How the FAIS Act protects you

The Financial Advisory and Intermediary Services (FAIS) Act became fully effective on Thursday, September 30, 2004.

The FAIS Act, for the first time, gives you protection against poor advice, and will help prevent scam operators selling you a financial product.

In terms of the Act, anyone or any institution selling a financial product or giving you financial advice for a fee or commission must, in dealing with you, meet certain minimum requirements; behave honourably, professionally and with due diligence; provide you with appropriate advice; and are subject to disciplinary procedures if they do not adhere to the FAIS Act.

The legislation, however, does not mean that people with ill-intent will not try to con you. You still have an obligation to protect yourself, and to ensure that the person or institution giving you advice or selling you a financial product is properly licensed and behaves according to the law.

The regulator of the FAIS Act, the Financial Services Board, and Personal Finance have teamed up to explain to you exactly what you must do to protect yourself and ensure you are receiving advice and financial products that are appropriate for your needs. Here is your FAIS Act checklist.

1. WHO DOES THE FAIS ACT REGULATE?

The FAIS Act regulates financial service providers and the representatives of financial service providers selling a wide range of financial products.

In a nutshell, a financial service provider (FSP) is any person or organisation that provides you with financial advice or what are called intermediary services, which includes selling you a financial product.

An FSP can be an individual, such as an independent financial adviser, selling the products of many financial service companies, or an FSP representative. An FSP representative is employed by a company, such as a life assurance company, as an agent.

The objective of registering an FSP is to ensure that the people who are providing the public with inappropriate advice or who are selling fraudulent products, such as Jack Milne's PSC Guaranteed Growth Fund, are kept out of the financial services industry.

2. KNOW YOUR FINANCIAL ADVISER

Before you do business with any financial service provider (FSP), they must provide you with essential information about themselves. This information includes:

Name and address

FSPs or FSP representatives must give you their full business and trade names, licence registration number, postal and physical addresses, telephone and cellphone numbers, and internet and email addresses, as well as the names and details of other people or branch offices you can contact if you need further information.

Properly licensed

All FSPs and FSP representatives must be licensed by the Financial Services Board (FSB).

An FSP can be an individual or an institution, such as a life assurance company. If the FSP is an independent financial adviser, he or she must be licensed directly with the FSB.

If the FSP works as an agent (representative) of a larger company - say, a life assurance company or a bank brokerage company - that company must be licensed as an FSP.

The institution that employs a representative must ensure that the representative meets all the requirements of the FAIS Act. Anyone providing advice or intermediary services must have a licence from the FSB. They must show you this certificate. You can (and should) double-check with the FSB whether the person has a licence.

If you are dealing with an FSP representative, you can (and should) check with the company that the representative is, in fact, employed by that company and is entitled to sell you its products. FSPs are obliged to ensure that their representatives are in possession of documentation providing these details. You can also check with the FSB whether or not the FSP representative is registered.

In order to be registered by the FSB, an FSP must meet a number of minimum requirements. These requirements include:

- Honesty and integrity. The FSB will not register an FSP if, in the five years preceding his or her application, the FSP has, among other things:

* Been found guilty of a criminal offence where the person has been involved in fraud, dishonesty, been dishonourable or in breach of a fiduciary duty;

* Been found guilty by any professional or financial services industry body of an act of dishonesty, negligence, incompetence or mismanagement, sufficiently serious to impugn the honesty and integrity of the applicant;

* Been denied membership of any body on account of an act of dishonesty, negligence, incompetence or mismanagement, sufficiently serious to impugn the honesty and integrity of the applicant;

* Been found guilty by any regulatory or supervisory body (recognised by the FSB) and, as a result, had authorisation to carry on business refused, suspended or withdrawn because of dishonesty, negligence, incompetence or mismanagement, sufficiently serious to impugn the honesty and integrity of the applicant;

* Had any licence granted by any regulatory or supervisory body suspended or withdrawn by such body on account of an act of dishonesty, negligence, incompetence or mismanagement, sufficiently serious to impugn the honesty and integrity of the applicant.

