LICENSING AND SUPERVISION OF ASSET MANAGERS, LOCAL AND FOREIGN

By Francisco Khoza Friday, June 22, 2012
  • SHARE THIS ARTICLE

Licensing and supervision of asset managers, local and foreign
The regulation and supervision of fund managers in South Africa depends on a variety of factors including the nature of the services they provide, the type of fund structure they manage and the target investors. 
In general, the provision of fund management services is subject to regulation in terms of the Financial Advisory and Intermediary Services Act (“FAIS Act”). However, if the manager manages a collective investment scheme (“CIS”), the provision of that service is exempted from regulation in terms of the FAIS Act as it is subject to regulation in terms of the Collective Investment Schemes Control Act, (“CISCA”). Managers of private equity funds and hedge funds must meet additional requirements if their funds are to qualify as ‘private equity funds’ or ‘hedge funds’ as defined in the investment regulations to which most pension funds are subject.
The FAIS Act
The FAIS Act regulates the provision of financial services. A person may not act or offer to act as a financial services provider unless that person is authorised (‘licensed’) by the registrar of financial services to do so. Any person, whether domiciled in or outside South Africa, may submit an application for authorisation as a financial services provider in South Africa. In essence, although the FAIS Act does not have extra-territorial application it will apply to a foreign financial service provider providing fund management services on a cross border basis into South Africa.
Financial services refer to the provision of ‘advice’ and ‘intermediary services’. 
The term ‘advice’ means any recommendation, guidance or proposal of a financial nature, 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 of any financial product; or 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 or investment in any such product.
The term ‘intermediary services’, on the other hand, refers to 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, 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 is invested.
‘Financial products’, as defined in the FAIS Act, means, among others: securities and instruments (such as shares in a company, debentures and securitized debt; any money market instrument, any warrant, certificates and other instruments acknowledging, conferring or creating rights to subscribe to, acquire, dispose of, or convert the securities and instruments); participatory interest in one or more collective investment scheme; a long-term and short-term insurance contract; benefits by a pension fund; foreign currency denominated investment instrument (including a foreign currency deposit) and any other products similar in nature to the financial products described in this paragraph.
Although a fund manager may provide advice to its clients, in the main a fund manager will provide ‘intermediary services’.
Depending on the nature of the intermediary service to be provided, the fund manager must first one of the following licenses.

Category I, FSP License to provide advice and/or intermediary services on a non-discretionary basis;

Category II, FSP License to provide discretionary investment management services, that is, services of a discretionary nature as regards the choice of a particular financial product;

Category IIA, FSP License to manage a hedge fund. The hedge fund manager will require, in addition, a Category II license;

A private equity fund manager will require either a Category I or a Category II license, depending on whether it formally acts as an advisor to a private equity fund or is responsible for the exercise of investment discretion on behalf of the private equity fund. The SA Venture Capital and Private Equity Association is currently in negotiations with the Financial Services Board with a view to agreeing the conditions for the granting of a new special-purpose Category VI license for private equity fund managers.
Included in the conditions for all financial services provider licenses are ‘ fit and proper’ conditions, that is, conditions relating to competency, experience, continued professional development, operational ability, financial soundness and suchlike.
The Financial Services Board acknowledges that foreign financial services providers that solicit for business or provide financial services in South Africa may be subject to similar regulation and supervision by regulators in their home jurisdictions. Provided that the licensing requirements of the foreign regulator are at a standard that the FSB regards as sufficiently high, foreign financial services providers and their compliance officers may be able to obtain exemptions from compliance with some local ‘fit and proper’ and auditing requirements.
A recent court judgment has confirmed that if a financial services provider does not have the license required for the provision of the financial services it has agreed to provide a client, its agreement with that client is void from the outset.