February 2022 Legislative Update

February 2022 Legislative Update

As we marvelled at the date pattern on 22 02 2022 (better at 20:22 that evening) some of those more community minded were contemplating the life and message of the late Archbishop Emeritus Desmond Tutu. Let’s hope peaceful and reasonable voices like his will be heard in the unfolding Russia-Ukraine conflict.

Many countries have imposed sanctions against Russian companies and the state itself as we see the further weaponisation of ‘trade’. If you’re trading into Russian markets, you need to consult with your Money Laundering Control Officer and review your Risk Management and Compliance Plan.

THE FINANCIAL SECTOR CONDUCT AUTHORITY (THE FSCA)

Premium collection extensions

The FSCA extended the exemption for direct collection of premiums by 12 months in FSCA Insurance Notices 1 and 2 (available here).

Provided no further extension is granted, intermediaries will continue to be remunerated for premium collection services until 31 January 2023. The FSCA’s expectation is that premiums will then be collected directly into the accounts of insurers.

Intermediaries and binder holders should now be nearing the completion of the change in processes and should use the extension to test and finalise the collection processes.

Similarly, FSCA Insurance Notices 3 and 4 of 2022 were released, and extend the exemption for intermediaries to collect premiums into a separate bank account until 31 March 2024. The conditions of prompt and proper accounting and reporting to insurers still apply.

Request for Information (RFI)

Most financial service providers (FSPs) will have seen the FSCA reminders to complete the RFI. This is after the 31 January extended deadline. It seems many submissions failed to load on the FSCA system despite attempts by FSPs and compliance officers to submit and a second reminder being sent. We have also seen two cases where FSPs’ licenses were only approved in February but they received a reminder as the FSCA had not captured the information!

It’s frustrating (trust us, we know!), but it’s a simple enough exercise to complete. Should you be concerned that your FSP’s submission is still outstanding, get in touch and we’ll assist.

FSCA fines Pioneer FX (Pty) Ltd and Quintin Moorcroft

The FSCA imposed an administrative penalty of R2 million on Pioneer FX (Pty) Ltd and Quintin Moorcroft. The FSCA also debarred Moorcroft for a period of 10 years.

The FSCA found that Pioneer FX and Moorcroft traded in Contracts for Differences (“CFDs”) on behalf of 276 clients. Trading decisions made by Moorcroft caused trades to be executed on client accounts. The FSCA is of the view that Pioneer and Moorcroft acted as a discretionary financial services provider, without having the required authorisation to do so, and contravened section 7(1) of the FAIS Act.

In coming to the determination, the FSCA found aggravating circumstances in that Moorcroft also provided financial advice to clients relating to future market movements, that he had previously contravened section 7(1), that he had a substantial number of clients, and that his clients lost a material amount of money.

Financial services tribunal members

On 21 February 2022, the FSCA released an updated list of tribunal members. This list is available here.

PRUDENTIAL AUTHORITY (PA)

Extension to proposed amendments relating to banks’ exposures and loss-absorbing capacity

The PA confirmed that the proposed amendments to the supervisory framework for measuring and controlling large exposures and the total loss-absorbing capacity holding standard guidance released on 9 July 2021 (Guidance Note 4 of 2021) are not yet in force as they have not been written into law by the Minister of Finance.

The PA is working towards having the law approved with an effective date of 1 April 2022.

Read the full Prudential Communication 2 of 2022 released on 27 January 2022 here.

Capital requirements for financial conglomerates for field testing purposes

On 28 January 2022, the PA published Draft Prudential Standard: FC01.

The Standard and Return are the frameworks for the field testing of the Standard with designated conglomerates and volunteer organisations.

The results of the field testing will guide the formal Standard.

The Return is available here.

Financial soundness standards for insurers

The PA released a Technical Supervisory Observation regarding the Financial Soundness Standards for Insurers on 29 January 2022.

The document covers two topics: “Encumbered Assets” and “The Regulatory Balance Sheet”.

The intention is to guide affected entities on the PA’s expectations regarding these requirements based on the PA’s observations.

The Observation is (as it states) quite technical; should you be affected and wish to discuss the effect, please contact us.

Solo quantitative reporting template amendment

The PA released Prudential Notice 1 of 2022 on 2 February 2022 advising insurers of the amended reporting requirements of the Solo Quantitative Reporting Template (QRT).

The amendment to the annual and quarterly QRTs is intended to enhance the detail and increase the frequency of operational risk loss reporting from annually to quarterly by insurers with effect from 1 January 2022.

The annual QRT submitted to the PA four months after insurers’ financial year-ends creates a time lag between operational risk loss events and the reporting of such events. The quarterly QRT is amended by the addition of the operational risk loss event to enable increased frequency in the reporting of operational risk loss data by insurers.

Conducting insurance business outside South Africa

Prudential Communication 4 of 2022 was released on 22 February 2022 to provide clarity on the process to obtain approval to conduct insurance business outside South Africa.

The Communication does not apply to reinsurers, foreign reinsurers, Lloyd’s underwriters, or Lloyds.

The Communication clarifies the application process, the process to add foreign jurisdictions, and provides for conditional prior approval where the insurer’s business model is based on multinational programmes or where adding foreign jurisdictions is not material to the insurer’s risk appetite and solvency when compared to the insurer’s Own Risk Solvency Assessment.

To allow for expedient risk placement, the revised process requires insurers to submit an annual application to place business in foreign jurisdictions, but does not require additional applications should further jurisdictions be added during the year. Quarterly returns will confirm which additional foreign jurisdictions were used.

The conditions which must be adhered to are:

• The business must be in the classes and sub-classes the insurer is authorised to write outside of South Africa.
• The risks must fall within the risk appetite model of the insurer.
• The assessment of foreign jurisdiction risks should be aligned to the risk management practises of the insurer applied in South Africa.
• Underwriting guidelines established and embedded within South Africa must be followed.
• Quarterly reports and signed declarations from head of actuarial control function and the chief executive officer as well as a letter from the head of risk management control function must be supplied.
• The head of risk management letter must confirm:
  • That the insurer met the limitations on reinsurance arrangements.
  • That the insurer has mitigated the risks of fronting and market spirals.
  • The nature of the risks placed in the foreign jurisdictions fall within the insurer’s risk appetite model.
• Amendments to underwriting guidelines or risk management practises to assess the additional foreign jurisdictions must be communicated to the PA within one month, and the impact of the amendments must be quantified accordingly.

The supporting annexures are here, here, and here.

If you need further guidance, please contact us.

NATIONAL TREASURY

National Treasury released the third Financial Sector Assessment Program (FSAP) Financial System Stability Assessment (FSSA) issued by the International Monetary Fund (IMF) and the World Bank report for South Africa on 11 February 2022.

The FSAP assessment is conducted jointly by the IMF and the World Bank every five years.

The assessment team met with National Treasury, the South African Reserve Bank, the PA, the FSCA, National Credit Regulator, industry participants, and public-sector entities such as the Public Investment Corporation. The report was informed by the authorities’ views on the stability and soundness of the country’s financial system.

The key recommendations in the FSSA report include the need to:

• promote fintech while balancing the risks it may pose to financial stability.
• improve the implementation of the risk-based approach to anti-money laundering / combating the financing of terrorism (AML/CFT) supervision.
• bring all sectors covered by the Financial Action Task Force standards under the AML/CFT framework.
• address the challenges related to climate risk.
• embrace the new opportunities of sustainable finance.

Read the full report here.

FINANCIAL INTELLIGENCE CENTRE (FIC)

Sanction against motor vehicle dealership

The FIC imposed a sanction against Truck World (Pty) