How to Apply for a FSCA license + Step by Step Guide

What is FSCA regulation for brokers in South Africa?

The Financial Services Conduct Authority (FSCA) was also previously known as the Financial Service Board, or FSB. It is the financial watchdog in South Africa which governs regulation of the financial market by protecting South African traders and investors along with the economy.

The FSCA protects people specifically from potential money laundering as well as any fraudulent schemes. Even is South African traders and investors being free to make use of brokers that are not regulated by the FSCA such as many offshore brokers, they are advised to make use of brokers who are specifically regulated by the FSCA.

The reason for this is simple; should the broker go bankrupt or they are in any other way unable to meet their financial obligations to traders, South African traders have backing from the FSCA to have the funds that they invested in the broker restored.

Another advantage in choosing a FSCA-regulated broker is that traders and investors will know any type of misconduct will be dealt with by both local authorities as well as laws, with which South African traders and investors will be aware.

The FSCA provides a regulatory framework in South Africa, with its specific functions as well as purpose stipulated in the Financial Sector Regulation Act, No. 9 of 2017 (FSRA). The FSRA along with other financial sector laws empower the FSCA in making conduct standards.

In addition, there may also be joint standards made with the FSCA in collaboration with the Prudential Authority on matters of common interest, in addition to the FSCA issuing guidance notices and interpretation rulings.

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How does FSCA regulation deal with brokers?

The FSCA possesses full authority over the forex market in South Africa. Even though this is a bold claim, the FSCA regulates all legitimate brokers in South Africa. Should there be any reason for traders to end up with a broker that is not regulated by the FSCA, even if they are highly praised and traders have made substantial profits, traders are advised to use FSCA-regulated brokers.

The FSCA issues specific warnings regarding such topics as brokers who do not have FSCA regulations do not conform to local requirements. When evaluating brokers who claim to have FSCA regulation, it is imperative to confirm such claims by consulting the list of regulated entities on the FSCA website.

Traders are advised to confirm the claim to licensing even if the broker provides a license number. Brokers who form part of a parent or umbrella company are likely to procure a license number, expecting traders to believe it.

Traders who require more information on brokers, or to confirm claims, will have a wealth of information presented to them on the FSCA’s website. Should traders encounter a broker that claims it has FSCA regulation, but does not, must report the broker to the FSCA immediately so that steps can be taken.

The FSCA brings peace of mind to traders and brokers alike. Brokers who truly seek regulation from the FSCA will follow the correct procedures in applying for such licensing. This will provide them with a substantial amount of trustworthiness within the South African trading community.

FICA

Money laundering as well as terrorist financing is combatted by the following in South Africa:

• The Financial Intelligence Centre Act, 38 of 2001 (FICA)
• Prevention of Organised Crime Act, 1998 (POCA)
• The Prevention and Combatting or Corrupt Activities Act, 2004 (PRECCA), and
• The Protection of Constitutional Democracy Against Terrorism and Related Activities Act, 2004 (POCDATARA).

FICA has introduced a regulatory framework consisting of numerous measures which require certain categories of businesses, or accountable institutions, inter alia an authorized user of an exchange, collective investment scheme manager, as well as financial service providers (FSP) to take the necessary steps regarding due diligence, recordkeeping, and information reporting of customers to the Financial Intelligence Centre.

The Financial Intelligence Centre use this information to develop financial intelligence, made available to competent authorities such as law enforcement agencies, South African Revenue Services (SARS), and other supervisory bodies for investigation follow-up, or to take administrative action where necessary.

FSCA is therefore responsible to ensure and enforce compliance with FICA by all authorized users of an exchange along with collective investment scheme managers, and FSPs.

Financial Action Task Force (FATF)

The FATF is an inter-governmental body which focuses on combatting money laundering as well as terrorism funding. It is a policymaking as well as standard-setting body which promotes policies associated with combating money laundering as well as terrorism financing.

South Africa is an FATF member and in addition, is also a member of the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG), which is a regional body of the FATF aiming to provide support to countries in the region. It also aims to implement global AML/CFT standards.

Thus, FSCA forms a part of South Africa’s delegation which attends both FATF and ESAAMLG plenaries in addition to aiming at aligning policies and processes with the standards, as they are set by FATF.

Proposal of the Financial Intelligence Centre (FIC)

The FIC has proposed that certain businesses or institutions, which perform certain categories of activities, be included in the scope of FICA, even those who currently reside outside its scope with a view to potentially include them in Schedule 1 of FICA, but not limited to non-life insurers and financial intermediaries.

