South Africa: FAIS Act Definition Of "Intermediary Services" Considered By The Supreme Court Of Appeal

Last Updated: 6 June 2013
Article by Johan Loubser

Most Read Contributor in South Africa, September 2018

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) [2013] ZASCA 59 (16 May 2013) will be an important reference point in this area of the law.

Tristar Judgement

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".

Discussion

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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions