THE FINANCIAL ADVISORY AND
INTERMEDIARY SERVICES ACT, 2002
DISCUSSION PAPER ON
CONFLICTS OF INTEREST
AND
TRANSPARENT DISCLOSURE
January 2007
Discussion paper on conflict of interest and transparent disclosure
CONSULTATION PROCESS
The original discussion document in this regard was prepared by Ms R
Lightbody, a member of the Advisory Committee on Financial Services Providers,
who in considering all the issues, desired outcomes, proposals and arguments
both for and against the proposals and recommendations, consulted extensively
with representatives from Long-Term insurers, Collective Investment Scheme
Management Companies, LISPA, IMASA, the ACI, the Cape Chapter of the
Compliance Institute, and individual internal as well as external compliance
practitioners. Ms Lightbody also visited several institutions in Australia and held
consultations with product providers, dealer groups (large and small, institutionowned and independent), regulators (ASIC), industry bodies (IFSA and FPA) and
industry advisors (compliance, legal and practice management firms).
This document was distributed to various industry bodies and comments from
LISPA, IMASA, ACI, FPI and Ms L Dewey in her capacity as committee member
were tabled at the Advisory Committee on Financial Services Providers. Based
on this input this discussion paper was compiled and consulted with the
Committee. The Registrar is hereby making this discussion document available
for industry comment.
After consideration is given to comments received changes to the General Code
of Conduct relating to the management conflict of interest and transparent
disclosure will be made. You are invited to provide comments on the proposals in
this discussion paper by 16 February 2007. Comment can be sent to:
Ms W Hattingh
Head: FAIS Supervision
PO Box 35655
Menlo Park
0102
E-mail: [email protected]
Facsimile: (012 422 2973)
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Discussion paper on conflict of interest and transparent disclosure
EXECUTIVE SUMMARY
1
CONFLICTS OF INTEREST
1.1
Background
The General Code of Conduct for Authorised Financial Services Providers
and their representatives, 2003 (“General Code”) currently requires
Financial Services Providers (“FSPs”) and their representatives to disclose
to the client the existence of actual or potential conflicts of interest.
However, there does not appear to be a common understanding of what
indirect benefits need to be disclosed, or how disclosure is to be carried
out. Currently there are not efficient conflict management policies in place
within financial institutions. The absence of conflict management policies
and a generic understanding of what conflict of interest is and the impact
on a providers’ behaviour can lead to unfair treatment of consumers and
the rendering of inappropriate financial services by providers.
Disclosure of direct and indirect benefits is generally not made in a
consistent or transparent manner across the industry. This has resulted in
the perception that non-cash incentives and other benefits are not being
disclosed, or where they are disclosed, such disclosure is vague and
inadequate. This is damaging to the public’s perception of the integrity of
the financial services industry.
1.2
Desired outcome
1.2.1 The General Code will have clear provisions around conflict
management which must include a requirement to have conflict
management policies. This will bring about a consistent manner of
dealing with and disclosing conflicts.
1.2.2 Conflicts of interest will be a serious concern of product suppliers in
the design and offering of rewards, and will be a serious concern of
intermediaries in the decision to accept rewards. As a result,
consumers will be exposed to fewer conflict situations, and where
there are conflicts, these will have been clearly disclosed.
1.2.3 The consumer will be better equipped to assess whether the advice
given to him is being unduly influenced. It is submitted that
consumer education would play an important role in this regard.
1.2.4 The same conflict management, disclosure and avoidance of
conflict of interest requirements should be simultaneously applied to
all competing product types to avoid both inconsistency and the
situation where less regulated industries profit at the expense of
those whose practices have been curtailed.
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Discussion paper on conflict of interest and transparent disclosure
1.3
Recommendations:
1.3.1 The General Code should contain a specific section devoted to the
management of conflicts of interests and require FSPs to have a
conflict management policy which is implemented and understood
by everybody in the organisation and monitored on an ongoing
basis.
1.3.2 Conflicts of interest management will be categorised into the
following categories:
1.3.2.1 Non-cash incentives and benefits that are viewed as
inconsequential of nature such as small promotional items,
reasonable entertainment in the course of business
relationships and gifts to prescribed maximums and which
may be received and recording thereof in a public register;
1.3.2.2 Non-cash incentives and the benefits that are viewed as
educational of nature which may be received subject to
upfront disclosure to clients and recording thereof in a
public register;
1.3.2.3 Non-cash incentives and benefits that are viewed as
undesirable inducements and which may not be received;
1.3.2.4 Other conflict of interests situations and structures which
must at all cost be avoided or disclosed in such a manner
that it is clear to the client that it may lead to a conflict of
interest between the provider’s interest and that of the
client.
1.3.3 In setting out the various categories of conflicts in the General
Code, a combined rules- and principles-based approach will be
employed.
1.3.4 Standardised disclosure relating to points 1.3.2.1 and 1.3.2.2 will be
described in the General Code.
1.3.5 A public register, to be maintained by the receiver of non-cash
incentives and benefits of an educational nature should be
mandatory.
1.3.6 Consideration should be given to centralisation of such register or
disclosure thereof on a regular basis to the Registrar.
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Discussion paper on conflict of interest and transparent disclosure
2.
TRANSPARENT DISCLOSURE
2.1
Background
Coupled with the requirement to manage conflicts of interests is the need
to adequately and transparently disclose all types of fees that are earned
by financial services providers.
It is becoming of increasing concern that the legal requirement for full
disclosure of all fees and commissions is, in some quarters, being
responded to by the development of complex, “opaque” fee structures,
which are neither simple to disclose nor simple to understand.
Rebates and related payments within the financial services industry need
consideration. A rebate is generally the term used where a collective
investment scheme management company returns a part of its
management fee to a party, which party may be an administrative FSP
(“LISP”), an intermediary or a client.
The discussion paper on Contractual Savings has raised various concerns
relating to the relationship between FSP and product suppliers and the
disclosure of fees, charges and commission. It is necessary to assess at
the current disclosure requirements and to address such inadequacies.
2.2
Desired outcome
Clients understand the differences between the different fee and
commission scenarios, which need to be clearly differentiated and
transparently disclosed. Consumers should know how much they are
paying – directly and indirectly, and to whom – and for which financial
services. An agreement between FSPs and clients that stipulate the extent
of the financial services and what fees the provider will receive and for
what period of time becomes mandatory.
2.3
Recommendations:
2.3.1 Fees, commissions and any other money-based remuneration or
benefit must be fully disclosed upfront.
2.3.1.1 Changes to the General Code of Conduct are required to
clarify disclosure issues.
2.3.1.2 In addition, where it is not possible to disclose an exact
amount.
2.3.1.3 Where annual, ongoing percentage fees are to be paid and
an annual statement must be issued to the client.
2.3.1.4 Once the exact amount is known it must be disclosed - by
way of a statement to the client.