Non-life insurance entities working group with the FIC

There is a joint Working Group to commence with a money laundering/terrorism financing risk assessment which includes the following bodies:

• The South African Insurance Association (SAIA)
• The Financial Intermediaries Association (FIA)
• The South African Underwriting Managers Association (SAUMA)
• The Prudential Authority (PA)
• The Financial Sector Conduct Authority (FSCA), and
• FICA

This risk assessment will cover the non-life insurance industry, with the Representatives of the Insurance Crime Bureau (ICB) forming a part of the process. Non-life insurance industries entered a voluntary sharing of information and once the risk assessment is completed, a decision on the continuation of such sharing of information is set to be taken, amongst others.

Differences between FSB and FSCA

As previously mentioned, the FSCA used to be FSB, and changes made run much deeper than merely a name change. In the change, there were changes made to the structure as well, and many South African forex brokers faced challenges in adjusting to the new FSCA regulations.

The changes that were made include:

• The FSCA became responsible for providing quality education pertaining to the financial field to customers. This was done through procuring some of the best educators in the field, resulting in fair treatment promotions.
• The FSCA took responsibility for ensuring the financial stability of customers. This means that should there be a slump in the finances of one customer, without any fault of their own, the FSCA would step in and act.
• The FSCA took responsibility to distribute information regarding the changes which took affect to companies that fall under their regulatory authority, which was also a part of fair treatment promotion.
• The FSCA became responsible for overseeing the development associated with the South African financial market, with their main goal to ensure both the efficiency as well as the integrity of the entire system.

Even after these changes were communicated, many firms reacted irrationally, forcing the FSCA board to clearly indicate the changes which would take effect. It was then decided to provide brokerages with some time to adjust their business models according to the changes made.

What is FAIS?

The Financial Advisory and Intermediary Services Act of 2002, more commonly known as FAIS, applies to all Financial Services Providers (FSP), wherever they are domiciled. FSPs who are based outside of the borders of South Africa are also bound by the terms stipulated of FAIS, if they wish to continue offering their services in the country.

A financial product can be defined as per Section 1 of FAIS and it includes both securities and foreign currencies. It requires that person who provide either advice or intermediary services with respect to financial products, must register as an FSP.

No person may either act or offer to act as an FSP in South Africa unless they are licensed to do so according to Section 8 of FAIS.

What is the purpose of the FAIS Online System?

The FAIS Online New License Application system is designed specifically for the submission of new license applications. It can be used by registered users and only for the submission of new license applications. Once an application has been submitted through the system, information on it cannot be updated.

Applicants must therefore ensure that all relevant and correct information is captured and that all relevant documents are indexed before applying. Applicants must note that multiple applications may be created under a single user profile.

How to use the FAIS Online New License Application system

Those who wish to apply, can follow these steps:

• Enter www.fsb.co.za into the URL bar on a web browser.
• Select FAIS on the bottom left-hand corner of the screen.
• Select Registration on the left-hand side of the screen and navigate to Registration followed by New License Applications.
• Lastly, select the
• FAIS Online License Applications link.

Applicants can follow the next few steps to register and apply for a license:

Profile Creation

• Screen 1 – Click register to be redirected to the second screen.
• Screen 2 – Enter an email address, First and Last name, and click register. An automatically generated password will be sent to the email address entered and the applicant will be redirected to the first screen to enter the email address along with the password provided. This information can subsequently be used to log in.
• Screen 3 – The applicant will be requested to change their password to a user-selected password. Once this is done, ‘update’ can be selected.

Create a new license application

On Screen 4, the applicant will see the following options:

• Create a new application
• Change password
• Logout

Screen 5 – The applicant can select the option to create a new license application and follow these steps:

• Complete the field requesting the applicant’s name, which can either be a natural or juristic person.
• Select the legal capacity making use of the drop-down function.
• Select submit to obtain a reference number. This number will be sent to the email address which was previously recorded and must only be used as reference when making payments.

Capture the relevant information

• Screen 6 – To capture all the relevant information, the applicant can click on the relevant tab, for instance FSP 1, and complete the information as required.
• Screen 7 – As soon as all the required information has been captured under each tab, the applicant can click the ‘save’ option to save their captured information. After having saved the information, the applicant will be redirected to Screen 4.

Indexing Attachments

Screen 8 – Once all the relevant information has been captured, the applicant can upload the required supporting documents. The applicant will notice the option to upload the documents under each FSP form or under the general person’s attachments tab.

• When the uploading documents, the applicant must select ‘upload attachments.
• The applicant can then select ‘browse’ and select the relevant document. After having selected the document, the name of the document must appear in the ‘browse line’. The applicant can then click on ‘upload attachment’.
• If successful, the applicant will see a pop-up message which will confirm that the document has been successfully uploaded.

