FINANCIAL ADVISORY AND INTERMEDIARY SERVICES ACT, 2002 (“THE ACT”)

GUIDANCE NOTE: INTERMEDIARY SERVICES AND REPRESENTATIVES

(Revised 12/01/2011)

1. Introduction

The Act aims to ensure that every person who renders financial services to a
client, meets the necessary fit and proper requirements to discharge this
responsibility, whether acting personally or through other persons; and does so in
accordance with the Act and its Codes of Conduct.

2. “Financial Services”

The Act, in section 1 thereof, provides that financial services include:

 the furnishing of advice; or
 the furnishing of advice and the rendering of an intermediary service;
or
 the rendering of an intermediary service.

3. “Intermediary Service”

In the same section of the Act, intermediary service is defined as follows:-

“intermediary service” means, subject to subsection (3)(b), any act other than the
furnishing of advice, performed by a person for or on behalf of a client or product
supplier-
 (a) the result of which is that a client may enter into, offers to enter into or enters
into any transaction in respect of a financial product with a product supplier;
or

(b) with a view to-

(i) buying, selling or otherwise dealing in (whether on a discretionary or
non-discretionary basis), managing, administering, keeping in safe
custody, maintaining or servicing a financial product purchased by a
client from a product supplier or in which the client has invested;
(ii) collecting or accounting for premiums or other moneys payable by the
client to a product supplier in respect of a financial product; or
(iii) receiving, submitting or processing the claims of a client against a
product supplier.”

4. “Representative”

A representative is defined in the Act as follows –

“representative” means any person, including a person employed or mandated by

such first-mentioned person, who renders a financial service to a client for or on
behalf of a financial services provider, in terms of conditions of employment or any
other mandate, but excludes a person rendering clerical, technical,
administrative, legal, accounting or other service in a subsidiary or
subordinate capacity, which service-

(a) does not require judgment on the part of the latter person; or
(b) does not lead a client to any specific transaction in respect of a financial
product in response to general enquiries.”
5. “Advice”

It may be inferred from these definitions that any person who provides advice (as
defined in the Act) to a client for or on behalf of a financial services provider, in
terms of conditions of employment or any other mandate, will always be a
representative of that financial services provider. This is so because the exclusions
set out in the definition of “representative” are clearly not applicable to a person
furnishing advice, as such person will not be rendering a clerical, technical,
administrative, legal, accounting or other service in a subsidiary or subordinate
capacity. In addition, advice will always require judgment on the part of the person
giving advice. It follows that any such person who provides advice, will of necessity
be a representative.

6. Intermediary service (without advice)

The following question has arisen: When will a person be regarded as a

representative for purposes of the Act if that person provides an intermediary
service to a client for or on behalf of a financial services provider, in terms of
conditions of employment or any other mandate, but does NOT provide advice?

To answer this question one must, apart from analysing the definition of
“intermediary service”, take cognisance of the exclusions in the definition of
“representative”. If the intermediary service rendered is a clerical, technical,
administrative, legal, accounting or other service in a subsidiary or subordinate
capacity, and is of the nature set out under paragraphs 4(a) or (b) above, the
person concerned will not be a representative as contemplated by the Act.

The exclusions provided for in the definition of “representative” thus have the effect
of limiting the seemingly wide activities expounded in the definition of “intermediary
 service”, where such service is provided for or on behalf of, and not by, an
authorised financial services provider.

7. Which persons are not representatives?

(a) It is a factual enquiry whether in given circumstances someone acts or has

acted as a “representative” or whether that person falls under the
exclusions provided for in the definition of “representative”.

(b) Such an examination must commence with an interpretation of the words of

the definition beginning from the exclusion until the end of the definition.

(c) Types of services are mentioned there, all qualified by being rendered “in a
subsidiary or subordinate capacity”, and then being further qualified that the
service-
 does not require judgment on the part of the person; or (to be
interpreted disjunctively1)
 does not lead a client to any specific transaction in respect of a financial
product in response to general enquiries.

(d) The legislature’s obvious intention was to prevent too many categories of
persons who, technically, could otherwise be classified as “representatives”
from being so classified.

(e) As stated in the introductory paragraph, the primary objective of the Act was
to ensure that financial services rendered to a client, were so rendered by
persons fit and proper to discharge their responsibility.

1
A disjunctive interpretation of the “or” means that if either one of the exclusions applies a person rendering an
intermediary service will not be regarded as a representative subject to such service being of a clerical, technical,
administrative, legal or accounting nature and that it is performed in a subsidiary or subordinate capacity.
 (f) Thus, a person who, for example, performs a “mechanical” service by
merely handing over a proposal form to a client, who takes receipt of a
claim form from a client, or who performs any other purely clerical
interaction with a client, without applying any judgment process in relation to
that interaction, is intended to be excluded as a representative. However,
this does not mean that an intermediary service is not being rendered. If
the actions of the person meet the requirements of the definition of
“intermediary service” (see paragraph 3 above), then an intermediary
service is being rendered. The person on whose behalf the firstmentioned
person acts, is rendering the intermediary service and must therefore be
authorised to render such service.