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Discussion paper on conflict of interest and transparent disclosure
2.3.2 The General Code of Conduct must contain specific provisions
relating to agreement between a client and the provider. Guidance
must be issued on how this must be implemented
2.3.2 Fee “rebates” passed between collective investment scheme
management companies and FSPs should be clearly defined and
transparently disclosed – by the party making the payment in
appropriate cases (It is submitted that this will require changes to
CISCA).
2.3.3 Standard definitions, terminology and the manner of disclosure
should be prescribed in the case of rebates. Additional provisions
should be included in the FAIS General Code to address these
issues.
2.3.4 Special provisions should be added to the Discretionary Code of
Conduct, to cover:
2.3.4.1 Authorised users in terms of conflict of the Security
Services Act who have relationships with discretionary
FSPs that often result in “soft commissions” – some of
which need clear disclosure and others which should not
be permitted.
2.3.4.2 Disclosure of performance fees needs to be fully
addressed. The sharing of performance fees with
intermediaries should also be dealt with in this Code.
3
PRODUCT SUPPLIER REGULATION
Appropriate provisions in respect of conflicts of interest and transparent
disclosure may need to be introduced into product legislation (Long-Term
Insurance Act, Short-Term Insurance Act, Collective Investment Scheme Act and
Security Services Act) to cater for those long-term insurers, management
companies of collective investment schemes and members of Exchanges that do
not fall under the FAIS legislation. Other parties in the short-term and long-term
insurance value chains, such as networks, underwriters, claims administrators
etc, pension fund administrators and medical scheme administrators must also
be considered.
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Discussion paper on conflict of interest and transparent disclosure
SECTION 1 - CONFLICTS OF INTEREST
1.
Underlying principles
1.1
In the financial services industry, conflicts of interest can be described as
circumstances where some or all of the interests of clients to whom an
FSP renders financial services are inconsistent with, or diverge from,
some or all of the interests of the provider or its representatives.
1.2
Adequate conflict management helps to minimise the potential adverse
impact of conflicts of interests on clients. Without adequate conflict
management, FSPs whose interests conflict with those of the client are
more likely to take advantage of that client in a way that may harm that
client and may diminish confidence in that provider and in the financial
services industry as a whole.
1.3
Adequate conflict management should also help an FSP to ensure that the
quality of their financial services is not significantly compromised by
conflicts of interest, situations that may arise in normal course of its
business.
1.4
While it is conceded that all potential conflicts of interest do not
necessarily manifest themselves into actual conflicts, it is submitted that
the very perception of bias is a negative one, and carries a negative
impression of the industry.
1.5
Conflict of interest management needs to be addressed in order to
enhance the levels of professionalism and perceived professionalism of
the financial services industry. Disclosure on its own is not always
adequate. Management of conflicts as well as transparent, effective
disclosure needs to be achieved.
1.6
Whereas it is reasonable to expect financial services providers to manage
and avoid conflicts of interests, it can be difficult for them to adhere to this
principle in an environment where product suppliers and other parties are
constantly devising reward, remuneration and benefit schemes that
present conflicts of interests and encourage behaviour that could result in
unsuitable financial services being rendered. It is submitted that this
results in an unhealthy tension between the FSP’s regulatory obligations
on the one hand and the enticements on offer in the market on the other.
Although tensions should always be minimised, it must be accepted that
these tensions will always apply to a degree to any profit-making
enterprise – every player in the value chain will inevitably seek to
maximise its own profits, and therefore have to balance its profit motive
against consumer needs.
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Discussion paper on conflict of interest and transparent disclosure
1.7
The same disclosure and avoidance of conflict of interest requirements
should be simultaneously applied to all competing product types to avoid
both inconsistency and the situation where less regulated industries profit
at the expense of those whose practices have been curtailed.
1.8
The FAIS legislation already requires an FSP to disclose conflicts of
interest to its clients. The General Code currently requires an FSP to
disclose to the client the existence “of any circumstance which gives rise
to an actual or potential conflict of interest, and take all reasonable steps
to ensure fair treatment of the client”. “Non-cash incentives offered and/or
other indirect consideration payable by another provider, a product
supplier or any other person to the provider could be viewed as a potential
conflict of interest”.
1.9
However, there does not appear to be a common understanding of what
indirect benefits need to be disclosed, or how disclosure is to be carried
out. Disclosure of direct and indirect benefits is generally not made in a
consistent or transparent manner across the industry. This has resulted in
the perception that non-cash and indirect incentives are not being
disclosed, or where they are disclosed, such disclosure is vague and
inadequate. This is extremely damaging to the public’s perception of the
integrity of the financial services industry.
1.10
A disturbing conclusion drawn as a result of extensive discussions held
and comment received from across the financial services industry has
been that most product suppliers and FSPs do not appreciate that they are
currently required to disclose and manage conflicts. They express
disapproval of suggestions made in this regard, but have no alternatives to
offer, no examples of what provisions they currently have in place to deal
with conflicts.
1.11
On the other hand, some parties state that they want to disclose issues
that clients could perceive as conflicts, but do not know how to go about it.
1.12
It is therefore submitted that the General Code needs to go further, and
should require FSPs to manage conflicts. Taking “all reasonable steps to
ensure fair treatment of the client” means avoiding conflicts wherever
possible, and managing and disclosing conflicts where avoidance is not
possible or where conflicts may be perceived but not necessarily exist
(and therefore avoidance is not necessary, but full disclosure allows a
potential client to decide whether in his view, a conflict situation may
indeed be biasing advice).
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Discussion paper on conflict of interest and transparent disclosure
1.13
It is submitted that clients in general do not understand the disclosure of
conflict situation and how it might lead to bias advice by the FSP. It is
therefore necessary to prohibit certain non cash incentive and other
indirect conflict situations. The prohibition should be clear and coupled
with awareness of product suppliers that inducements in all forms should
be avoided.
1.14
The tendency of the industry to reinvent incentives schemes to induce or
benefit FSPs where prohibitions have been introduced should be seen in a
serious light and communicated to all relevant parties.
2.
Desired outcome
The General Code will have clear provisions around conflicts, with a view to
bringing about a consistent manner of dealing with and disclosing conflicts.
Conflicts of interest will be a serious concern of product suppliers in the design
and offering of rewards, and will be a serious concern of intermediaries in the
decision to accept rewards. As a result, consumers will be exposed to fewer
conflict situations, and where there are conflicts, these will have been clearly
disclosed. The consumer will be better equipped to assess whether the advice
given to him is being unduly influenced.
3.
Detailed discussion on Management of Conflicts
3.1
Background
After extensive discussions with representatives from Long-Term insurers,
managers of collective investment schemes, discretionary and administrative
FSPs and internal as well as external compliance practitioners, it has become
clear that the managing of conflicts of interests is an extremely difficult,
contentious issue. Views on solutions vary from one extreme to the other. Some
sort of middle road needs to be found.
