Exam fraud: FSCA urges financial firms to verify RE certificates

Financial services providers have a crucial role to play in combating fraud related to FAIS regulatory examinations (REs), the FSCA says.

Katherine Gibson, one of the Authority’s three deputy commissioners, on Thursday issued a seven-page communication on RE fraud. The emphasis of Communication 38 of 2024 (FAIS) is that FSPs have a regulatory obligation to verify the authenticity of RE certificates.

Moonstone, the only institution approved by the FSCA to provide the REs in South Africa, has, over the years, exposed exam fraud and warned about it. Yet, as the Authority notes, the number of suspected fraud incidents has increased.

Exam fraud includes candidates buying forged or fake examination certificates, unlawfully altering exam certificates (certificate fraud), paying other people to impersonate them when writing an exam (identity fraud), and paying people who supposedly have some form of control over the examination process to guarantee a successful pass.

Gibson said several investigations into suspected fraudulent activities are under way.

“However, the responsibility to combat these activities does not rest solely with the FSCA. FSPs, as the primary gatekeepers of the financial services sector concerning key individuals and representatives, play a critical role.

“As employers and/or principals, FSPs are responsible for conducting thorough background checks, verifying the authenticity of RE certificates, and assessing the honesty and integrity of their key individuals and representatives before they are allowed to operate within the industry,” Gibson said.

The communication describes the various types of exam fraud and the tactics employed by fraudsters, who have become adept at using social media to lure candidates into their schemes. Fraudsters create support groups or forums targeting individuals struggling with the exams. These groups often disguise illegal services, such as selling fake certificates or offering to write the exam on the candidate’s behalf, under the pretence of providing assistance.

The Authority says the following are potential indicators of exam fraud:

• A candidate repeatedly attempts the RE through his or her employer’s enrolment system but then suddenly switches to private enrolment and passes the exam.
• A candidate consistently writes the RE at a particular venue but abruptly changes to a different examination centre and passes.
• A candidate shows a pattern of multiple failures followed by an unexpected pass with a significantly higher score compared to previous attempts.

Statutory obligation to verify

The FSCA wants FSPs actively to combat exam fraud by verifying certificates, reporting fraud, and educating their representatives about fraudulent practices and potential consequences.

Gibson said FSPs are required, under section 13(2) of the FAIS Act, to confirm that their key individuals and representatives comply with the Fit and Proper Requirements, which includes passing the relevant RE. This means the FSPs must verify the authenticity of RE certificates to ensure that individuals are competent and legally qualified.

Board Notice 194 of 2017 requires FSPs to adopt, document, and implement an effective governance framework. It outlines specific governance requirements that are, inter alia, based on the principles of effective risk management and internal controls to ensure regulatory compliance. These governance requirements make it necessary to verify RE certificates.

The FSCA said some FSPs do not approach either Moonstone or the FSCA to verify the authenticity of an RE certificate.

“This results in a flawed due diligence process, as reliance on potentially falsified information increases the risk of appointing or retaining non-compliant representatives. Without direct confirmation from the FSCA or Moonstone, the authenticity of the RE certificate remains uncertain.”

It is therefore essential that FSPs verify RE certificates directly with Moonstone or the FSCA, so they can be checked against the official records.

Verification can be done by submitting a request, including a copy of the candidate’s Identity Document or passport, the certificate(s), and written consent from the candidate permitting the sharing of RE-related information with either the FSCA or Moonstone.

• FSCA verification: The request and all supporting documents must be emailed to the FSCA Business Centre at businesscentre@fsca.co.za.
  • Moonstone verification: The request must be emailed to faisexam@moonstoneinfo.co.za. For any queries related to the RE or verification process, phone 021 883 8000.

In terms of its mandate from the FSCA, Moonstone is allowed only to confirm or deny that the certificate is valid. A standard confirmation email will be forwarded after the certificate has been authenticated if it is found to be legitimate. If the certificate is found to be fraudulent, it will be reported to the FSCA.

• If FSPs engage a verification agency to handle the verification process, the FSP must ensure that the agency conducts direct verification through either the FSCA or Moonstone.

The FSCA said FSPs should keep detailed records of the verification process, including communication with Moonstone or the FSCA, and the outcome of the certificate’s authenticity.

If a fake or altered certificate is discovered, FSPs should immediately report it to the FSCA and take appropriate action, such as rejecting the candidate or initiating a debarment process if they are already employed.

Requirement to debar

It is insufficient for an FSP to terminate the employment of a representative who submits a fake or forged certificate and remove his or her name from the representative register, the Authority said. The FSP is required by section 14(1) of the FAIS Act to debar a representative whose misconduct means he or she no longer meets the Fit and Proper Requirements.

• Failing to debar errant individuals enables them to seek employment at another FSP, where they may repeat fraudulent behaviour may be repeated.
• FSPs that do not comply with their section 14 obligations may themselves be in breach of the FAIS Act, Gibson said.

Advice for reps

FSPs should make representatives aware of the serious consequences of engaging in fraudulent RE activities, including potential debarment, other regulatory actions, and criminal sanctions.

They should also advise their representatives do the following to avoid falling victim to or participating in RE fraud:

• Always deal directly with Moonstone for RE bookings and avoid using third-party services. Moonstone will never contact candidates to offer booking services or guarantee exam success.
• Immediately verify with the FSCA the legitimacy of any person or entity requesting an examination fee that differs from the fee prescribed by law. Only Moonstone is authorised to accept payment of the RE fee and will never request a fee outside of the legal requirement.
• Representatives should report to the FSCA any suspected fraudulent or undesirable conduct relating to the RE.

Is the training up to standard?

• The FSCA says FSPs should offer their representatives support, guidance, and/or training, to help them successfully complete the RE.
• “It is crucial for FSPs to ensure that all training and materials they provide to their representatives are of high quality and up-to-date, as outdated materials may potentially negatively impact the candidates,” Gibson said.
• FSPs must also verify the effectiveness of the training offered by any of their elected training providers. This involves monitoring representatives’ pass rates to evaluate the quality of the training. Training programmes should comprehensively cover all the tasks and criteria for the RE and ensure a thorough understanding of the FAIS Act.
• Gibson emphasised that attending a one- or three-day training course alone is insufficient to ensure successful completion of the RE.
• Multiple failures are often not because of the examination’s perceived level of difficulty, but a reliance by the candidate on the training course without having thoroughly studied the FAIS legislation. Effective preparation requires dedicated study beyond the training course, she said.