The Financial Services Authority (FSA) is suggesting reforms comprising changes related to licensees, provisions, and typographical errors to the Securities Act 2007 (SA).
- It aims to improve how Securities Dealers operate in a controlled and well-regulated manner;
- It considers emerging risks and opportunities in the sector.
The Policy Paper:
- aims to inform the Securities Dealer industry about proposed changes to the regulatory framework governing Securities Dealers (SDs) and amendments to the SA and related regulations; these changes align with the FSA’s goal to create a Seychelles financial services centre that focuses on regulating meaningful and valuable licensed activities.
|
a) Physical Substance
|
FSA’S CHALLENGES/CONCERNS |
| Over 97.10% licensees have minimal or no physical presence in Seychelles, with unmanned offices.
– Many lack directors with a concrete understanding of the SDs’ core operations. – Limited or no records are kept in or accessible from Seychelles. – Either they have minimal or no bank accounts in Seychelles partly due to local banks’ reluctance. – Most outsource various functions, including compliance. Due to the recent technological developments the FSA has decided that the physical requirement is necessary, in relation to the operations and activities of SDs, licensed in Seychelles in order to implement enhanced monitoring and supervision of SDs
|
|
| b) Licensing Requirements
|
The FSA has recognized some gaps regarding the licensing criteria for the process of granting an SD licence:
– The Act does not specify whether company directors must be located in Seychelles or actively involved in company management. – This lack of clarity hinders accountability for licensees’ business conduct within the jurisdiction. – Existing requirements allow licensees to operate remotely without a physical presence in Seychelles. – This setup makes it challenging for the Authority to effectively regulate, monitor, and enforce actions against malpractice or non-compliance by licensees and their directors. – Establishing domestic accountability for licensees is essential to ensure compliance with the Act and responsible business conduct. |
| c) Inherent Risks | The SD sector like any other business bears inherently prospective risks associated with its operations like:
· Liquidity risk · Market price risk · Exchange rate risk · Credit risk · Strategic risk · Operational risk · Compliance risk · Money laundering and terrorist financing risk · Legal and regulatory risk · Jurisdictional risk Due to the absence of physical substance and accountability of SDs in the jurisdiction, the aforementioned risks are greater, while the FSA is left powerless in acknowledging, observing and diminishing any risks along with controlling the required enforcement actions that can be taken concerning SDs, particularly those operational businesses outside Seychelles. Hence, it is crucial to device a risk-based supervision ‘RBS’ approach concerning the observation and regulation of entities operating beyond Seychelles enabling the FSA to keep the Seychelles’ jurisdiction intact while effectively administering the SDs. Finally, the RBS approach involves the allocation of supervisory resources based on an institution’s risk profile, following international principles like those endorsed by the FSA. It involves identifying, categorizing, evaluating, mitigating, reporting, and governing risks. RBS enhances decision-making and optimizes supervisory resource allocation. |
| d) General Outsourcing | Outsourcing of certain functions of a licensee is allowed, but primary functions and licensable activities must be kept in-house. International Organization of Securities Commissions (IOSCO) provides guidance on outsourcing principles, emphasizing that outsourcing should not prevent the regulator’s ability to supervise and examine regulated entities. Some jurisdictions may restrict outsourcing for tasks with unacceptable risks or critical importance. The FSA in Seychelles defines “core functions” as activities that must be performed in-house and include decision making, regulatory responsibilities and client or investor interactions. These core functions cannot be outsourced except within the same group of companies. Support functions like Human Resources, Finance, and Administration can be outsourced but not subcontracted. The regulated entity remains fully responsible and legally liable for outsourced tasks, just as if they were performed in-house. |
| e) Complaints handling | The FSA has observed a mounting of complaints from clients engaged in online services provided by licensed SDs. On average, seven complaints are received each month, equivalent to one to two complaints per week. These complaints encompass issues like remote access and boiler room activities, raising significant concerns about the operations of these licensed SDs. |
The proposal is to review the legislative framework and suggest requirements to existing licensed SDs along with having new applicants being in compliance with the proposed requirements.
|
a) At least one fit and proper resident director in Seychelles.
|
PROPOSALS/REFORMS | ||||
| Having a resident director in Seychelles to ensure accountability for Seychelles-based companies is of crucial importance. The resident director must be knowledgeable about the company’s operations, undergo a fitness and proper test, and can be investigated or prosecuted if necessary. If the director is found unfit, they will be removed, potentially jeopardizing the company’s compliance with the requirement for two fit and proper directors and putting the company’s operations and license at risk.
|
|||||
| b) Dual control (4‐eyes minimum criterion) by two full-time, resident, fit and proper individuals in Seychelles
|
The FSA will maintain the requirement to establish substance in Seychelles, as it aims to enhance compliance and believes the white paper provisions, including resident compliance officers and directors, will help meet these criteria.
