Page 92 - Profile's Unit Trusts and Collective Investments 2021 issue 2

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 FAIS, because if any part of the rebate is being paid as soft commission, the advisor is
obliged to disclose this to the client. The rationale, of course, is that the advisor’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 FSCA’s policy board issued its first consultative paper on the regulation of the retail
industry in August 1996. The Financial Advisors Bill was drafted and released for industry
comment in May 1999, and a revised draft was released in September. The legislation finally
became law in 2002.
The legislation covers all those who do not deal directly with the investment of money, but who
offer their advice. The Act requires investment advisors to be licenced. Under FAIS, advisors have
to meet entry level qualifications and must adhere to a code of conduct. It also defines the duties of
investment advisors, procedures to enforce rules, and rules to deal with misconduct.
FAIS Overview
FAIS seeks to license and regulate financial intermediaries in order to ensure the highest level
of advice and service for consumers and investors. FAIS brought a level of professionalism to the
business of financial and investment broking, and ensures that financial services providers (FSPs)
and representatives (FSPRs) have adequate knowledge and skills.
The Act determines that all FSPs and FSPRs must meet certain standards (the Fit and Proper
requirements) in terms of knowledge and skills in order to be licensed by an industry body. FAIS also
requires the appointment of compliance officers by FSPs, who must ensure that organisations comply
with the FAIS rules, and an Ombud, who provides a formal mechanism for dealing with complaints.
FAIS makes it illegal for any person to act as a financial services provider (FSP) unless that
person has been granted a license. An FSP, among other things, is any person who gives advice on
financial matters as part of his or her regular business.
The definition of “advice” under FAIS 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. FAIS 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 service providers and representatives.
In terms of FAIS, no person may act as a financial services provider (FSP) unless licensed to do so
in terms of Section 8 of the Act. In order to register a person, the Registrar must be satisfied that
applicants satisfy the requirements for “fit and proper” FSPs.
There are three main requirements of fit and proper:
Personal characteristics of honesty and integrity
The knowledge and skills to meet the obligations imposed by FAIS
Financial soundness (ie, if you can’t look after your own financial affairs, you shouldn’t be
giving advice to others)
Where a FSP is a company or other organisation, the Fit And Proper Requirements apply to all
“key individuals”, defined in the Act as “any natural person responsible for managing or
overseeing” the financial services activities of the company.
FAIS allows for different categories of FSPs, so that in practice licenses are issued at different
levels and for different areas of competence.
Once licensed, an authorised FSP must ensure that a certified copy of the license is displayed “in
a prominent and durable manner” in each of its offices. FSPs must also make sure that they refer to

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