Conflict of interest management can be categorised in the following four
categories:
a)
Receiving non-cash incentives and benefits that are viewed as
inconsequential benefits i.e. small promotional items reasonable
entertainment in the course of business relationships and gifts to prescribed
maximum and subject to disclosure in public register.
b)
Receiving non-cash incentives and benefits that are viewed as undesirable
inducements which may not be received or offered.
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Discussion paper on conflict of interest and transparent disclosure
c)
Receiving non-cash incentives and the benefits that are viewed as
educational of nature
d)
The avoidance and or management of other indirect conflict of interest
situations and structures. This can include but is not limited to the following:
i.
Conflicts within tied or in-house agency distribution where an advisor is
only rendering financial services the products of a single product
provider, and is often rewarded for promoting new or more profitable
lines.
ii.
Conflicts within “broker funds” where providers act as both the advisor
and discretionary FSP (investment manager) and therefore have a
clear bias towards their own product.
iii.
Conflicts within multi-managers acting as advisors, particularly where
different
underlying
investment
options represent different
management fees payable by the multi-manager and hence different
profit margins.
iv.
Conflict within transition managers or institutional investment portfolios
where the transition manager acts as (or is closely associated with)
investment consultants and advisors. The concern is that managing a
transition can be an extremely lucrative exercise, and so there is
incentive for the advisor to precipitate a change in the investment
strategy which would require transition management.
v.
Conflicts where advisors are part of large multi-disciplinary financial
institution which can lead to the institution having a financial interest in
investments endorsed by the advisor, e.g. a private client advisor in the
wealth management division of a large institution may advise clients to
apply for new share issues that another entity in the large institution is
underwriting.
vi.
Conflicts that may arise where entities in the same group of companies
act in an independent advisory capacity as well as in the capacity of
product supplier or discretionary FSP (investment manager). The
integrated and multi-functional nature of many institutions suggests
that there may be more instances of conflicts of interest than
contemplated above.
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Discussion paper on conflict of interest and transparent disclosure
3.2
International Comparison:
3.2.1 Australia
3.2.1.1
The Australian Securities and Investment Commission (“ASIC”) in
terms of policy statement 181 (Licensing: Managing Conflict of Interest)
identified three mechanism for managing conflict of interest:
a) Controlling conflict of interest
b) Avoiding conflict of interest
c) Disclosing conflict of interest
3.2.1.2
The Commission further states that: “The conflict management
obligation and the obligation to operate efficiently, honest and fairly are
interconnected”.
3.2.1.3
This statement accurately reflects the reason for the existence of
conflict management. Although the Australians do not prohibit certain
conflicts of interest directly, they do place an emphasis that conflicts of
interest are not just a disclosure issue but effective management of
conflict is important and where conflict does arise it should be avoided.
3.2.1.4
The Australian Investment & Financial Services Association (IFSA) and
Financial Planners Association issued a Code of Practice on
Alternative Forms of Remuneration in the Wealth Management
Industry in June 2004. The Code includes a “Decision Tree” which
charts the sequence of decisions that one should consider in
determining whether or not certain forms of alternative remuneration
influence or have the potential to influence advice. “Alternative forms of
remuneration” is their term used to describe arrangements that provide
for certain material benefits, other than payment of commissions or
service fees.
3.2.1.5
The Decision Tree contemplates three different ways of handling
alternative remuneration, or “non-cash incentives” (the term used in the
FAIS General Code), depending on the category of the incentive.
3.2.1.6
Non-cash incentives are viewed as falling into three basic categories
according to their Code:
1. Non-cash incentives that are material, not desirable, and should not
be permitted.
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Discussion paper on conflict of interest and transparent disclosure
2. Non-cash incentives that are material could be perceived as
influencing the objectivity of the FSP, and which should be
disclosed.
3. Non-cash incentives that are not material and disclosure should not
be required.
3.2.1.7
It is submitted that the Decision Tree is a useful guide when
considering how conflicts of interest should be managed, and it is
therefore reproduced (with some amendments for local business
practices) hereunder:
3.2.1.8
ASIC published a discussion paper in April 2006 on “managing conflict
of interest in the financial services industry” in which they highlighted
hypothetical case studies that point out incidences of conflict of interest
in the Australian industry and explain their view on how these conflicts
should be managed. It is submitted that this discussion paper may
highlight various pertinent instances of conflict of interest that must be
considered and guidance on this could provide clarity to providers on
how they should treat these situations.
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Discussion paper on conflict of interest and transparent disclosure
DECISION TREE USED IN AUSTRALIANCE REGULATION
Adapted for South African regulatory environment
Non-cash Incentives Decision Tree
Does the payment or benefit influence or have
the potential to bias advice?
Yes
No
Allow
Is it material?
Yes
What would a
reasonable person
think?
No
Is it consistent with the
provisions in the Codes of
Conduct?
Yes
No
It must be disclosed in one or
more of the following
manners
Ban
Receiver
e.g. Provider
Prior
disclosure
Record of
advice
Public
Register
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Giver
e.g. Product Supplier
Discussion paper on conflict of interest and transparent disclosure
3.2.2 United Kingdom
3.2.2.1
The Financial Services Authority (“FSA”) requires firms to conduct their
business activities with integrity, to pay due regard to the interest of its
customer and to treat them fairly. The FSA Handbook contains a
section in its conduct of business rules on inducements for both
designated investment business and insurance business.
1. The rule provides that a firm must take reasonable steps to ensure
that it, and any person acting on its behalf, does not offer, give,
solicit or accept an inducement; or direct or refer any actual or
potential item of designated investment business or an insurance
mediation activity to another person on its own initiative or on the
instruction of an associate if it is likely to conflict to a material extent
with any duty that the firm owes its costumers in connection with
designated investment business, an insurance mediation activity or
any duty which such a recipient firm owes to its costumers.
2. Inducements can include but are not limited to cash, cash
equivalents,
commission,
goods,
hospitality
or
training
programmes.
3. Firms may receive reasonable indirect benefits provided that the
receipt thereof does not conflict with the duties that they owe to
their clients. A list of such reasonable indirect benefits includes the
following main categories:
i. Joint marketing exercises
Generic product literature, “freepost” envelopes for
forwarding applications (if it is available to all firms that the
supplier deals with) product specific literature, draft articles,
news items and financial promotion’s for publication in
another firm’s magazine if any cost is not more than market
rate.
ii. Seminars and conferences
May take part and participate in seminar organised third
party if the participation is for genuine business purpose, the
contribution is reasonable and seminar organised third party
the seminar is open to participation by other firms.
iii. Technical services and information technology
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Discussion paper on conflict of interest and transparent disclosure
iv. Training
May provide training facilities lectures, venue and written
material) only if it is available generally to all other firms.
v. Travel and accommodation expenses
Attend national events of UK trade association, participate in
training, visit a product supplier’s office to receive information
on their administration systems
vi. May receive gifts
Hospitality or promotional competition prizes if the receiving
of this indirect benefit does not give a rise to a conflict with
the recipient’s duties that it owes its clients.