The services of a licensee must be conducted by at least two residents and fit and proper individuals which must be based in Seychelles on a full-time basis. The individuals can be either directors, compliance officers, representatives or any key officers of the licensee who has been determined to be “fit and proper” by the Authority. |
||||
| c) Compliance function to be undertaken in Seychelles by a resident person and can still be outsourced
|
The FSA decided to remove the requirement and maintaining the outsourcing of compliance function to resident individuals until further notice.
All FSA regulated licensees including SDs are required to appoint a compliance officer under section 23 of the FSA Act to fulfil the licensee’s compliance function. The FSA intends to amend the FSA Act, 2013 which means that the compliance officer will be required to be a resident of Seychelles. |
||||
| d) Complaints handling to be conducted in Seychelles as a core function with the exemption of being conducted outside Seychelles within the same group of companies | The FSA will maintain the requirement for an internal complaint handling unit/function as per the Financial Consumer Protection Act, 2022 (FCPA Act). This unit does not need to be within the licensed entity in Seychelles and can be managed by another unit or dedicated person within the same group of companies if they are based overseas, with defined service level agreements.
As complaints handling is considered a core function, where an SD forms part of a group, in which an affiliated entity is based in Seychelles, core functions may be allowed to be conducted outside of the Seychelles, subject to the FSA’s approval. The outsourcing of such function shall be contractually binding and the licensee shall have sufficient knowledge on the activity of the outsourced function.
|
||||
| e) Increase of paid-up capital requirements | Initial minimum paid up capital will be increased from USD50,000 to USD 100,000; to be kept with a bank at all times licensed in the Seychelles or a recognised jurisdiction to be approved by the Securities Authority.
Transition period for existing licensees to meet the new paid-up capital requirements from 6 to 12 months. |
||||
| f) Access to licensee records from Seychelles.
|
Records can be kept and shared in the cloud but is imperative for SDs and the FSA to have access to same.
All records and transactions pertaining to all the operations of an SD must be stored in Seychelles or be accessed through the SD’s office, thus enabling both the licensees and the Authority to access these records at all times for compliance purposes. Sufficient contingency planning should be ensured by licensees for such access through backups, additional internet connections or remote access for the FSA, or any other means deemed as appropriate by the Authority. |
||||
| g) Prohibit outsourcing of core functions with some flexibility | The FSA will maintain its position for prohibition of outsourcing of core functions to third party service providers but it will provide flexibility by allowing outsourcing within the same group of companies or to an affiliated entity, upon FSA approval. | ||||
| h) Outsourcing of support services is allowed | Support services are considered ancillary services and as they do not involve direct interaction with clients can be outsourced.
However, licensees are expected to submit the service level agreements to the Authority and in the event of a default on the part of the company to whom the function is outsourced, the licensee remains liable. |
||||
| i) All medium of communication used with the clients shall be traceable and recorded.
|
Licensees shall maintain, for at least 7 years, records of all communication with the clients, whether by phone (voice recordings or transcripts), text, email or other alternative forms of communication.
Note: Licensees raised specifically concerns as they felt that there is an expensive cost associated with the retention period of 7 years, especially for phone recordings. Τhe FSA has chosen to maintain its initial position, meaning the proposed requirement which aligns with the AML/CFT Act 2020. Nonetheless, transcripts will be allowed and maintained as an alternative to voice recordings by the FSA. All mediums of communication with clients must be recorded so as to ensure that transactions can be recreated. |
||||
| j) Limitation on trade names and domains | Each licensee shall consider the following for its tradename/domain:
1. Prior to purchase and use, entities should seek approval for use of all trade names and domains names, during the pre-licensing and post-licensing stage, from the FSA. 2. Trade names shall be registered with the Registrar of (Domestic) Companies before being used by the licensed entity, conditional upon the FSA’s approval. 3. The FSA addressed the licensing criterion that a licensed entity must list all their trade names along with their legal name on their license and on the Financial Services Authority (FSA) website. 4. Licensees must prominently display both their trade names and legal names on their website for clients or investors to easily see. 5. A licensed entity is initially allowed to operate with one domain and trade name, and if they want more, they will need to pay extra fees. See the list of applicable fees below: (a) Application fee for each additional Domain – $500 (b) Application fee for each additional Trade name – $500 (c) Annual fee for each additional Domain – $1,000 (d) Annual fee for each additional Trade name – $1,000
|
||||
| k) Limitation on worldwide operations/ Target Market | In regards to approved target markets/ worldwide operations, the burden/onus is on the licensee to comply with the following requirements:
(a) ensuring that countries in which they intend on providing services have clear provisions on providing financial services to their residents and/or citizens; (b) Reversing solicitation laws; Licensee must show proof to the satisfaction of the Authority that they are allowed to on-board and solicit clients in countries in which they intend on providing their services as part of the application for a license and at post-licensing stage. |
||||
| l) Fees to be increased | License type | Application fee | Annual License Fee | ||
| Current | Proposed | Current | Proposed | ||
| Securities Dealer | USD1500 | USD3000 | USD3000 | USD6000 | |
| Representative | REMAINING AT USD500 | REMAINING AT USD750 | |||
| m) Fit and proper fee to be adopted | Introduce a fit and proper fee which shall be applicable for a change in key persons required to undergo a fit and proper determination following submission of the initial SD application or following issuance of license.