No one will be given a licence if he or she has, at any time, been disqualified or prohibited by any court of law from taking part in the management of any company or regulated body, irrespective whether or not the disqualification has since been lifted.

- Competency. The FAIS Act sets minimum qualifications and experience that people who give advice about different types of products must meet. These qualifications are the minimum and will be raised over the next two to three years. If financial advisers do not achieve the qualifications as they are raised, they will lose their licences.

Minimum qualifications have been set for a wide range of financial services, from collective investments (unit trusts) to retirement products to life assurance (with three different levels) to investments. You must take note of the minimum qualifications and assess for yourself whether you believe an FSP is sufficiently competent to handle your financial affairs.

- Financial soundness. A licence will not be issued to anyone or any institution:

* Who is an unrehabilitated insolvent or under liquidation or provisional liquidation; or

* Whose liabilities exceed their assets if they receive your money or as intermediaries have any discretion over your investments.

Contractual details

An FSP or an FSP representative must give you, in writing, concise details of their legal and contractual status, including details about what financial services they are permitted to provide and which company or companies they represent. These details must be provided in such a way that you can understand which entity accepts responsibility for the actions of the FSP or an FSP representative.

They should also spell out the extent to which you will have to accept responsibility for any decisions you make or information you provide.

Who is checking up

FSPs or FSP representatives must give you, in writing, the names and contact details of the compliance department that ensures they adhere to the FAIS Act. The compliance department will be your first port of call should you have a complaint against an FSP.

Insurance cover

An FSP or an FSP representative must tell you, in writing, whether the FSP holds guarantees or professional indemnity or fidelity insurance cover. This is to ensure that the FSP can meet any financial obligation to you if something goes wrong.

Any exemption

An FSP or an FSP representative must tell you, in writing, about any exemption to the FAIS Act he or she may have been granted.

3. STANDARDS YOU SHOULD EXPECT FROM YOUR ADVISER

A financial service provider (FSP) or an FSP representative must always provide you with financial services honestly and fairly, done with due skill, care and diligence. This service must be in your interests, and uphold the integrity of the financial services industry. This means:

- Any advice or information you receive must:

* Be factually correct;

* Be presented in understandable language, avoiding uncertainty or confusion and not be misleading;

* Be adequate and appropriate to the particular financial service the FSP is providing, taking into account your level of knowledge;

* Be provided timeously so you have reasonably sufficient time to make an informed decision about any proposed transaction; and

* Be provided with full details, in monetary terms, of all amounts, sums, values, charges, fees, remuneration or monetary obligations involved and payable to the product supplier or the FSP or the FSP representative.

If the figure is not reasonably pre-determinable, the basis on which it is calculated must be described to you.

All this advice or information may be provided orally and, at your request, confirmed in writing.

When you ask for advice or information in writing (which you should do for your own protection), the information must be presented in a clear and readable print size, spacing and format. The advice or information does not have to be repeated to you every time you are given advice by your FSP, unless there are material or significant changes or the relevant financial service makes it necessary.

- FSPs or FSP representatives must tell you about any interests they have in a product or service, including:

* The existence of any personal interest they have in any service you receive (such as if they will receive commissions and/or fees), or of any circumstance which gives rise to an actual or potential conflict of interest in giving you any service.

If they are in a position where their interests conflict with yours, they must take all reasonable steps to ensure you receive fair treatment.

* The non-cash incentives, such as luxury foreign trips or invitations to rugby test matches, they may be offered by another FSP, a product supplier or any other person.

The FAIS Act's Code of Conduct hints that these incentives may be considered unacceptable, because they could be viewed as a potential conflict of interest.

- Any service you receive from an FSP or FSP representative must be in terms of a contractual relationship with you and on your reasonable request or instructions. The service must be provided as soon as reasonably possible in your interests, and your interests must be given priority over the interests of the FSP.

- An FSP must keep proper records of any transactions conducted for you.

- An FSP or FSP representative is not allowed to deal in any financial product for his or her own benefit, account or interest where such a transaction is based upon advance knowledge of pending transactions with you or anyone else, or on any non-public information which could be expected to affect a product's price.