4. Firms are not allowed to enter into agreements relating to packaged
products, where commission must be disclosed to clients, where
they receive volume overrides, where commission is increased in
excess of the amount to disclosed to the client, or where
commission is paid to a firm other than the firm responsible for the
sale.
5. Specific prohibitions to financial assistance to other firms are also
contained in the rules.
3.2.2.2
The FSA conducted a study into conflict of interest in 2005 and through
a letter addressed to the firms’ management, they highlighted the
following issues:
1. Processes in firms for identifying a mitigation conflict of interest are
not sufficiently developed.
2. Conflict of interest is perceived in too narrow a manner and often
considered to be solely about remuneration, which is incorrect.
3. While avoiding conflicts is linked with observation of the duties of
agency, intermediaries should also ensure that they consider the
wider issue of dealing with clients in a manner that is fair and seen
to be fair.
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3.2.2.3
The FSA requested management to review their conflict of interest
policy and suggest the following approach that is also deemed relevant
to FSPs in the South African situation:
1. Senior management should be fully engaged in all aspect of conflict
identification.
2. Senior management should take on a holistic approach in the
entity’s conflict management.
3. Senior management should review the performance of conflict
mitigation.
4. Senior management should have policies and practises in place for
compensation and training and the organisational culture should
support conflict management and mitigation.
3.2.2.4
When comparing the findings of this study with the South African
environment, it is evident that the same issues that exist in the UK
where there are more clear requirements relating to conflict of interest
management than in South Africa, is also applicable to our situation. It
is submitted that we should carefully consider the process of
implementing and monitoring conflict and interest management and
clear guidance must be provided.
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3.3
DISCUSSION AND CONSULTATION ISSUES THUS FAR
A discussion document was prepared by Ms R Lightbody a member of the
Advisory Committee on Financial Services Providers, who in considering
all of the issues, desired outcomes, proposals, arguments both for and
against the proposals and recommendations, consulted extensively with
representatives from Long-Term insurers, Collective Investment Scheme
Management Companies, LISPA, IMASA, the ACI, the Cape Chapter of
the Compliance Institute, and individual internal as well as external
compliance practitioners. The following is a summary of these discussion
and recommendations that is made on the way forward, this must be read
in conjunction with the final recommendations.
3.3.1 If the types of non-cash incentives and benefits that fall into the
different categories should be prescribed, what incentives should fall
into which category?
Below is a list of examples of non-cash incentives and benefits and how it
can be allocated to each category that have been the subject of extensive
debate within the industry, and consensus was not reached and it is
consensus on issues such as these might never be achieved.
Definitions relating to the suggested list below:
“Domestic” means within the Republic of South Africa.
“International” means outside the borders of the Republic of South
Africa.
“material benefits” are any forms of non-cash incentives or benefits
that are R500.00 or more in value for any single item or part
thereof, including benefits that are passed to the spouse, partner,
family member, business associate or employee of a provider or
provider’s representative by a product supplier; and also includes
such non-cash incentives or benefits that amount to more than
R1000 per natural person from a single product supplier over any
calendar year.
“Product supplier” includes collectively:
 the related, holding and subsidiary companies of the product
supplier;
 companies in which the product supplier holds a percentage
of shares which on its own or together with the percentage
holding of other product suppliers, gives the product supplier
or group of product suppliers as the case may be, effective
control of such company; and
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Discussion paper on conflict of interest and transparent disclosure


companies within the same group; and
another any other financial services provider that act similar
capacity as a product supplier (e.g. discretionary and
administrative FSPs).
First list:
Certain forms of non-cash incentives should not be permitted, for
example:
i)
International “incentive trips”, educational or professional
development
conferences,
accommodation
and
travel
arrangements with which financial services providers and/or their
representatives are rewarded by a product supplier or another FSP
(e.g. an administrative or discretionary FSP), including any part
payment towards these costs;
ii)
Domestic “incentive trips”, educational or professional development
conferences, accommodation and travel arrangements with which
financial services providers and/or their representatives are
rewarded partially or exclusively for the volume of business placed
with such product supplier, including any part payment towards
these costs;
iii)
Sponsorships by product suppliers for financial services providers
and/or their representatives to attend and/or hold international
conferences.
iv)
Sponsorships by product suppliers for financial services providers
and/or their representatives to attend and/or hold domestic
conferences, where the sponsorships are granted subject to a
certain volume of business having been placed or in anticipation of
its being placed with such product supplier;
v)
Gifts that amount to material benefits;
vi)
Cash or gift vouchers;
vii)
Provision of motor vehicles;
viii)
Mortgage bonds and/or other loans on more favourable terms than
those normally available in the market to the provider or provider’s
representative;
ix)
Payment or provision of all or part of the costs of any business
service or other business expense, including but not limited to:
i. Office rental;
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ii.
iii.
iv.
v.
Computer hardware and commercial software;
Practice management services;
Compliance services;
Provision of staff or payment of all or part of staff salaries.
Second list
Certain forms of non-cash incentives should be permitted, but must be
disclosed by both the giver and receiver, for example:
i)
Entertainment, tickets for sporting and other events with a value
over R500.00 per person per single item,
ii)
Domestic educational or professional development conferences,
accommodation and travel arrangements that are awarded to the
provider using selection criteria that are not partially or exclusively
based on sales volumes, including any part payment towards the
costs
iii)
Sponsorship of domestic provider events, including conferences, by
a product supplier, which includes the purchasing of advertising and
promotional space,
iv)
Accommodation and travel costs where the provider is invited as a
speaker at a domestic conference/professional development event
held by a product supplier, including any part payment towards the
costs,
v)
Access to preferential, differentiated service and/or training and/or
advice facilities, and the like (Intermediaries must ensure that they
are aware that they are receiving a differentiated level of support.);
vi)
Shareholdings, equity entitlements, sales quota obligations or
performance fee entitlements that they, or an entity in which they
have an interest, have in the product suppliers of the products or
administrative financial services providers that the provider and/or
its representatives recommend to clients;
vii)
The fact that during the preceding 12 month period, the provider
received more than 30% of total remuneration, including
commission from a product supplier;
viii)
Where a provider markets or gives advice in respect of the products
of more than one product supplier, should the representatives of
such provider be rewarded in any way that could, or could be
perceived to, bias advice in favour of one product supplier over
another, this fact must be disclosed;
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ix)
Where a provider markets or gives advice in respect of the products
of one or more product suppliers, should the representatives of
such provider be rewarded in any way that could, or could be
perceived to, bias advice in favour of one particular product or
underlying product option over another, this fact must be disclosed;
and
x)
Any other non-cash incentives that are material and are not
specifically described in the Code.
