Financial services delivery models (Part 1)
The differences between financial services and service delivery models
Financial Services, in general, is a term which is used when referring to services rendered within the financial industry, but what exactly constitutes financial services and when are financial services and the services delivery methods regulated by the FSCA?
The FAIS Act defines financial service as:
“any service contemplated in paragraph (a), (b) or (c) of the definition of “financial services provider”, including any category of such services;
A financial services provider means any person, other than a representative, who as a regular feature of the business of such person -
(a) furnishes advice; or
(b) furnishes advice and renders any intermediary service; or
(c) renders an intermediary service.
So to summarize, financial services can, therefore, refer to advice, intermediary services or both.
What constitutes advice?
In terms of Section 1 of the FAIS Act, advice is defined as:
“any recommendation, guidance or proposal of a financial nature furnished, by any means or medium, to any client or group of clients -
in respect of the purchase of any financial product; or
in respect of the investment in any financial product; or
on the conclusion of any other transaction, including a loan or cession, aimed at the incurring of any liability or the acquisition of any right or benefit in respect of any financial product; or
on the variation of any term or condition applying to a financial product, on the replacement of any such product, or on the termination of any purchase of or investment in any such product, and irrespective of whether or not such advice:
is furnished in the course of or incidental to financial planning in connection with the affairs of the client; or
results in any such purchase, investment, transaction, variation, replacement or termination, as the case may be, being affected;
The golden thread in the definition of advice is that advice should be in relation to a financial product as defined by the Act The Act excludes the following actions as advice for the purpose of the FAIS Act namely:
1) "Factual advice given on:
the procedure for entering into a transaction in respect of any financial product;
the description or objective information of a financial product;
in answer to routine administrative queries; or
by the display or distribution of promotional material;
2) An analysis or report on a financial product without any express or implied recommendation,
guidance or proposal that any particular transaction in respect of the product is appropriate to the particular investment objectives, financial situation or particular needs of a client.
3) advice given by -
the board of management, or any board member, of any pension fund organisation or friendly society the members of the organisation or society on benefits enjoyed or to be enjoyed by such members; or
the board of trustees of any medical scheme , or any board member, to the members of the medical scheme, on health care benefits enjoyed or to be enjoyed by such members; or
4) any other advisory activity exempted from the provisions of this Act by the Authority "
What constitutes intermediary services?
The FAIS act defines intermediary service as “any act other than the furnishing of advice, performed by a person for or on behalf of a client or product supplier -
the result of which is that a client may enter into, offers to enter into or enters into any transaction in respect of a financial product with a product supplier; or
with a view to -
buying, selling or otherwise dealing in (whether on a discretionary or non-discretionary basis), managing, administering, keeping in safe custody, maintaining or servicing a financial product purchased by a client from a product supplier or in which the client has invested;
collecting or accounting for premiums or other money payable by the client to a product supplier in respect of a financial product; or
receiving, submitting or processing the claims of a client against a product supplier;
According to the FAIS Act Intermediary services does not include the following:
1) "The rendering by a bank, mutual bank or co-operative bank of a service of collecting or
accounting for premiums or other moneys payable by the client in respect of a financial product
contemplated in where the bank, mutual bank or co-operative bank acts merely as a conduit
between a client and another product supplier;
2) an intermediary service rendered by a product supplier -
who is authorised under a particular law to conduct business as a financial institution and where the rendering of such service is regulated by or under such law;
3) any other service exempted from the provisions of this Act by the Authority."
Financial services which fall within the definitions stated above are regulated by the FAIS Act and thus the FSCA and any person who wants to perform a service defined above will be required to apply for a license to do so.
Financial service providers are divided into the following categories of financial service providers and are licensed accordingly:
Category I FSP is an FSP who may be authorised for advice and intermediary services in relation to financial products only.
Category II FSP is a discretionary FSP. This category FSP render intermediary services of a discretionary nature as regards the choice of a particular financial product( such as Long-term
Insurance, Pension Fund benefits, Securities and debentures, Forex investments, deposits and participatory interests in CIS and CIS Hedgefund), but without implementing any bulking;
Category IIA FSP is a hedge fund FSP. This category FSPs renders intermediary services of a discretionary nature in relation to a particular hedge fund or fund of hedge funds in connection
with a particular financial product.
Category III FSP is an administrative FSP that renders intermediary services in respect of financial products on the instructions of a client or another FSP and through the method of bulking
Category IV FSP is an assistance business FSP refers to a person that performs the administration of assistance policies and includes a person who is a binder holder as defined in the Regulations under the Long-term Insurance Act, where such administration is performed by that binder Holder.
In some instances it may not be clear whether the “financial services-type” rendered falls within the ambit of the FAIS Act, it is thus important to obtain professional advice or come into contact the FSCA before rendering financial services.
In part 2 of our discussion we shall have a closer look at some of the ways financial services may be rendered namely direct marketing, automated advice and execution of sales.