Calculation of Fees

Screen 9 – The fee calculator will assist the applicant in determining their fees payable for the application. The fee calculation is determined by the license category selected as well as the appointment of key individuals, compliance officers, and auditors.

Validation

Screen 10 – The ‘validate’ button can be used to ensure that all required information has been captured and that the required documents have been uploaded. When validating, any outstanding items will be indicated immediately.

It should be noted that the application cannot be submitted until all validation errors which appear have been cleared.

Submission

Screen 11 – Once the application has been validated successfully, the ‘submit’ button will become available on the webpage. The applicant can proceed to click on ‘submit’ to submit their application.

Applicants must ensure that all information has been captured correctly as amendment are prohibited following the application’s submission. Once the application has been submitted successfully, confirmation thereof will be provided along with a temporary number.

What information/documents are needed to apply for licensing?

All Over-the-Counter Derivative Providers, such as forex brokers, must ensure that they complete the necessary documents along with submitting their application for an FSCA license.

‘Application Index 2’ which can be obtained from the FSCA website must be completed and the relevant and required documentation to substantiate claims must be provided as well.

The following sections will clearly set out the required documents/information needed for forex brokers to apply for their FSCA license.

Operational Capital Requirements

Operating Capital Calculation:

• A three-year plan which indicates the available capital, expected expenses as well as income, expected profits/losses, cash equivalents, and securities which will serve as liquid assets for each of the three years.
• Annual qualification associated with potential business losses for an orderly wind-up.
• A definition, according to the applicant, of operational, legal, investment, general business, and custody risk along with a quantification of each of those risks.
• A stress test along with a scenario analysis framework or stress testing methodology.

The following documents must be provided to substantiate the information above:

• Annual financial statements.
• Working capital projections which must include three years in detail and five years, which can be less detailed.
• Break-even analysis of profits as well as cash flows.
• Source of funding, if applicable.
• Proof of irrevocable line of credit line, if applicable.
• Capital raising plan which includes all necessary approvals, if applicable.
• Any assumptions which were made in budget preparation, financial statements, calculation, and other relevant documents.
• Details pertaining to segregation as well as safeguarding of assets.
• Policies along with controls regarding the above mentioned.
• Confirmation of banking details, and
• Six months’ bank statements.

Fit and Proper

• There must be confirmation as well as acceptance of appointment of an auditor as well as an attorney.
• Procedures involved with election and/or appointment of members of the controlling body along with their terms of office and when office may be terminated must be stated.
• Powers as well as responsibilities of the controlling body as well as senior managers.
• Procedures associated with conducting meetings with persons who hold ownership interested in the ODP.
• Voting powers of people who hold ownership interest in the ODP.
• Procedures associated with the dissolution of the ODP.
• Controlling body as well as senior manager’s SAPD Police clearance.
• Official representation from the controlling body members.
• Confirmation of good standing as dictated in Section 4.2 of the Criteria for Authorisation of ODP.
• Details of offence, if any, to any regulatory body if it is applicable.
• Application forms, which replace Annexure 1 FORM 6, B and C which are attached in the ‘Criteria for Authorisation of OTC Derivatives Providers under Conduct Standard 1 of 2018.’
• A completed application Form 1, which must be completed by the controlling body or the senior managers of the ODP, and
• A completed application Form 2 which must be completed in respect of the provider.

Adequacy of Human Resources

This includes the following:

• A Schematic structure of the ODP.
• The management structure which clearly indicates the individuals who take responsibility for major areas.
• The number of personnel who are employed in each area of function.
• The projection of staff who are required for the operations of the ODP, if applicable, and
• A clear indication of full-time employees who are allocated to the ODP.

Competency

This section includes the following documentation:

• The full comprehensive Curriculum Vitae of each of the controlling body members as well as the senior managers.
• Certified copies of the relevant qualifications of each controlling body member as well as senior managers, and
• Certified copies of the IDs of each controlling body member and senior managers.

Operational Ability

This will include proof of the following:

• Proof of physical address of the ODP.
• Proof of appropriate communication facilities provided.
• A confirmation of off-site as well as in-house storage facilities, if applicable, and a contractual agreement with the provider thereof.
• Copy of the company’s registration documents, and
• Proof of corporate governance policies as well as principles.