Third list:
The following are examples of benefits that should be permitted, with no
requirement to disclose:
i)
Computer software linked to a product supplier’s products, such as
a product-linked advice tool.
ii)
Benefits that are not material and are not in the form of cash or gift
vouchers.
iii)
Professional development conferences/courses that meet the
following criteria:
a. The conference may be for no longer than three days and two
nights
b. The professional development must account for at least 4 hours
per day.
c. Flights and other forms of transport must be domestic only and
must be the regular class (not for example, business or first
class).
d. The total cost of accommodation, meals and incidentals must
not exceed R1750.00 per day.
e. Only the financial services provider or representative may be
paid for – not any spouse, family member or other person.
f. The location of the conference/ course must be domestic.
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3.3.1.1
Arguments
incentives:
against
different
categories
of
non-cash
a. The approach is too harsh: A far “lighter touch” should be
employed. Only two categories should exist – material and
immaterial non-cash incentives. Disclosure is a cure for any
perceived conflict on interests. Normal business relationshipbuilding will be stifled. If volume-based awards are banned,
then “by invitation” arrangements will still have volume-based
criteria – these criteria will simply be unspoken, or unwritten.
Ineffective legislation will be in place, which will lead to a lack of
respect for legislative requirements.
b. The approach is too lenient: A far stricter approach should be
followed. Insurance companies are prohibited from offering
anything other than commission, and to say that category (b)
and item (iii) of category (c) are acceptable, results in unfair, unlevel playing fields.
3.3.1.2
Arguments for:
a. Disclosure is not adequate on its own. If it is disclosed that an
FSP is open to accepting bribes, does that make bribery
acceptable? Relationship-building is reasonable, but should not
be allowed to be an excuse for unbridled, excessive incentives.
A counter argument against this statement is that disclosure is
not always adequate on its own, primarily because disclosure is
often too “easy” to structure in such a way that it does not reveal
the potential for conflict of interest. However, in this analogy
bribery is illegal and the receiving of incentives are not, provided
they do not result in inappropriate, biased advice.
b. The South African environment is not mature enough to rely on
FSPs and product suppliers to make their own rules without
express guidance.
c. Even in Australia, where the culture of disclosure and
management of conflicts is relatively entrenched in the industry,
it is considered necessary to set out that which is not
acceptable.
d. Only insurance products are subject to commission regulation.
The desirability of this is not the subject of this document. While
commission regulation is in place in respect of insurance
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Discussion paper on conflict of interest and transparent disclosure
products, there will always be “uneven playing fields” in this
regard.
Where an intermediary markets only insurance
products, he will clearly not be allowed to accept anything other
than commission and immaterial non-cash rewards from an
insurance company directly. This will need to be made clear in
the proposed provisions. (Although this is correct, it is evident
from market practise that insurance companies utilise other
structures to give non-cash incentives to FSPs and this practise
must be considered).
e. Consistency needs to be achieved.
f. The Australians believe that non-cash based incentives offered
by product suppliers to FSPs where the qualification criteria are
based on the volumes of sales of the particular product supplier,
are undesirable. It is submitted that this principle should be
adopted in South Africa.
3.3.1.3
Recommendation:
1. Non-cash incentives will be categorised into the following
categories:
a. Non-cash incentives and benefits that are viewed as
inconsequential benefits i.e. small promotional items
reasonable entertainment in the course of business
relationships and gifts to prescribed maximums and which
may be received subject to disclosure in a register;
b. Non-cash incentives and benefits that are viewed as
educational of nature which may be received subject to
disclosure in a public register;
c. Non-cash incentives and benefits that are viewed as
undesirable inducements and which may not be received.
2. Acceptance by an FSP of non-cash incentives that are
prohibited should result in severe penalties and/or the loss of
the FSP license. Penalties such as the following should be
provided for:
a. In the case of non-disclosure of a category (a) item, a fine
equal to the value of the non-cash incentive plus a multiple
should be imposed.
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b. In the case of the acceptance of a category (c) item, a fine
equal to the value of the non-cash incentive plus a multiple
should be imposed, and the loss or suspension of the FSP
license should be mandated.
3.3.2 Should the types of non-cash incentives and benefits that fall into
the three categories above be prescribed, or should each FSP decide
for themselves?
3.3.2.1 Argument for FSPs deciding for themselves
a.
It becomes very difficult to draw the line and to draft wording
that captures every possible conflict that may arise.
b.
The LOA in its Code on Commission Control has attempted
for many years to delineate acceptable behaviour in this
regard, and have found policing it very onerous.
c.
Once wording is in place, it is believed that detractors will
exploit loopholes.
d.
It will be necessary to prescribe monetary limits, and inflation
will dictate that these will need modification over the years.
e.
A principles-based approach is preferable to a rules-based
approach.
f.
A principles-based approach with industry rules is preferable.
3.3.2.2 Argument against FSPs deciding for themselves
a.
If each FSP is to decide for themselves what should fall into
which category, then consistent dealing with conflicts will not
have been achieved. More aggressive market players will
take conflicts issues less seriously, and the more
conservative players will be forced, in order to remain
competitive, to follow.
b.
It will be more difficult to sanction parties for failing to deal
effectively with conflicts, because no firm rules will be in
place.
c.
The fact that something may be difficult to police does not
mean that it should be avoided.
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d.
Creative ways to “police” can be found, such as compliance
officers needing to monitor and certify compliance with the
Code; strict penalties for non-compliance, and disclosure
being standardised where necessary and in some cases,
public.
e.
Just as the markets are not yet ready for the de-regulation of
commission on insured products, so it is not mature enough
for self-regulation in this area. The reason why the LOA has
found it difficult to enforce and police its Code on
Commission Control is because the Code has no legislative
force, and in any event, applies to long-term insurers only,
not their holding or other associated companies.
f.
Whereas a principles-based approach would ultimately be
desirable, a combination of a rules- and principles-based
approach is more appropriate at this stage.
g.
Unfortunately, industry rules are not always workable. Not all
players in each financial services industry belong to that
industry’s association. Certain members of these
associations do not feel as uncomfortable about breaching
industry codes as they do about breaching legislation. To get
all industries to agree on similar codes regarding conflicts
will be impossible. Consistency across the financial services
industry will not be achieved.
3.3.2.3
Recommendation
1.
The types of non- cash incentives and benefits that fall into
the three categories should be prescribed. In setting out the
various categories of conflicts in the General Code, a
combined rules- and principles-based approach will be
employed.
2.
The General Code will be amended to contain a chapter
devoted to the management of conflicts of interests, which
lays down specific requirements.
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Discussion paper on conflict of interest and transparent disclosure
3.
