Page 88 - Profile's Unit Trusts & Collective Investments - March 2025

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 adviser is
obliged to disclose this to the client. The rationale, of course, is that the adviser’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 public's pereception of agents and brokers
FSPs, FSPRs and KIs before the FAIS Act was promulgated were summed
up by the judge who led the commision into the
Under the FAIS Act, Financial
Services Providers (FSPs) must failure of investor protection after the collapse of the
comply with many rules. What is an property debenture scheme Master. In hard-hitting
FSP? FAIS uses the term to cover both remarks assessing the need for the legislation in an
individuals and large organisations – an FSP can early draft of the FAIS Act, Judge Hendrik Nel said:
be an independent financial adviser (IFA) who “Most South African financial advisers cannot
works alone or a company that employs distinguish between a prospectus and marketing
hundreds of people. information, are unaware of the legal requirements
Different requirements and levels of registration relating to a prospectus, cannot read or understand
apply in each case. Where the FSP is an financial statements, are unable to assess
organisation, an Financial Services Provider institutional risk, and are unlikely to make intelligent
Representative (FSPR) is a representative who deals inquiries about the nature of the security underlying
with clients and a Key Individual (KI) is a person with secured debentures”.
management or “oversight” responsibilities. An IFA
who flies solo is an independent FSP who must also Judge Nel went on to say that “...intermediaries
comply with KI requirements. are able to practice without being required to
demonstrate qualifications, skills or adherence to
Most brokers and agents in the field are FSPRs.
Exempted from FAIS regulations are people doing ethics”. FAIS was an attempt to correct these
clerical and administrative work foranFSP,provided deficiencies in SA’s regulatory system.
they don’t give advice and only do work which The Financial advisers Bill was drafted and
“does not lead a client to a specific transaction”. 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 any one who offers advice on a financial product or provides an
intermediary service. This means the Act requires all advisers and product providers to be licenced.
Under FAIS, advisers have to meet entry level qualifications and must adhere to a code of conduct.
It also defines the duties of investment advisers, procedures to enforce rules, and rules to deal with
misconduct.
FAIS Overview
FAIS seeks to license and regulate financial intermediaries in order to ensure they provide a
high level of advice and service for consumers and investors. FAIS introduced a level of
professionalism to financial and investment advice, and ensures that financial services providers
(FSPs) and their representatives (FSPRs) have adequate knowledge and skills.
The Act requires all FSPs and FSPRs to meet certain standards (the Fit and Proper requirements)
in terms of knowledge, skills and ethics in order to be licensed. FAIS also requires FSPs to appoint
compliance officers, who must ensure that organisations comply with the FAIS Act. It also establishes
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