Risk Management and Internal Control

This requires documents proving the following:

• Approved risk assessment policies as well as frameworks and governance structures.
• Enterprise risk policies along with associated processes.
• Risk management processes of the ODP along with its escalation procedures.
• Details and a full description associated with the risk assessment systems relating to Information Technology (IT).
• Composition of both the audit and risk committee and terms of reference.
• The approved netting policy along with the liquidity policy.
• Details pertaining to risk reports and the frequency that these will be issued.
• Internal audit oversight schedule along with sample reports.
• The error reports.
• Proof of daily error resolution.
• Fraud prevention policies along with the review frequency.
• ISAE 3402 report, if applicable.
• Full narrative of operations.
• Full narrative of qualitative as well as quantitative risk processes.
• Details of the applicable disclosures.
• Details of application of Three lines of defence, or explanation of segregation, of duties/roles and responsibilities associated with busines, risk, and audit.
• Details pertaining to continuous risk training programmes which are in place, and
• List of all the third-party services with the emphasis on material arrangements.

Compliance Function

The following documents must be provided:

• Compliance policy for the ODP.
• Compliance monitoring process, and
• Compliance function reporting lines.

Business Continuity

• Business continuity plan which includes disaster recovery and/or operational resilience, and
• An approved internal audit plan.

Recordkeeping as well as data retention

• Policies concerned with data retention as well as storage.

Additional Information

The following details must be provided:

• The valuation policy which includes valuation methodology as well as the process for approval.
• The processes involved in resolving pricing differences.
• Details pertaining to expertise of personnel who perform valuation.
• Details pertaining to the services which will be provided.
• Details pertaining to the licensed independent clearing house or, where applicable, the associated clearing house which has been appointed by the provider.
• Details on the settlement, custody, and the administration arrangements which must be put in place by the provider.
• Details of any additional and/or unregulated business which will be provided.
• Details on whether the provider will offer any services in respect to an over-the-counter derivative in a foreign jurisdiction.
• Details on the trading method or the facility through which the provider will trade its securities.
• The range of counterparties as well as clients, both local and foreign, who are expected to transact with the provider.
• Both the extent and the manner of the arrangements which must be in place for the facilitation of portfolio compression, if applicable.

Reporting Obligations

Proof/information must be given on the following:

• A list of asset classes which will be reported by the ODP.
• The proof of ability to generate the report in Annexure A of ‘FMA Conduct Standard 3 of 2018 – Conduct Standard for reporting obligations in respect of transactions in over-the-counter derivatives.’
• Reasons should the ODP be unable to generate the report.
• Confirmation of daily reporting which must be done by the ODP, and
• Details of the licensed Trade Repository which will be used for the reporting of transactions if this is applicable.

Capital Adequacy Requirements for an Over-the-Counter Derivatives Provider (ODP)

The adequacy requirements must be submitted prior to the application at the closest month end and must contain the values of the following:

• Eligible capital.
• Eligible capital less adjustments.
• Adjusted capital.
• Adjusted capital less required capital to be maintained, and.
• Liquid resources.

Calculation of Eligible Capital of the ODP

The calculation of the ODP’s eligible capital must be categorised as followed and the ZAR value provided for each segment:

• Issue ordinary share capital.
• Issue preference share capital, if it is not redeemable within the year and not redeemable at the option of the shareholder.
• Share premium account.
• Non distributable reserves.
• Retained income, if audited, 100% must be included, and
• 50 cents of the positive audited retained income, or 100% of the negative thereof, must be included.
• Loans, only if it has been properly subordinated in the ODP’s favour.
• Guarantees, but only from a third-party and only if it is exercisable on demand by the ODP.

Adjustment for Eligible Capital as at the ODP

The adjustment for eligible capital as at the ODP must be broken down as follows:

• Intangible assets.
• Guarantees which are provided by the ODP.
• Contingent liabilities.
• Net deferred tax assets, and
• Any assets that have not been convertible in five business days including, but not limited to fixed assets, net of related secured loans along with investment in unlisted businesses.

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Computation of Fixed Expense Base Requirement as at the ODP

This must be broken down in segments with the amounts provided for those treated as cost amounts, treated as trading costs and ‘non-cash’ items, and expenses per the income statement. This must be done for each of the following:

• Accounting and secretarial in addition to other services, charges, and other relevant factors.
• Auditors
• Depreciation
• Insurance
• Bank overdraft or interest paid other than that to directors.
• Other finance or interest paid other than that to directors.
• Charges and fees
• Motor vehicle expenses
• Net loss on realization associated with fixed assets.
• Office rentals.
• Machine and any other leasing charges and/or rentals.
• Printing as well as stationary.
• Salaries and wages.
• Telephone, telex, and postage costs and charges.
• Other expenses
• Directors’ salaries and fees
• Interest