It will contain clear principals as to what activities are
banned, and what are allowed subject to limits and
disclosure. It will be clear that the list is not exhaustive, and
that any conflict of interest not specifically mentioned in the
Code should be measured and considered in the light of the
types of conflict of interest. If it is not clear such conflict
should be avoided.
3.3.3 Where disclosure is required, should it be standardised and publicly
available?
3.3.3.1
Arguments for:
a.
Standardised disclosure ensures consistency of approach by
all FSPs and product suppliers. It ensures that all similar
arrangements are disclosed in a similar manner, which
makes it much easier for consumers to compare different
service offerings and what influences may be potentially
affecting advice.
b.
The public register: what FSPs and product suppliers are
afraid of becoming public knowledge should probably not be
happening.
c.
The public register is in operation in Australia, and has
proved to be most effective in reducing conflict of interest
situations. Reasons given for this were varied, for example:
 “It is too much trouble to fill in the register – it is simpler to
just decline the offer.”
 “We are not comfortable with the financial press viewing
these arrangements and the negative publicity that may
follow.”

3.3.3.2
“Clients feel that they are ultimately bearing the costs of
the conference / function / sponsorship, and this does not
go down well.”
Arguments against:
a.
Maintaining a register is yet another cost.
b.
Journalists
negatively.
will
misconstrue
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Discussion paper on conflict of interest and transparent disclosure
c.
3.3.3.3
There might be logic behind the principal of having both
givers and receivers recording data in the register but this
would make it even more burdensome. A question that can
arise is what happens if there is a mismatch between the two
sets of data and will this always be indicative of some kind of
non-disclosure, or simply a difference in interpretation. It can
therefore be argued that it would be more feasible to require
only the recipient to disclose (including disclosing the identity
of the giver), with appropriate compliance monitoring being
required by the recipient’s compliance officer to verify details
with all product suppliers with whom the recipient has
contractual relationships.
Recommendations:
1.
Standardised disclosure should be explored. For instance
the Association of Collective Investments has examples of
standard wording that is used across that industry in respect
of certain generic disclosures, so the principle has been
successfully implemented to a certain extent within the
financial services industry.
2.
Upfront disclosure to the client should be made in a
standardised manner regarding conflict of interest. e.g. “We
have
xxx
arrangements
in
place
with
certain
intermediaries/product suppliers.
A list
of the
intermediaries/product suppliers and the benefits we receive
from them can be found in our register.” The standard
wording, or examples of standards to suit various sets of
circumstances, could be specified in an annexure to the
General Code.
3.
It is not suggested that all disclosures should be
standardised. It is submitted that areas where consumers
and even FSPs who are giving advice could become
confused; where complex cost structures are involved, such
as collective investment scheme funds of funds where layer
upon layer of fees and performance fees are involved –
consideration should be given as to whether a standard
disclosure format will be helpful. It is important that industry
associations should partner with the regulator here, as is
increasingly happening in the UK. Industry associations are
best positioned to devise disclosure standards suitable for
their industry-specific circumstances.
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Discussion paper on conflict of interest and transparent disclosure
An appropriate degree of industry control with regulatory
partnership will also permit greater flexibility to adapt to new
practices or address loopholes as they arise.
4.
An effective means of disclosure is by way of a public
register to be maintained by both the giver and receiver of
the non-cash incentive. As FAIS is only applicable to FSPs
further consultation would be required to also include the
giver if it is not a FSP. The following provisions should
apply:
i)
The Register will be maintained by both givers and
receivers of non-cash incentives. In terms of receivers,
the Register will be kept in relation to payments and
benefits received by financial services providers in
respect of themselves and their representatives.
ii) The Register will contain details of date, type of non-cash
incentive/s or indirect benefit/s, value of benefit and the
name of the giver and the receiver.
iii) The Register will be available for inspection on request
by any person requesting it. A copy of the Register is to
be provided within 7 days of written request.
iv) The client is to be informed in writing at the
commencement of the transaction of full details as to
where and how the Register may be obtained.
v) The Register is to be updated on at least a monthly basis.
vi) Each FSP must appoint a designated person within the
organisation whose duties will include monitoring
adherence to the requirement to keep the Register,
updating the Register and dealing with requests for the
Register.
5.
Requirement in the compliance report that the compliance
officer monitor and report on the maintenance of the public
register.
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3.3.4 The same principals relating to non-cash incentives should apply
equally to “In-house” / “Tied Agents” (Representatives)
Concern has been expressed around “in-house” advisers or “tied agents”
(which are representatives of FSPs) and the fact that they will not be able
to receive non-cash incentives. This has also been highlighted in the
National Treasury Discussion paper on Contractual Savings. Certain
insurers employ advisers as their employees, or engage them on a
contractual basis on condition that they may not market any products other
than those of that insurer and other financial service companies within the
same group.
3.3.4.1
Arguments for:
a. If representatives are treated differently it will create an unlevel
playing field between insurance “tied agents” and small FSPs
entering the industry. It is submitted that all non-cash incentives
regardless of whether an FSP or its representatives receive them,
should be avoided. There is no difference in bias of the financial
services that may be rendered. FSPs should manage their conflicts
and should ensure that if they offer their representative bonuses, it
is done in a transparent manner and remuneration disclosed to
clients if the bonus is linked to the financial service.
3.3.4.2
Arguments against:
a. Care should be taken to ensure that the proposed changes to
General Code do not infringe on employee/employer relationships
in this context. If part of an employee’s bonus for instance is an
overseas trip for attaining certain targets, than as long as the
targets and the calculation thereof are disclosed to clients, it may
not be a conflict of interest.
b. It is even debatable whether the targets and calculation of incentive
qualification needs to be disclosed in these cases. The test should
be, as proposed throughout this document, whether the incentive
gives rise to any potential (or actual) conflict of interest. In those
cases where the range of products an intermediary may offer is
limited to a particular product supplier (or group), and this limitation
is fully disclosed, no advice bias can arise and hence no conflict.
c. Most “tied” representatives operate in the long-term insurance
context, and it is necessary to bear in mind the impact of the
pending commission changes on the sustainability of long-term
insurance intermediaries and the ability to attract new entrants.
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It has been argued that a large number of new intermediaries enter
the industry as tied representatives, as they are unable to
immediately operate on the pure commission model applicable to
independent intermediaries. Therefore it is argued that it is
important that insurers should be able to continue to offer more
flexible remuneration models to tied representatives. In a FAIS
context of course, similar rules should apply to all representatives in
similar positions, not only long-term insurance representatives.
3.3.4.3
Recommendation:
a. Non-cash incentives must be treated in the same way for
representative and FSPs should in their conflict of interest
management policy include specific provisions relating to duties of
representatives and their remuneration.
