The lack of oversight by key individuals, non-compliance with the Financial Intelligence Centre Act (FICA), unauthorised copy trading, and unregistered funeral insurance business are among the FSCA’s regulatory focus areas this year.
The Authority released its Regulatory Actions Report for 2023/24 last week. The FSCA said it will allocate significant resources to combating areas where misconduct, poor behaviour, and risks to consumers are of particular concern.
Lack of oversight by key individuals
The FSCA said KIs play a crucial role as “the first line of defence” against non-compliance by FSPs and their representatives.
In this year’s report, the Authority drew attention to the decision by the Financial Services Tribunal in the reconsideration application lodged by Satish Bhala, who was one of the KIs of Stringfellow Financial Services from February 2016 to April 2018.
The Tribunal upheld the FSCA’s decision to debar Bhala for eight years and fine him R100 000.
Read: KI’s enquiries could have prevented losses suffered by Stringfellow clients, says FST
The Authority said the FST’s decision reaffirmed KIs’ significant responsibility in ensuring adherence to regulatory standards.
The role of a KI is not passive but requires active management and oversight of the financial services provided to clients. Importantly, when non-compliance with financial sector laws is identified, the KI is primarily accountable for the non-compliance.
Inadequate RMCPs
The FSCA will intensify its supervisory activities in respect of anti-money laundering and counter-terrorism financing (AML/CFT) compliance.
The Authority’s main concerns when it comes to compliance with the FICA are:
- Many accountable institutions have inadequate Risk Management and Compliance Programmes (RMCPs), resulting in insufficient AML/CFT controls.
- Accountable institutions often do not perform thorough customer due diligence or appropriately risk rate their clients.
- Accountable institutions are not screening their clients against the Targeted Financial Sanctions Lists.
The FSCA has increased the amount of administrative penalties to reflect the severity of non-compliance. In this regard, the report referred to the fine of R870 000 (R470 000 conditionally suspended) imposed on an FSP, Jannie Parsons Future Financials (Pty) Ltd.
Read: Failure to meet FICA provisions costs FSP R400 000
Copy trading requires authorisation
There has been a noticeable increase in individuals offering to help clients trade in high-risk derivative products on internet-based platforms. “These products are not suitable for most financial customers,” the FSCA said.
Individuals assist clients to open trading accounts and either trade on the clients’ behalf or allow clients to copy their trades (referred to as copy trading or mirror trading).
“In many instances, clients receive statements with inadequate disclosures reflecting unrealistic gains. It is common knowledge that the success rate of trading on these platforms is low.”
Copy trading constitutes a financial services activity, which requires authorisation as an FSP.
Likewise, the FSCA said, the provision of trading signals (recommendations to buy or sell an asset at a certain time and price) constitutes the furnishing of financial advice, and an FSP licence is required to conduct this activity.
Where authorisation and supervisory oversight are absent, customers are not protected against conflicts of interest, there is no proper disclosure, and entities fail to act in the clients’ best interest and with due care and diligence.
Funeral parlours conducting unauthorised insurance business
A “significant number” of funeral parlours are engaged in the self-underwriting of insurance policies and the unauthorised collection of “premiums” from clients, according to the report.
Consequently, the FSCA and the Prudential Authority have initiated a collaborative project that seeks to address the concerns of the Authorities and industry representative bodies. This project includes:
- A review of the insurance regulatory framework affecting the funeral parlour market, to identify areas for improvement.
- Enhanced compliance awareness and capability support.
- Improved supervision and enforcement strategies to achieve appropriate compliance levels, ensuring sound prudential principles and fair customer outcomes while minimising compliance costs.
- Developing strategies to enhance financial literacy and awareness among funeral insurance consumers.
The FSCA recorded 67 new unregistered insurance and FAIS (funeral parlour) investigations during the reporting period. A total of 25 investigations were finalised, while 42 are ongoing.
In 13 of the 25 finalised investigations, the funeral parlours were correctly authorised and licenced, leading to the closure of these matters.
In the other 12 cases, the funeral parlours were found to be non-compliant. In all these cases, the parlours were offered the opportunity to regularise their businesses by applying for an FSP licence or becoming a juristic representative of an FSP and ensuring that their clients were underwritten with by a licenced insurer. In all these cases, the FSCA used enforceable undertakings to ensure the regularisation process was completed.
The FSCA said it has also noticed that some catering companies have entered the funeral industry, collecting “premiums” in return for providing catering services at funerals.
In addition, some burial societies have exceeded the maximum threshold for contributions to qualify for an exemption from the FAIS and Insurance Acts, leading to unregistered funeral insurance activities coming to our attention.
Unauthorised guarantee policies
This year’s report once again highlighted the problem of entities or persons posing as legitimate issuers of guarantee policies. These policies are issued in favour of state entities that award tenders for infrastructure projects.
The FSCA said guarantee policies are insurance products and as such can be issued only by a licenced insurer.
Soliciting deposits for investments in agriculture
The FSCA has noticed an increase in entities soliciting deposits from the public for investments in agricultural products, such as livestock and harvests, promising investors a ring-fenced share in the profits. The FSCA said this type of investment amounts to receiving deposits from the public and is therefore a regulated activity.
Fraudsters are also promoting “investment schemes” that are supposedly linked to an agricultural product. Invariably, images displayed on social media of the purported investment schemes are fake. Investors are promised unrealistic returns and provided with fictious updates on their “investment”.
Concern about the impact of finfluencers
Social media influencers can wield significant influence over consumer behaviour through social media content. This has led to the rise of finfluencers – people who post financial and investment-related content on social media, sometimes to promote specific financial products.
In some instances, finfluencers play a positive role by enhancing financial literacy and contributing to increased participation in financial markets, the FSCA said. At the same time, there are finfluencers who are conveying misinformation and perpetuating scams.
The FSCA said it will closely monitor the impact of finfluencers and, where required, take action to safeguard financial customers from potential harm.