- An FSP must have procedures and systems in place to:

* Record any verbal and/or written communications you receive. Records must be kept for five years after the termination of any product involved or after you have received advice.

* Store (and, on request, retrieve) the records and any other documentation involving you.

- An FSP is not allowed to disclose any confidential information about you to anyone else unless you give your written consent, or if disclosure of the information is required in the public interest or under any law.

4. STANDARDS OF ADVICE

The directives to your financial service provider (FSP) concerning the standard of advice that he or she must provide are probably the most important aspects of the FAIS Act.

The directives stipulate that the advice must be appropriate to your personal circumstances and that your FSP must follow a proper procedure to ensure that the advice he or she provides is in your best interests.

But there are also obligations on you to co-operate fully with your FSP to ensure that you do get the best advice.

Among other things, your FSP must:

- Take reasonable steps to obtain from you appropriate and available information regarding your financial situation, your experience with financial products to establish how financially astute you are, and your financial objectives to ensure you are provided with appropriate advice.

- Analyse the information obtained from you.

- Identify the financial product or products that will be appropriate to your risk profile and your financial needs, and give you a reasonable and appropriate general explanation of the nature and material terms of the product, and give you any information that will enable you to make an informed decision.

The product information that your FSP must give you includes:

* The name, class or type of financial product concerned; and

* The nature and extent of the benefits to be provided, including details of the manner in which such benefits are derived or calculated, and the manner in which they will accrue or be paid.

- Provide you with additional details when you receive advice on a

financial investment product or a product which has an investment component. This information includes:

* Concise details of how the value of the investment is determined, including details of any underlying assets or other financial instruments.

* Disclosure of any charges and fees to be levied against the product, including the amount and frequency of the charges. Where the product entails other underlying financial products, you must be told the net investment amount ultimately invested for your benefit.

* At your request, provide information about the past investment performance over periods and at intervals which are reasonable, including a warning that past performances are not necessarily indicative of future performances.

- Provide you with information about the nature and extent of monetary obligations you assume, directly or indirectly, in favour of a product supplier, including the manner and frequency of payments, the consequences of non-compliance and, any anticipated or contractual escalations, increases or additions that you must meet.

- Provide you with concise details of any special terms or conditions of any product, including:

* Exclusions of liability, waiting periods, loadings, penalties, excesses, restrictions or circumstances in which benefits will not be provided;

* Any guaranteed minimum benefits or other guarantees;

* The extent to which the product is readily realisable or the funds involved are accessible to you;

* Any restrictions on, or penalties for early termination of, or withdrawal from, the product;

* Any material tax considerations;

* Whether cooling-off rights are offered, allowing you to cancel your purchase of a product, and what the cooling-off procedures are;

* Any investment or other risks associated with the product; and

* In the case of an insurance product that provides for an increase of premiums, the amount of the increased premium for the first five years and thereafter on a five-year basis, but not exceeding 20 years.

- Fully inform you about any transaction requirement you need to complete or submit, including:

* All material facts that you must disclose accurately and properly, together with a warning that the accuracy and completeness of all answers, statements or other information provided by, or on your behalf, are your responsibility.

* That if you permit your FSP to complete or submit any transaction requirement on your behalf, you must make sure the details are accurate and complete. (Your FSP is not allowed to let you sign any written or printed form or document unless all details have been filled in by you or have been completed on your behalf by your FSP.)

* The possible consequences of the misrepresentation or non-disclosure of a material fact or the inclusion of incorrect information.

- Disclose to you the full consequences of replacing an existing financial product you have with another. This must include:

* The fees and charges of the replacement product;

* Any special terms and conditions, exclusions of liability, waiting periods, loadings, penalties, excesses, restrictions or circumstances in which benefits will not be provided;

* In the case of an insurance product, the impact of age and health changes on the premium payable;

* The tax implications of the replacement product and the terminated product;

* Material differences between the investment risk of the replacement product and the terminated product;

* Penalties or unrecovered expenses deductible or payable due to termination of the terminated product;

* To what extent the replacement product is readily realisable or the relevant funds accessible, compared to the terminated product; and

* Vested rights, minimum guaranteed benefits or other guarantees or benefits which will be lost as a result of the replacement.

