A person may not render financial services unless he or she is an authorised financial services provider or is appointed as a representative of an authorised financial services provider. Recent amendments to the Financial Advisory and Intermediary Services Act (“the Act”) have sought to further clarify the relationship between a financial services provider and its appointed representatives.
Sections 8 and 13 of the Act (as amended), read with various board notices issued by the Financial Services Board, provide, in brief, that:
- a natural person or a juristic entity may not act as a representative of an authorised financial services provider unless mandated by such financial services provider (“mandated representative”);
- the mandated representative acts in the name of the financial services provider;
- the mandated representative must comply with the applicable fit and proper requirements and, where the mandated representative is a juristic entity, its key individuals and representatives must comply with the applicable fit and proper requirements;
- the financial services provider accepts responsibility for the activities of the mandated representative that are performed in the scope of, or in the course of, rendering financial services to clients in terms of any such contract or mandate; and
- prior to rendering a financial service, a representative must provide confirmation, certified by the financial services provider to the client, that a service contract or mandate to represent such financial services provider exists and that the financial services provider accepts responsibility for those activities of the representative performed within the scope of, or in the course of, implementing, any such contract or mandate.
The applicable fit and proper requirements require a representative or, where the representative is a juristic entity, its key individuals and representatives, to (i) be honest and have integrity; (ii) comply with certain minimum experience requirements; (iii) possess certain qualifications; (iv) pass the prescribed regulatory examinations; and (v) comply with continuous professional development requirements as set out in the relevant notice.
Representatives may be exempt from the minimum experience, qualifications, continuous professional development and regulatory examination requirements and be allowed to render financial services to clients, subject to a supervisor’s guidance and oversight.
A supervisor may be a financial services provider who is a natural person, a representative of a juristic financial services provider who has met all of the fit and proper requirements applicable to a key individual and a representative, or a key individual who has met all of the fit and proper requirements applicable to a key individual and a representative.
However, notwithstanding that a representative may be exempt from one or more of the fit and proper requirements, such representative must at all times act in accordance with any other obligations imposed by law and may be held liable if found to have contravened such obligations. Further, supervisors may also be held liable for any loss suffered by a client, where it is found that a supervisor has not performed his or her supervisory duties over a representative, as required by the Act. This position has recently been affirmed by the Appeal Board of the Financial Service Board in the decision Moore, Johnsure Investments CC v Black.
In this case, an investor sought to hold a representative and his supervisor liable for loss suffered by the investor as a result of the representative’s non-compliance with the Act and Board Notice 80 of 2003, which sets out the code of conduct with which all authorised financial services providers and representatives must comply (“the Code”). The Appeal Board rejected the argument that a representative under supervision was excused from liability and that his supervisor alone should be liable for such loss.
The Appeal Board reiterated that section 12 of the Code requires a financial services provider to be responsible for the actions of its representatives and to implement policies, procedures and controls that ensure its representatives comply with the provisions of the Act and the Code.
The Appeal Board also emphasised that the intention of the exemption is to allow a representative, notwithstanding his inability to comply with the fit and proper requirements, to continue rendering financial services, subject to a supervisor’s guidance and oversight. However, apart from this exemption, the representative must comply with all provisions of the Code. A representative will never be exempt from section 8(1)(a) of the Act, which requires representatives to act with integrity. This is further affirmed by section 2 of the Code, which requires a financial services provider and its representatives to, at all times, render financial services honestly; fairly; with due skill, care and diligence; and in the interests of the clients and the integrity of the financial industry.
The Appeal Board held the supervisor, its key individual (as it was a juristic entity) and the representative responsible for the loss suffered by the investor. According to the Appeal Board, “the supervisee and the supervisor must work together. Both have an equal obligation towards their clients.”
The Appeal Board emphasised that the supervisor had accepted responsibility as supervisor of the representative and was thus also responsible for the loss suffered by the investor. The Appeal Board found the representative and the supervisor jointly and severally liable.
This decision highlights the seriousness with which supervisors must take their supervisory duties. All too often, in practice we note a willingness during the application process to appoint representatives under supervision without a realisation of the burden that comprehensive supervision would, in fact, entail.
Supervisors are responsible for overseeing the services rendered by their representatives and must ensure that the representatives carry out their duties in accordance with the applicable laws. Failure to do so may result in the liability of the supervisor for any loss suffered by a client.
It is also important to note that representatives are not absolved from liability simply because they are acting under supervision. Representatives are still required to act in accordance with the Code and all other applicable laws, and failure to do so may result in the liability of the representative.