3.4
FINAL RECOMMENDATION
After consideration of the above mentioned points the following
recommendations is made to effect changes to the General Code of Conduct:
3.4.1 The General Code should contain a specific section devoted to the
management of conflicts of interests and require FSPs to have a conflict
management policy which is implemented and understood by everybody in
the organisation and monitored on an ongoing basis.
3.4.2 In setting out the various categories of conflicts in the General Code, a
combined rules- and principles-based approach will be employed.
3.4.3 Conflicts of interest management should be categorised into the following
categories:
3.4.3.1
Non-cash incentives and benefits that are viewed as
inconsequential of nature such as small promotional items,
reasonable entertainment in the course of business
relationships and gifts to prescribed maximums and which may
be received subject to upfront disclosure to clients and recording
thereof in a register in accordance with the FSP’s conflict of
interest management policy;
3.4.3.2
Non-cash incentives and the benefits that are viewed as
educational of nature which may be received subject to upfront
disclosure to clients and recording thereof in a public register;
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3.4.3.3
Non-cash incentives and benefits that are viewed
undesirable inducements and which may not be received;
as
3.4.3.4
Other conflict of interests situations and structures which must
at all costs be avoided or disclosed in such a manner that it is
clear to the client that it may lead to a conflict of interest
between the provider’s interest and that of the client.
3.4.4 Standardised disclosure will be described in the General Code.
3.4.5 A public register, to be maintained by the receiver of non-cash incentives
and benefits of an educational nature should be mandatory. The following
is a proposed example of such register:
NAME OF FINANCIAL SERVICES PROVIDER
Name of
giver
Date
Details of
inconsequential
benefits
Details
educational
benefits
Other
conflict
of
interest
Amount/
value
Representative A
Representative B
Representative C
3.4.6 Consideration should be given to centralisation of such register or
disclosure thereof on a regular basis to the Registrar.
3.4.7 It is proposed that the following is added as an additional chapter to the
General Code to give effect to the proposed recommendation. The object
of this chapter of the Code is to introduce the concept of management of
conflict of interest and to introduce clear guidelines on the receiving of
non-cash incentives and other benefits.
Definitions:
“Domestic” means within the Republic of South Africa.
“educational benefits” are domestic educational or professional
development conferences, accommodation and travel arrangements that
are awarded to the provider, its employees or representatives or
representative employees using selection criteria that are not partially or
exclusively based on sales volumes, including any part payment towards
the costs that are less than R2 000 per natural person and provided that
such educational benefits may not amount to more than R6 000 per
natural person over any calendar year.
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“inconsequential benefits” are any form of cash or non-cash incentives
or benefits including educational benefits that are less than R500 per
person in value for any single item or part thereof, including benefits that
are passed to the spouse, partner, family member, business associate or
employee of a provider or provider’s representative or its employees by a
product supplier: provide that such non-cash incentives or benefits may
not amount to more than R1 000 per natural person over any calendar
year.
“Product supplier, other financial service provider or associate”
includes collectively a product supplier as defined in section 1 of the Act or
any other financial services provider and:
 related, holding and subsidiary companies of the product supplier or
other financial services provider;
 persons in which the product supplier or other financial services
provider have a direct or indirect interest;
 companies within the same group as the product supplier or other
financial services provider; and
 any other person with whom a product supplier or other financial
services provider has an arrangement or agreement to provide
benefits to a provider
Provisions in terms of the management of conflict of interest
(1)
A financial services provider must develop and implement a conflict
of interest management policy as part of its risk management
framework, which must contain at least the following:
a) the allocation of responsibility for the identification and
management of conflict of interest to an accountable person;
b) the formalisation of the policy and approval by controlling body
of FSP;
c) provision for formal review of the policy;
d) the policy should be holistic and must not solely concentrate on
remuneration issues;
e) identify appropriate process and/or controls that will identify
compliance with the policy;
f) provide for regular review of conflict of interest policy preferably
by external party; and
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Discussion paper on conflict of interest and transparent disclosure
g) provide for incorporation
employees to the policy.
of
training
and
adherence of
(2)
With the exception of inconsequential and educational benefits no
financial service provider may receive any benefit whatsoever from
a product supplier, any other provider or its associates directly or
indirectly, other than cash remuneration payable directly to the
financial services public provider.
(3)
Where a financial service provider or its representatives receive
educational benefits, the following must be recoded in a public
register:
(a)
(b)
(c)
(d)
name of the giver;
date;
details of the inconsequential or educational benefit; and
amount or value of the benefit.
(4)
Where a financial service provider or its representatives receives
inconsequential benefits from another FSP or its representatives, it
specified guidelines contained in the conflict of interest
management policy must be recoded in a register within;
(5)
The following disclosure must be made to clients if the provider may
receive inconsequential and educational benefits:
“<Name of provider> and/or its employees, business associates,
representatives or its employees which have contractual
relationships with the following product suppliers or other financial
service providers:
<List the product suppliers or other financial service providers>
During the course of the relationship they may receive
inconsequential and educational benefits from the above entities
and/or persons. Clients should be aware that this may influence the
financial services (which includes advice) that is provided to the
client.
Clients can obtain a copy of a register containing all educational
benefits from <name of the person responsible for maintaining the
Register>”
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(6)
Conflict of interests business associations, situations and structures
must be avoided or disclosed in such a manner that it is clear to the
client that it may lead to a conflict of interest between the provider’s
interest and that of the client.
(7)
A financial services provider may not give or offer to give any noncash incentives or other benefits, other than inconsequential or
educational benefits to another FSP.
SECTION 2 - TRANSPARENT DISCLOSURE
1.
Underlying principles
1.1
Coupled with the requirement to manage conflicts of interests is the need
to adequately and transparently disclose all types of fees that are earned
by financial services providers.
1.2
It is becoming of increasing concern that the legal requirement for full
disclosure of all fees and commissions is, in some quarters, being
responded to by the development of complex, “opaque” fee structures,
which are neither simple to disclose nor simple to understand.
The Australian regulator (ASIC) holds and, it is submitted that it is the
correct view, that complex fee structures do not justify poor disclosure.
Parties that set up complex fee structures must ensure that full,
transparent disclosure is made to clients, as required by this Code. If such
disclosure is rendered difficult or even impossible by the structure, then
the parties involved will not be excused for their poor disclosure. The
impossibility or difficulty with respect to disclosure that the structure
presents renders the structure undesirable.
1.3
Rebates and related payments within the financial services industry need
consideration. A rebate is generally the term used where a collective
investment scheme management company returns a part of its
management fee to a party, which party may be a LISP, an intermediary or
a client. It is important that clients understand the differences between the
different scenarios, which need to be clearly differentiated and
transparently disclosed.
1.4
Ongoing fees, which are sometimes termed “advice fees” or “trail fees”,
are not always being adequately disclosed.
1.5
Of serious concern is the proliferation of “all-in-fee” class of collective
investment schemes, which funds are sometimes “white-labelled” by
intermediaries who have discretionary FSP licences.
