Financial Soundness – at all times
By Alan Holton
At a recent meeting between senior officials of the FAIS Division of the FSB and a committee of industry members, Ms Lorraine van Deventer expressed the concern that many FSPs still do not fully appreciate the financial soundness requirements that were imposed in the Fit and Proper Requirements contained in Board Notice 106 of 2008.
In terms of S 9 of this Board Notice, the assets of every FSP must exceed such FSPs liabilities. The problem arises in that the specific requirement expressly excludes certain assets and certain liabilities from the calculation.
In calculating the effect of this requirement, all goodwill, intangible assets, investments in and loans to related parties and investments with, or loans to, persons to whom the FSP renders financial services, must be excluded from the total assets. Liabilities may be reduced by excluding any loans due by the FSP but have been subordinated in favour of other creditors.
Accountants who are required to certify the solvency of an entity often are not aware of these particular exclusions and hence do not take the exclusions into account. And so, as happens fairly frequently, accountants of FSPs who are unaware of these specific requirements, provide their clients with technically incorrect confirmation concerning their financial soundness as required by Board Notice 106 of 2008.
There is another requirement regarding financial soundness that is also often overlooked.
Any Category I FSP that holds client assets or receive premiums or money and every Category II and Category IV FSP must comply with these requirements at all times. This specific requirement has not expressly been imposed on Category I FSP who do not hold client assets or receive premiums or money. The implications are that FSPs that fall within this definition must have procedures in place to ensure that these requirements are met at all times.
All FSPs are, in terms of s 19 (1)(a) of the FAIS Act, 2002 required to maintain full and proper accounting records on a continual basis, brought up to date monthly. It would seem appropriate therefore, for Category I FSP that holds client assets or receive premiums or money and all Category II and Category IV FSP’s to actually record in writing their calculations, based on the monthly accounts, proving their ongoing compliance with this requirement.
These particular FSPs are also required to hold liquid assets equal to varying percentages of annual expenditure. Again, when recording compliance with this requirement, it was recommended by the FAIS officials that the type and nature of the liquid assets held by the FSP be recorded so as to be able to demonstrate at all times that this requirement had been met. In this regard, special attention must be given to the definition of “liquid assets” in Board Notice 106 of 2008.
Once the proposed Revised Fit and Proper Requirements are finalised and Board Notice 106 of 2008 repealed, these requirements will still apply. There will however be additional requirements that have to be met and these new requirements will be dealt with once the revised Fit and Proper Requirements have become effective.
Alan Holton is a director of Compliance Monitoring Systems cc and an associate of Moonstone Compliance.
Paul Kruger: Moonstone Compliance (Pty) Ltd
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