By Nomfundo Manyathi-Jele

The profession approached the Financial Services Board (FSB) for guidance on whether financial transactions by attorneys involving the investment of trust funds are subject to the Financial Advisory and Intermediary Services Act 37 of 2002 (the Act).

In a notice to members, the statutory provincial law societies said the FSB had indicated that:

• The Act is wide in terms of its application and includes all persons who give advice and/or render intermediary services to a client in relation to a financial product. An attorney could be such a person.
• The Act does not affect attorneys who confine their activities to the practising of law. However, if they render financial services to the extent that such activity becomes a regular feature of their practice/business, those attorneys will become subject to the Act and need to apply for a licence.
• ‘Regular feature of business’ is not defined and must be given the ordinary common law meaning of the expression. It is important to note that this expression cannot merely indicate dealings with clients on a regular basis in the sense of ‘daily’ or at least frequently.

The FSB made the following guidelines available to the profession:

• The Registrar agrees that an attorney carrying on the business of an investment practice, where funds, are invested on behalf of clients, pursuant to an investment mandate (without there being any underlying transaction), would be required to obtain authorisation under the Act, if it, as a regular feature of its business, renders a financial service in respect of a financial product.
• It is the Registrar’s understanding that attorneys accepting funds in trust on behalf of clients and their subsequent dealing therewith in terms of s 78(2A) of the Attorneys Act 53 of 1979, merely invests client funds in a separate trust account in order for the client to obtain the interest for the duration that the client’s funds must be kept in trust by an attorney. The money invested remains part of the trust assets in the attorney’s trust account.

The Registrar further understands that such an investment in a separate interest-bearing account for the benefit of a client, does not equate to the conclusion of an agreement between the client and the particular banking institution where the client’s money is invested. It amounts to an agreement between the attorney and the bank for the investment of a client’s money in what can be termed a ‘ring-fenced’ portion of the attorney’s trust account.

Accordingly, money disinvested in terms of a s 78(2A) investment has to be paid back into the attorney’s general trust account together with the interest earned thereon for credit of the client.

An attorney’s activities, if they fall within the scope of s 78(2) as understood by the Registrar and form part of the ordinary business of an attorney, would not fall within the ambit of the Act.

However, if the attorney furnishes advice in respect of any financial product or performs any act referred to in the definition of ‘intermediary services’ that results or may result in a client entering into a transaction in respect of a financial product, it will have to be authorised under the Act.

• The Registrar agreed that, if an interim investment in terms of s 78(2A) was made, but after completion of the underlying transaction, the client instructs the attorney to retain the monies on investment on his or her behalf or make a new investment and the monies are not earmarked for any other transaction except to invest, consideration should be given thereto whether such investment would be subject to the Act.

The statutory provincial law societies have urged attorneys to ensure their compliance with the Act. They outlined the procedure to be followed if a licence is required, which are:

– An application for a licence as a financial service provider must be submitted to the Registrar of Financial Services (the Registrar). The application can be completed online.

– The application must be supported by information to satisfy the Registrar that the applicant complies with the relevant fit and proper requirements in respect of personal character qualities of honesty and integrity, competence, operational ability and financial soundness. The documents include reference letters from previous employers or product suppliers reflecting the nature and extent of experience gained, certified copy of qualification, business description and financial projections or budget.

– An application fee is payable prior to the submission of the application and proof of payment must accompany the application form.

– Non-individual applicants with more than one key individual or representative are required to appoint a compliance officer.

– The Registrar may either grant the application, if the applicant and its key individual(s) comply with the relevant requirements of the Act or refuse the application, if the application is non-compliant.

– The Registrar may impose conditions and restrictions on the exercise of authority granted by the licence, having regard to the factors listed in the Act.

Nomfundo Manyathi-Jele, Communications Officer, Law Society of South Africa, nomfundom@lssa.org.za

This article was first published in De Rebus in 2016 (Oct) DR 20.