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In such unit classes, a total management fee is generally disclosed
upfront. Out of this fee, the management company pays an amount to a
LISP and/or an intermediary and/or a multi-manager. Performance fees
are also sometimes paid to various parties. It is not made clear exactly
what percentage or amount is paid to which party. In some instances, the
fund is sold to the client of an intermediary who then shares in a rebate
and/or performance fee paid by the management company to the
discretionary FSP. Because units are not sold off to pay the various fees,
reports to clients do not always clearly reflect the fees being paid. When
this fee structure was explained to certain Australian product suppliers,
their view was that this development was “a step backwards”.
1.6
It is submitted that consumers have the right to know:
1.6.1 How much they are paying – directly and indirectly
1.6.2 to whom the remuneration is paid,
1.6.3 for what financial services.
This is what FAIS already requires, although it is not currently consistently
applied and interpreted. It is therefore necessary to expand the disclosure
requirement make it clear.
1.7
Discretionary FSP Code
Special provisions should be added to the Discretionary FSP Code, to
cover:

Stock brokers who have relationships with asset managers that
often result in “soft commissions” – some of which need clear
disclosure and others which should not be permitted. IMASA has
advised that they are currently drafting a code in this regard.

The issue of disclosure of performance fees needs to be fully
addressed. The sharing of performance fees with intermediaries as
an additional commission could also be dealt with in this Code.
2.
Recommendation:
2.1
Fees, commissions and any other money-based remuneration or benefit
must be fully disclosed upfront. In addition, where it is not possible to
disclose an exact amount, or annual, ongoing percentage fees are to be
paid, once the exact amount is known it must be disclosed - by way of a
statement send to clients within prescribed period.
2.2
Rebates and related payments
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2.2.1 Prior to transacting, all entities in the value chain need to be
identified, for example: CIS manager, investment manager/s, multimanager, LISP, distribution network and intermediary. The total
percentage fee (both initial and ongoing) must be disclosed upfront
and this must then be broken down into the portion allocated to
each party in the value chain.
2.2.2 The same principles of disclosure apply to reporting after the
investor has transacted. The entities in the value chain need to be
identified, including any fee-sharing arrangements, and at this
stage, the actual rand-value charges need to be reflected for both
initial and ongoing charges. This disclosure must be made in
periodic (not less frequent than annual) statements of account.
2.2.3 Fee “rebates” passed between collective investment scheme
management companies and administrative and discretionary FSPs
(and “ordinary” Category I FSP’s in certain cases) should be clearly
defined and transparently disclosed – by the party making the
payment in some cases.
2.2.4 Standard definitions, terminology and manner of disclosure should
be prescribed in the case of rebates.
2.2.5 The following additional provisions should be included in the
General Code to address these issues relating to rebates. The
object of this chapter of the Code is to introduce standard
definitions assisting in the disclosure of what are currently generally
known as “rebates” at all levels within the financial services
industry. It identifies who carries the disclosure responsibility for
rebates as well as how they should be described and disclosed.
The purpose is to ensure that clients understand what a rebate is
and how it relates to the financial products in which they invest so
that clients are able to easily compare different product
arrangements that involve rebates. Transparency of disclosure is
to be enhanced.
2.2.5.1
Standard definitions and terminology and manner of
disclosure
2.2.5.1.1
In all mandates, application forms, terms and
conditions of contracts and in any other client
documentation:-
a)
in the case of payments passed through to clients the
following descriptive term must be used:
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A “rebate” is a discount on the administration,
management or any other fee that is passed through
to the client, whether by reduced fees, the purchase
of additional investments or direct payment. Only
discounts that are passed through to clients may be
termed “rebates”.
b)
in the case of payments made to administrative
financial services providers the following descriptive
term must be used:
A “platform fee” is a payment made by a product
supplier to an administrative financial services
provider for the administration and/or distribution
and/or marketing cost savings represented by the
distribution opportunity presented by the platform. It
may be a flat Rand amount or a volume-based
percentage of assets held on the platform.
2.2.5.1.2.
Disclosure of a rebate arrangement must be made
upfront and on an ongoing basis. Disclosure may be
made as a rand or percentage amount. Where
disclosure of a percentage is made, an example using
actual amounts must be given. Thereafter, Rand
disclosure must be made at the earliest reasonable
opportunity.
2.2.5.1.3.
Disclosure of a platform fee arrangement must be
made to the client upfront. It will be adequate to state
that, for example, platform fees of up to a stated
percentage may be made by a product supplier to an
administrative financial services provider should
certain volumes of product be administered on the
platform of the administrative financial services
provider. It will be adequate to state the fact of the
payment, not the actual amount. Or should there
somehow be retrospective disclosure of the actual
amount after it has been earned?
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2.2.5.1.4.
Disclosure of what fees and commissions are to be
received by which party as a result of the client’s
investment, must be made upfront by the payer (even
where acting simply as pay-agent), and by the
receiver. The client must know exactly what fees and
commissions is being or are to be received by all
parties, and what services are to be delivered for
those fees. Mere disclosure of an all-inclusive fee is
not adequate.
2.2.5.1.5.
In the case of performance fees to be earned, the
period over which performance is to be measured
before a performance fee is charged must be stated.
If a performance fee is charged to a client from
inception of the investment, based on past
performance prior to that client’s investment, that
must be stated.
A provider must explain the
benchmark on the attainment of which performance
fees become payable.
2.2.5.1.6.
The above disclosure requirements are to be read
together with any additional disclosure provisions in
this Code.
SECTION 3 - PRODUCT SUPPLIER REGULATION
3.1
Appropriate provisions in respect of conflicts of interest and transparent
disclosure may need to be introduced into product legislation (Long-Term
Insurance Act, Short-Term Insurance Act, Collective Investment Scheme
Control Act and Security Services Act) to cater for those long-term
insurers, management companies of collective investment schemes and
Members of Exchanges that do not fall under the FAIS legislation.
3.2
Other parties in the short-term and long-term insurance value chains, such
as networks, underwriters, claims administrators etc, pension fund
administrators and medical scheme administrators must also be
considered. Further research and consultation will be conducted into this
issue and comment on the matter is invited.
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ANNEXURE A – RELATED SOURCES
1)
Australian Securities & Investment Commission - Managing conflict of
interest [PS 181] – August 2004
2)
Australian Securities & Investment Commission policy proposal - Dollar
disclosure – August 2004
3)
Australian Securities & Investment Commission discussion paper Managing
conflict of interest in the financial services industry –– April 2006
4)
Financial Services Authority UK - Management letter on Conflict of Interest 18 November 2005
5)
Financial Services Authority UK – Conflicts of interest in investment
research – March 2004
6)
National Treasury Discussion paper on contractual savings – 2006
7)
CFA Institute – Soft Dollar Standards – November 2004
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