- Take reasonable steps to ensure you understand the advice and are in a position to make an informed decision.

- Must ensure you understand the consequences of not providing all information requested by your FSP to enable your FSP to provide you with appropriate advice; and warn you when to take particular care.

Also, if you conclude a transaction that differs from the recommendation of your FSP, or you decide not to follow the advice of your FSP, or decide to receive more limited information or advice than your FSP is able to provide, then your FSP must alert you to the existence of any risk to you and advise you to take particular care.

- Must keep a record of the advice given to you. This enables both you and your FSP to provide proof in case of any future dispute. You must also be provided with a written record of the advice. The record must include:

* A brief summary of the information and material on which the advice was based;

* The financial products which were considered; and

* The financial product or products recommended, with an explanation of why the product or products were selected, and why the product or products are likely to satisfy your identified financial needs and objectives.

5. WHAT A PRODUCT PROVIDER MUST TELL YOU

When you buy a financial product, your financial service provider (FSP) must provide you with details of both the product supplier and the product. These details must be confirmed in writing within 30 days. This enables you to check that you are getting what you were sold. The information you must be given includes:

- The name, physical and postal addresses, and the telephone numbers of the product supplier.

- The nature of the contractual relationship (if any) between your FSP and the product supplier, and whether or not your FSP has contractual relationships with other product suppliers.

- The contact details of the product supplier's compliance and complaint department, as these will be your first port of call in the event of a complaint.

- Any conditions or restrictions imposed by the product supplier with regard to the types of financial products or services that may be provided or rendered by your FSP. This includes a declaration to you when your FSP:

* Directly or indirectly holds more than 10 percent of the shares of the product supplier, or has any equivalent substantial financial interest in the product supplier; and

* Has, during the preceding 12-month period, received more than 30 percent of his or her total remuneration, including commission, from the product supplier.

In terms of the FAIS Act, your FSP must exercise judgment objectively in your interests.

Your FSP may not compare different financial products, product suppliers, providers or representatives, unless the differing characteristics of each are made clear.

Your FSP may not make inaccurate, unfair or unsubstantiated criticisms of any financial product, product supplier, provider or representative.

WHAT YOU SHOULD KNOW ABOUT DIRECT SALES

A financial services company that sells its products directly to you, whether by advertisements or cold-calling, is considered to be a financial service provider (FSP) and as such it is subject to the FAIS Act and must be licensed.

There are special conditions that apply to direct selling by an FSP. These include:

The FAIS Act places significant restrictions on advertisements to prevent you from being misled. Advertisements must:

- Not contain any statement, promise or forecast which is fraudulent, untrue or misleading.

- Include supporting basic assumptions that have a reasonable chance of being met if they contain performance data (including awards and rankings), illustrations, forecasts or hypothetical data.

Rankings and awards must include references to their source and date, and the information must state that performance is not guaranteed and are provided for illustrative purposes only.

Where returns or benefits are dependent on the performance of underlying assets or other variable market factors, there must be a clear indication of the dependence.

- Have a warning statement about risks involved in buying or selling a financial product; and information about past investment performance, including a warning that past performances are not necessarily indicative of future performances.

- Contain a warning if no guarantees are provided.

- In the case of a radio advertisement, the advert must include the business name of the FSP.

Telephone calls

When an FSP advertises a financial service by telephone, it must:

- Voice record the call.

- Provide a copy of the offer at your request or the request of the Financial Services Board within seven days of the request.

- Provide you with basic details such as the FSP's business name, its telephone number or address and the same details of its compliance department. If the direct selling results in a sale, you must be given full details in writing within 30 days of the transaction.

Obligations of a direct marketer

When a direct marketer provides you with a financial service, it must give you the following particulars:

- Its business or trade name, its telephone contact details and the telephone contact details of its compliance department in case you have a problem.

- Confirm that it is a licensed FSP with details of the financial services it is authorised to provide.

- Disclose whether it holds professional and indemnity insurance.