Proposed fee – USD500 |
||||
| n) Clarity on permissible activities of Securities Dealers | SDs are allowed to generally provide investment advice on securities as part of their operations without the need of an Investment Advisor license.
For clarity purposes, Section 48(4)(a) which deals with the licensing of Investment Advisors, shall be repealed. |
||||
| o) Negative Balance Protection for Retail Clients trading CFD Product | A negative balance protection on a per trading account basis is being proposed with the aim of limiting a retail client’s aggregate liability/losses for all CFDs connected to a CFD trading account with a CFD provider to the funds in that CFD trading account.
Consequently, an SD that has opened a trading account for a Retail Client to trade in CFD products will be unable to recover any losses from the client that go beyond the funds in the Retail Client’s trading account. |
||||
| p) Risk warnings for retail clients | Another risk mitigating measure proposed by the FSA would require SDs when trading in Securities, Futures and Contract for Differences to
imprint/display risk warnings for their retail clients, notably for – 1. Understanding of the complexity of the instrument and the risks that comes with it; 2. The risk of losing money rapidly due to leverage and price fluctuation.
Note: The FSA has removed the requirement of advising clients of the percentage of clients that has lost money. |
||||
| q) Change of licensee name | Currently, Section 61 of the Securities Act details when the FSA may mandate the name change of a licensee. Whilst changing a name requires certain administrative procedures from the authority’s side, the FSA proposes a fee to be imposed to commensurate the procedures.
Proposed Name Change Fee – USD500
|
||||
| r) Approval of issue, transfer of disposal of shares | As of now, section 60 requires for approval of issuance, transfer or disposal of shares of a licensee. Whilst approving for issuance, transfer and disposal, the authority must undergo certain administrative procedures to give effect to such approval. The FSA’s opinion is that a fee to commensurate the procedures is essential i.e. for examination and administration processes undertaken from them.
Fee for approval for insurance, transfer and disposal of shares – USD500
|
||||
| Role of Securities Dealer’s Representative | Whilst the original definition for Securities Dealer[1] will be maintained, its representatives would not be doing the licensees’ functions. Instead, they would be managing the activities as employees of the licensee / rather overseeing the activities as employees of the licensee.
Handful Definitions: “securities dealer’s representative” means an individual in the employment of (including a director of) with a securities dealer whose principal purpose is to oversee the execution of the activities outlined within the meaning of section 45, whether he is paid a salary, wages, commission or otherwise;
|
||||
| s) Coming into force of the proposed amendments
|
Entities licensed before taking effect of the amendment in the Securities Act, Securities (Conduct of Business) Regulations, Securities (Financial Statement) Regulations and for the declaration of the Securities (Outsourcing of Functions) Regulations, shall have 18 months to comply with the provisions, unless specified otherwise.
New licensees shall immediately comply with new legislative requirements. The Securities (Fees and Forms) Regulations shall come into force the moment it is put in the gazette.
|
||||
[1] A Securities Dealer (SD) means a company who, in accordance with sections 2 and 45 (5) of the Act:
(a) carries on the business of dealing in securities or,
(b) holds himself out as conducting such business listed below:
(i) makes or offers to make an agreement with another person to enter into or offer to enter into an agreement, for or with a view to acquiring, disposing of, subscribing for or underwriting securities or in any way effects or causes to effect a securities transaction;
(ii) causes any sale or disposition of or other dealing or any solicitation in respect of securities for valuable consideration, whether the terms of payment be on margin, instalment or otherwise or any attempt to do any of the foregoing;
(iii) participates as a Securities Dealer in any transaction in a security occurring upon a securities exchange;
(iv) receives as a Securities Dealer an order to buy or sell a security which is executed;
or
(v) manages a portfolio of securities for another person on terms under which the first-mentioned person may hold property of the other person.