Financial services delivery models (Part 2)
Differences between direct marketing, automated advice and execution of sales
In part 1 of this series, we had a look at what constitutes financial advice and intermediary services. In today’s article, we shall have a look at some of the ways financial services can be delivered to clients.
The General code of conduct for authorised financial services providers and representatives (GCOC 2003) gives guidelines to all financial services providers and representatives on how to go about when delivering financial services.
For instance, in terms of the Code of conduct a provider must, regardless of the manner in which financial services are delivered, ensure that it “at all times render financial services honestly, fairly, with due skill, care and diligence and in the interest of clients and the integrity of the financial services industry.” In addition to the general requirements, the General Code of Conduct Section 3 describes specific duties for financial services providers which relate to representations made, conflict of interest, disclosures etc.
Each financial services provider and representative should carefully read and understand the obligations of the Code of Good Conduct to ensure that the manner in which services are delivered align with the requirements of the Code of conduct.
The “conventional” manner of rendering financial services are in general to arrange a meeting with a client to discuss his or her financial needs and subsequent ongoing financial services through e-mails, telephone calls or personal consultations to the extent of the arrangement between the parties.
An FSP can now also deliver financial services through one of the following delivery methods namely direct marketing, automated advice and execution of sales, it is however important that the FSP take note of the requirements imposed on financial services providers in relation to their services.
However, before we highlight the regulatory requirements unique to the service delivery methods we shall have a look at the descriptions of each of the service delivery methods.
What is direct marketing?
The General Code of Conduct defines marketing as “the rendering of financial services( advice and/or intermediary services) by way of telephone, internet, media insert, direct mail, or electronic mail, excluding any such means which are advertisements not containing transaction requirements. And a "Direct marketer" means a provider who, in the normal course of business, provides all or the predominant part of the financial services concerned in the form of direct marketing.
What is automated advice?
Board Notice 194 of 2017(“fit and proper determination”) introduced the concept of automated advice and it means “the furnishing of advice through an electronic medium that uses algorithms and technology without the direct involvement of a natural person”.
What is execution of sales?
In terms of the same fit and proper determination, execution of sales means “ an intermediary service performed by a person on an instruction of a client to buy, sell, deal, invest in, replace or vary one or more financial products”
The table below summarizes the differences between these service delivery models or methods:
Automated advice | Execution of sales | Direct marketing | |
The financial service | Advice only | Intermediary services only | Advice and/or intermediary services |
Who renders the service | An electronic medium without the direct involvement of a natural person | Performed by a person on instruction from the client | A direct marketer is a provider and thus an FSP and includes a representative |
The medium of service delivery | An electronic medium that uses algorithms and technology | May be performed in a direct manner or telephonically( subject to additional requirements) | By way of telephone, internet, media insert, direct mail, or electronic mail, excluding any such means which are advertisements not containing transaction requirements. |
Automated advice and execution of sales were introduced in 2018 and an FSP that wish to deliver financial services in such a manner will in some instances be required to apply for an amendment of its licence.
During May 2019 the FSCA published additional guidance in relation to uploading representatives performing execution of sales in terms of a script. The Communication stipulates that an FSP is required to amend its license to reflect that it performs scripted execution of sales and will be required to confirm that it complies with additional regulatory requirements before the license will be amended. Please see herewith the communication for further insight: FAIS Communication 1 of 2019
In part 3 we shall have a look at the regulatory requirements an FSP will be required to adhere to in relation to each of the aforementioned service delivery methods.