Page 85 - Profile's Unit Trusts & Collective Investments - March 2026

Legislation and guidelines 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 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).

Judge Nel went on to say that “...intermediaries are
able to practice without being required to demonstrate FSPs, FSPRs and KIs
qualifications, skills or adherence to ethics”. The FAIS
Act, which became law in 2002, an attempt to correct Under the FAIS Act, financial service
these deficiencies in SA’s regulatory system. providers (FSPs) must comply with
many rules. What is an FSP? The
The legislation covers any one who offers advice on FAIS Act uses the term to cover both individuals and
a financial product or provides an intermediary service. large organisations – an FSP can be an independent
This means the Act requires all advisers and product financial adviser (IFA) who works alone or a company
providers to be licensed. Under FAIS, advisers have that employs hundreds of people.
to meet entry level qualifications and must adhere to a
code of conduct. It also defines the duties of investment Different requirements and levels of registration
advisers, procedures to enforce rules, and rules to deal apply in each case. Where the FSP is an organisation,
with misconduct. an financial service provider representative (FSPR)
is a representative who deals with clients and a
FAIS Act overview key individual (KI) is a person with management or
The FAIS Act seeks to license and regulate financial “oversight” responsibilities. An IFA who flies solo is
intermediaries in order to ensure they provide a high level an independent FSP who must also comply with KI
of advice and service for consumers and investors. The requirements.
FAIS Act introduced a level of professionalism to financial Most brokers and agents in the field are FSPRs.
and investment advice, and ensures that financial service Exempted from FAIS regulations are people doing
providers (FSPs) and their representatives (FSPRs) clerical and administrative work for an FSP, provided
have adequate knowledge and skills. they don’t give advice and only do work which “does
The Act requires all FSPs and FSPRs to meet not lead a client to a specific transaction”.
certain standards (the Fit and Proper Requirements)
in terms of knowledge, skills and ethics in order to be licensed. The Act 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.
The FAIS Act makes it illegal for any person to act as an FSP unless that person has been granted
a licence. 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.
The definition of “advice” under the FAIS Act is very broad, and includes advice about almost any
financial or investment activity. Even if advice is incidental to financial planning, and even if it does
not result in a transaction, it falls under the auspices of the Act. The FAIS Act seeks to ensure that
anyone giving any kind of financial advice in a professional capacity is subject to its rules.

Fit and Proper Requirements
The Fit and Proper Requirements apply to both financial services providers and representatives.
In terms of the FAIS Act, no person may act as an FSP unless licensed to do so in terms of Section
8 of the Act. In order to licence a person, the FSCA must be satisfied that applicants satisfy the
requirements for “fit and proper” FSPs.
There are three main requirements of fit and proper:
R Personal characteristics of honesty and integrity

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