Investment Practices and FAIS
Section 86(4) of the Legal Practice Act 28 of 2014 (the Act) allows legal practitioners to invest client monies in a separate trust savings account or other interest bearing account where there is an underlying transaction with an explicit mandate from the client to do so. These investments should be made through banks with which the Legal Practitioners’ Fidelity Fund (the Fund) has entered into an arrangement.
These investments remain part of entrusted monies and are recorded as such in the trust accounting records of the legal practice and enjoy protection by the Legal Practitioners’ Fidelity Fund (the Fund).
Some legal practices operate investment practices, wherein they regularly open investment accounts in terms of the Rules for their clients. With effect from 1 November 2018 legal practices and legal practitioners are regulated in terms of the Legal Practice Act 28 of 2014 and its Rules. These rules permit legal practices to invest on behalf of individuals without there being an underlying transaction, and these investments can be done in terms of rule 55. Monies invested in terms of the rules that have no underlying transaction and are not earmarked for any purpose other than to invest, do not form part of general trust monies and should not be accounted for as part of general trust monies/balances, and DO NOT enjoy the protection by the Fund.
Legal practices investing in terms of the Rules should pay attention to the requirements of the Rules as follows:
- Rule 55.1 – A firm shall for the purpose of this rule be deemed to be carrying on the business of an investment practice if it invests funds on behalf of a client or clients and it controls or manages such investments, whether directly or indirectly.
- Rule 55.2 – A client shall for the purpose of this investment practice rule include any person on whose behalf a firm invest funds or manages or controls investments, whether or not such person is otherwise a client of the firm concerned
- Rule 55.4 – A firm carrying on an investment practice shall obtain an investment mandate from each client before or as soon as possible after investing funds for that client. The form of the investment mandate shall be substantially in the form of the Ninth Schedule to these rules, and shall contain a statement that the client acknowledges that moneys so invested DO NOT enjoy the protection of the Fund.
Legal practitioners are urged to read rule 55 in full to get more information on Investment Practice Rules. Refer to the URL below:
Following on an opinion sought, the Law Society of South Africa (LSSA) sought clarity from the Financial Sector Conduct Authority (FSCA), previously known as the Financial Services Board (FSB), and were advised in July 2015 by the Deputy Registrar of the FSB that investments in terms of the Act would not fall within the ambit of the FAIS Act, while investments in terms of the Rules would require compliance with the FAIS Act. As such legal practices that run investment practices are required to be licensed with the FSCA as Financial Service Providers (FSPs).
Proper and accurate distinctions of investments should be made by legal practices when investing client funds in terms of the Act or the Rules so as to ensure compliance with relevant legislation and/or regulations.
Legal practices who invest monies in terms of the rules are running an investment practice and must ensure that they:
- Are licensed to do so by the FSCA
- Obtain a mandate from their client to invest his or her money
- Make an accurate classification of an investment at all times
- Explicitly disclose to the client that the investment is NOT protected by the Fund and
- Fully comply with the requirements of the FAIS Act
Click here to access an article that was published in De Rebus in April 2016 dealing with this issue.
Click here to access a recent article that was published in the Risk Alert Bulletin in the November 2018 publication