(g) The exclusions in the definition of “representative” would normally not apply
to a person who actively and consciously sells a financial product to a client,
as such act cannot be regarded as a service that is of a clerical, technical,
administrative, legal or accounting nature and performed in a subsidiary or
subordinate capacity. Persons engaged in such active and conscious
selling, even where they do not provide advice, therefore need to be either
financial services providers or representatives in the true sense.

8. Specific guidance

8.1. Furniture and motorcar dealers

(a) When facts are to be applied to the law, or vice versa, uncertainty often
arises.

(b) One troublesome area is where insurance is sold, or offered for sale, on
“dealer floors”. This practice presents itself in different forms. A proposal
 form for assistance business or other insurance may be made available in a
retail shop for a customer to uplift. It may even be handed to a customer
with or without an indication of what the content is about. No interaction
requiring judgment takes place between such person and the client. The
client, if interested in the product, merely completes a space of his/her
choice and returns it to a given address or hands it to a person. If this leads
to a transaction with the customer, such a person will not be regarded as a
representative in terms of the definition.

(c) By contrast, there are dealers who, through their sales persons, actively
encourage a customer to accept, or even require a customer to enter into
an insurance agreement. This often occurs in respect of a credit insurance
agreement providing long-term or short-term cover, as ancillary to the main
credit sale agreement.

(d) In May 2008 “A report by the Panel of Enquiry on CONSUMER CREDIT

INSURANCE in SOUTH AFRICA” under chairmanship of Judge PM
Nienaber was published. The Report followed a public investigation by the
Panel, including evidence submitted by most insurers doing business in the
field of credit insurance.

(e) The undisputed evidence to the Panel led it to conclude that consumer
credit insurance was a unique type of insurance. The way it operates is
equally unique. In the case of credit insurance sold by furniture dealers, the
furniture dealer is often also the credit provider or an associate of the credit
provider and the underwriting insurer is often (but not always) also in the
same group of companies. Most policies are sold by way of a group scheme
administered by the dealer or its associate. The dealer floor can in some
instances function as a “mini-branch” office of the insurer.
The insurer itself therefore outsources much of the administration of the
policies concerned to the dealer or associate concerned. With this structure
in place the dealer is paid various fees including commission, administration
 fees and fees for other outsourced services rendered. Income thus earned
by dealers can exceed that earned from their furniture business. The
evidence on behalf of SAIA to the Panel was that in some instances as
much as 67% of the insurance premium goes to the dealer.

(f) The legislature has seen fit to impose certain conditions on credit insurance
through provisions in the National Credit Act. This is dealt with in paragraph
1.4 of the Nienaber Report with specific reference to Section 106 of the
National Credit Act. This provision requires certain explanations to be given
to the consumer, choices to be allowed, and the like.

(g) It is not feasible to sustain an argument that, where relatively complicated

matters regarding insurance cover must be explained to (unsophisticated
and often illiterate) consumers, including the exclusions provided for in the
policy, and the fact that the consumer has a choice between an existing
policy and one offered by the dealer, that the person interacting with the
consumer on these matters, does so in an administrative, clerical or
technical manner or in a subordinate capacity and does not require the
person to exercise judgment. Furthermore, a transaction in respect of a
financial product almost invariably results. Accordingly, typically neither of
the exclusions from the definition of “representative” will apply in such
instances, and the argument that the person concerned should not be
required to meet the fit and proper requirements of a representative, cannot
be sustained.

(h) If dealers wish to avoid appointing their salespersons as representatives,

they will need to ensure that such salespersons do not interact with
customers in respect of insurance transactions in the manner described in
paragraphs (c) and (g) above. Instead, they should consider appointing one
or more dedicated insurance representatives to be readily available to
interact with the customer on the insurance aspect of the transaction.
9. Application of the Act

(a) In judging whether or not a person dealing with the public in a manner
postulated by the definition of “intermediary service” is a representative, the
Registrar will look at the surrounding circumstances.

(b) Where authorised financial services providers claim that the persons
rendering financial services on their behalf “do not exercise any judgment”,
they must be in a position to substantiate such claims.

(c) If in a given situation judgment by such persons2 is required, as in (but not

limited to) the case of furniture or motorcar dealers selling insurance on
their floors and having to explain features of the policy to the customer, the
persons concerned will be regarded as representatives for purposes of the
Act, irrespective of whether or not they also give advice.

G E Anderson
Deputy Registrar: Financial Services Providers

2
In other words, persons who render financial services of a clerical, technical, administrative, legal, accounting or
other service in a subsidiary or subordinate capacity.