- Make enquiries to establish whether the financial product or products concerned will be appropriate for you, taking account of your risk profile, financial needs, and circumstances.

- The business or trade name of the product supplier, its relationship with product supplier, and details about any product on which you receive advice. The details that must be provided are generally the same as required for your FSP (Step 4).

- Records must be kept of any dealings with you. The records need not be put in writing, but a copy of the voicelogged records must be provided to you on your request.

6. CHANGING YOUR FINANCIAL ADVISER

A financial service provider (FSP) must, subject to any existing contractual obligations with you, give immediate effect to a request from you to end any agreement with the FSP or relating to a financial product or advice.

If you make a request to terminate an existing contract with an FSP on the advice of another FSP, the new FSP must take reasonable steps to ensure that you fully understand all the implications of the termination.

If an FSP, apart from an FSP representative, stops business operations, you must be told immediately.

Your FSP must take reasonable steps to consult you and your product suppliers about the consequences of him, her or it ceasing to operate, to ensure that any outstanding business is completed promptly or transferred to another provider.

When an FSP representative ceases to represent a company, the FSP must immediately take reasonable steps to notify you and ensure that outstanding business is completed or transferred to the company or another representative.

10 questions to ask your financial adviser

1. Are you registered with the Financial Services Board as a Financial Service Provider (FSP)?

2. Are you an FSP representative?

3. Do you have indemnity insurance?

4. Which company's products are you licensed to sell?

5. What products are you licensed to sell?

6. What are your qualifications?

7. Will you do a financial needs analysis for me?

8. Will you provide me with my risk profile?

9. How will you be paid and how much? What other incentives do you receive?

10. How often will I see you?

Your rights

A financial service provider (FSP) may not request or induce you in any manner to waive any right or benefit you have in terms of the FAIS Act, nor can an FSP recognise, accept or act on any such waiver by you. Any such waiver is null and void in terms of the FAIS Act.

HOW TO COMPLAIN TO THE OMBUD

If you receive inappropriate advice or your financial service provider (FSP) or FSP representative has not followed the proper procedures, you are entitled to complain to the Ombud for Financial Service Providers, Charles Pillai.

However, before you may complain to the Ombud, you and your FSP must follow a procedure:

- You must complain to your FSP in writing if possible. Your FSP must handle your complaint in a timely and fair manner, which includes taking steps to investigate and respond promptly to your complaint. You are entitled to be told about the procedures that will be followed to resolve your complaint.

- If your complaint is not resolved to your satisfaction, your FSP must:

* Give you full reasons, in writing, for rejecting the complaint; and

* Advise you of any further steps you may take in terms of the FAIS Act or any other law to resolve your complaint. This includes informing you that you have six months within which to take your complaint to the Ombud. You must be provided with the Ombud's name and how to contact him or her.

When an FSP resolves a complaint in your favour, the FSP must ensure that a full and appropriate level of redress is offered to you without delay. The FAIS Act does not provide guidelines as to what the redress should be. However, if you are not happy with the redress, your original complaint still pertains.

You may take your complaint to the Ombud for FSPs if:

- The act about which you are complaining occurred on or after October 1, 2004.

- You have written proof of your complaint.

- Your FSP does not respond to your complaint within six weeks.

- Your FSP has not resolved your complaint to your satisfaction and you have a letter from your FSP rejecting your complaint.

- You have not taken separate legal action.

- The six-month period in which you may complain to the Ombud has not expired. The six months runs from two weeks after your FSP failed to resolve your complaint or six weeks after you complained to your FSP and did not receive a response.

- The amount involved in the complaint does not exceed R800 000, except where you are prepared to forego any claim for any amount over R800 000 or the FSP agrees that the Ombud can adjudicate on a larger amount.

A determination by the Ombud has is legally binding.

If a party to the complaint does not perform in terms of a determination, a judgment can be entered against the FSP's name and a warrant of execution can be issued.

The Ombud can award compensation to you.

The FAIS Act allows the Ombud to share information provided in adjudicating a complaint with the FSB, which could result in an FSP being deregistered and barred from providing financial or intermediary services.