Whether the definitions of "advice" or of "intermediary service" contained in the Financial Advisory and Intermediary Services Act, 2002 ("FAIS Act") apply to particular circumstances is perhaps one of the most frequently asked questions in South African financial services law. The matter is important since persons rendering "advice" or "intermediary service" to clients as a regular feature of business must comply with the licensing and compliance regime created under the FAIS Act. In addition, under section 7(3) of the FAIS Act a person who is already licensed as a financial services provider under the FAIS Act may only conduct financial services related business with a person rendering financial services if the latter is properly licensed in terms of the FAIS Act. Since case law on the interpretation of these definitions is rare, the recent judgement on the definition of "intermediary service" by the Supreme Court of Appeal in TriStar Investments v The Chemical Industries National Provident Fund (455/12)  ZASCA 59 (16 May 2013) will be an important reference point in this area of the law.
In summary, the facts of this case were that TriStar Investments (Pty) Limited ("Service Provider") and The Chemical Industries National Provident Fund ("Client") signed a written agreement titled "Investment Consulting Agreement" in terms of which the Service Provider agreed to provide certain services to the Client. The services included the furnishing of "advice" in respect of the investments of the Client and also included the following services:
- drafting detailed asset manager mandates for the Client's third party asset managers;
- implementing the Client's asset allocation model, investment strategy and asset manager mandates;
- negotiating contractual issues with current and new asset managers on behalf of the Client;
- managing the transition of assets from the Client's current portfolios to applicable new portfolios managed by the Client's asset managers; and
- monitoring and evaluating the performance of investments and the performance of asset managers and, where applicable, to take appropriate corrective action by ensuring that asset managers adhered to their mandates.
A dispute arose and the Client contended that it was not bound by the agreement since the agreement required the Service Provider to provide "intermediary services" as contemplated in the FAIS Act, which the Service Provider could not do without contravening the FAIS Act (the Service Provider was only licensed to provide "advice") and the agreement was therefore unlawful and void. In essence, the High Court agreed with this contention and found the agreement unlawful and void. On appeal, the Supreme Court of Appeal ("SCA") differed with the High Court on whether the agreement required the rendering of "intermediary services". It found that the agreement did not require the rendering of "intermediary services", was therefore not in contravention of the FAIS Act and therefore not unlawful. Because of this finding, it did not consider whether a contravention of the FAIS Act by the Service Provider would lead to the agreement being void.
In summary, the SCA's reasoning (per Nugent JA) was as set out below.
- The question is not whether the Service Provider performed services which were broader than the furnishing of advice (for which it was licensed under the FAIS Act), but whether or not the services in issue constitute "intermediary services" (for which it was not licensed).
- Although the FAIS Act defines the term "intermediary service", the essential characteristic of the ordinary language meaning of an "intermediary", namely that of one who "acts between others; a go-between", is retained in the statutory definition.
- Subparagraph (a) of the definition of "intermediary service", namely "any act ... performed by a person for or on behalf of a client or product supplier ... 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", applies where the actions of the relevant service provider, acting as intermediary, directly result in the applicable transaction in respect of a financial product. The quintessential example of such function is the role played by an asset manager who is mandated to act on behalf of the client. The Court held that including actions which indirectly result in the applicable transactions would lead to absurdities, although it did not say what those absurdities were.
- Subparagraph (b) of the definition of "intermediary service", namely "any act ... performed by a person for or on behalf of a client or product supplier ... with a view to 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 ...", contemplates a service provider who manages or administers "the relevant financial products".
- In applying this approach to the facts of the case, the Court found that what the Service Provider did was to manage and administer no more than the mandates of the asset managers of the Client. It found that the Service Provider did not undertake to bring about the relevant transactions in financial products as "go between" or intermediary as contemplated in subparagraph (a) of the definition of "intermediary service", rather the asset managers undertook to do so. Also, the Court found that the Service Provider did not manage or administer the financial products as contemplated in subparagraph (b) of the definition of "intermediary services".
- The Court could see no reason why the legislature thought it necessary for services of the kind rendered by the Service Provider – namely to manage and administer the mandates of asset managers – to be regulated as "intermediary services".
The SCA's finding that it cannot be assumed that all services in respect of financial products which do not constitute "advice" would constitute "intermediary services" and that it must be specifically considered whether the services in fact constitute "intermediary services" should be welcomed. Given that the language used in the definition of "intermediary service" in the FAIS Act is capable of extremely broad and onerous interpretation, the SCA's restrictive approach to the definition should, in principle, be welcomed. The definition nevertheless remains fraught with difficulties of interpretation. The following points can be noted.
First, the Court's finding that subparagraph (a) of the definition of "intermediary service" only applies to actions directly resulting in the relevant transaction in financial products leaves open the question of how one would distinguish between a direct and indirect cause in this context.
Second, the Court's interpretation of subpararagraph (b) as relating to a "person who manages or administers the relevant financial products" can clearly not be read as denying the possible application of the other instances of regulated conduct listed by the legislature in subparagraph (b), such as "keeping in safe custody, maintaining or servicing" financial products, but should rather be read as serving to emphasise that the applicable service rendered must relate to performing one of the listed activities in respect of financial products as opposed to the management or administration of a service relationship.
Third, the Court arguably did not explore whether the actual conduct of the Service Provider in providing the relevant services to the Client constituted "intermediary services" under the FAIS Act. Rather, it considered whether the terms of the agreement required the rendering of such "intermediary services". It is possible that the Court's finding as to whether the relevant services constituted "intermediary services" may have been different if the focus was on what the Service Provider in fact did on a day to day basis.
To illustrate the above, take for example the following two hypothetical situations. A service provider agrees with the client to take action if assets in a portfolio managed by the client's underlying asset manager fall outside the agreed investment limits. The service provider identifies that a particular portfolio limit (say, an agreed maximum exposure to units in collective investment schemes in securities that are fully invested in equity securities) has been exceeded. In the first scenario, the service provider communicates to the applicable asset manager on behalf of the client that the position should be addressed. The asset manager corrects the position by selling units identified by the asset manager and in so doing brings the portfolio within the agreed limits. The direct cause of this transaction would be the agreed portfolio limit together with the performance by the asset manager of its contractual duty rather than the prompting by the service provider to the asset manager to comply with its mandate. On what appears to be the SCA's approach, the action by the service provider would not constitute an "intermediary service" under either subparagraph (a) or subparagraph (b) of the definition of "intermediary service" since the service provider's actions did not result directly in the applicable transaction and the asset manager performed the applicable service by deciding which financial products to sell in accordance with the terms of the mandate. In the second scenario, the service provider alerts the client that the portfolio limit has been exceeded and, in response, the client makes use of an entitlement common to many mandates to issue specific instructions to the asset manager as to which financial products to sell. The client issues such an instruction and the instructions are conveyed to the asset manager by the service provider on behalf of the client. For the service provider to convey such an instruction from the client to the asset manager would presumably constitute both an intermediary action and the direct cause of the resulting transaction and therefore subparagraph (a) of the definition of "intermediary service" applies. Accordingly, a fairly minor change in facts results in a very different regulatory treatment. Nevertheless, it seems inappropriate for an important question such as whether or not a licence is required under the FAIS Act to turn on such subtle distinctions.
Lastly, it should be noted that the 2012 Financial Services Laws General Amendment Bill currently before Parliament does not contain any proposed amendment to the definition of "intermediary service" in the FAIS Act. Accordingly, the authority of the Tristar judgement is unlikely to be affected through legislative amendment in the short term.