Page 88 - Profiles's Unit Trusts & Collective Investments - September 2024

CHAPTER 5

Soft Commissions
Soft commissions are rebates paid to LISPs by fund managers in return for their funds being
listed on that LISP platform. These ‘softings’, as they are called, which typically range
between 20 and 50 basis points, were in the past not disclosed to investors. This has
changed under FAIS, because if any part of the rebate is being paid as soft commission, the advisor is
obliged to disclose this to the client. The rationale, of course, is that the advisor’s choice of product
may be influenced by soft commissions to the detriment of good advice. Another reason softings are
controversial is because they result in certain LISPs not offering the best unit trusts available (ie,
because certain funds refuse to pay the rebates demanded by the LISPs).

The hard-hitting remarks made by Judge Hendrik
FSPs, FSPRs and KIs Nel in an assessment of the draft Financial Advisors
Bill gives some indication of public perception of
Under the FAIS Act, Financial
Services Providers (FSPs) must agents and brokers in past decades. “Most South
comply with many rules. What is an African financial advisors cannot distinguish
FSP? FAIS uses the term to cover both between a prospectus and marketing information,
individuals and large organisations – an FSP can are unaware of the legal requirements relating to a
be an independent financial advisor (IFA) who prospectus, cannot read or understand financial
works alone or a company that employs statements, are unable to assess institutional risk,
hundreds of people. and are unlikely to make intelligent inquiries about
Different requirements and levels of registration the nature of the security underlying secured
apply in each case. Where the FSP is an debentures,” he said.
organisation, an Financial Services Provider Judge Nel, who led the commission into the
Representative (FSPR) is a representative who deals failure of investor protection after the collapse of the
with clients and a Key Individual (KI) is a person with
management or “oversight” responsibilities. An IFA property debenture scheme Masterbond in the
who flies solo is an independent FSP who must also 1990s, went on to say that “...intermediaries are able
comply with KI requirements. to practice without being required to demonstrate
qualifications, skills or adherence to ethics”. FAIS
Most brokers and agents in the field are FSPRs.
Exempted from FAIS regulations are people doing was an attempt to correct these deficiencies in SA’s
clerical and administrative work foranFSP,provided regulatory system.
they don’t give advice and only do work which The FSCA’s policy board issued its first
“does not lead a client to a specific transaction”. consultative paper on the regulation of the retail
industry in August 1996. The Financial Advisors Bill
was drafted and released for industry comment in May 1999, and a revised draft was released in
September. The legislation finally became law as the FAIS Act in 2002.
The legislation covers all those who do not deal directly with the investment of money, but who
offer their advice. The Act requires investment advisors to be licenced. Under FAIS, advisors have
to meet entry level qualifications and must adhere to a code of conduct. It also defines the duties of
investment advisors, procedures to enforce rules, and rules to deal with misconduct.
FAIS Overview
FAIS seeks to license and regulate financial intermediaries in order to ensure the highest level
of advice and service for consumers and investors. FAIS brought a level of professionalism to the
business of financial and investment broking, and ensures that financial services providers (FSPs)
and representatives (FSPRs) have adequate knowledge and skills.
The Act determines that all FSPs and FSPRs must meet certain standards (the Fit and Proper
requirements) in terms of knowledge, skills and ethics in order to be licensed by an industry body.
FAIS also requires the appointment of compliance officers by FSPs, who must ensure that
organisations comply with the FAIS Act, and an Ombud, who provides a formal mechanism for dealing
with complaints.
FAIS makes it illegal for any person to act as an FSP unless that person has been granted a
license. An FSP, among other things, is any person who gives advice on financial matters and/or
provides an intermediary service as part of his or her regular business.

86 Profile’s Unit Trusts & Collective Investments — Understanding Unit Trusts