FSPs are required to deal with conflicts of interests. Each FSP should consider whether its current business practices comply with the new rules and, if not, change its business practices appropriately. In addition, each FSP will need to consider and adopt a written conflict of interest management policy before mid-April 2011.