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

Chapter 5 Legislation and guidelines

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 the FAIS Act, 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 Financial Advisory and
FSPs, FSPRs and KIs
Under the FAIS Act, financial service Intermediary Services (FAIS) Act
providers (FSPs) must comply with Legislation to protect investors from bad investment
many rules. What is an FSP? The advisers was first mooted in the early 1990s. Before
FAIS Act uses the term to cover both individuals and the implementation of the FAIS Act, only investment
large organisations – an FSP can be an independent managers – people who actually invested money on
financial adviser (IFA) who works alone or a company behalf of their clients – had to be registered with the
that employs hundreds of people. FSCA, and gaps in legislation made it possible for
Different requirements and levels of registration virtually anybody to set up shop as an adviser and begin
giving advice. Due to the absence of a coherent body of
apply in each case. Where the FSP is an organisation, law, recourse in the event of disastrous advice often had
an financial service provider representative (FSPR) to be made in terms of common law, which proved costly
is a representative who deals with clients and a and ineffective.
key individual (KI) is a person with management or
“oversight” responsibilities. An IFA who flies solo is The public’s pereception of agents and brokers before
an independent FSP who must also comply with KI the FAIS Act was promulgated were summed up by the
requirements. judge who led the commision into the failure of investor
Most brokers and agents in the field are FSPRs. protection after the collapse of the property debenture
scheme master. In hard-hitting remarks assessing the
Exempted from FAIS regulations are people doing need for the legislation in an early draft of the FAIS Act,
clerical and administrative work for an FSP, provided Judge Hendrik Nel said: “Most South African financial
they don’t give advice and only do work which “does advisers cannot distinguish between a prospectus
not lead a client to a specific transaction”. and marketing information, are unaware of the legal
requirements relating to a prospectus, cannot read or
understand financial statements, are unable to assess institutional risk, and are unlikely to make
intelligent inquiries about the nature of the security underlying secured debentures”.
Judge Nel went on to say that “...intermediaries are able to practice without being required to
demonstrate qualifications, skills or adherence to ethics”. The FAIS Act was an attempt to correct
these deficiencies in SA’s regulatory system.
The Financial Advisers 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 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 Act overview
The FAIS Act seeks to license and regulate financial intermediaries in order to ensure they provide
a high level of advice and service for consumers and investors. The FAIS Act introduced a level
of professionalism to financial and investment advice, and ensures that financial service providers
(FSPs) and their representatives (FSPRs) have adequate knowledge and skills.

86 Profile’s Unit Trusts & Collective Investments September 2025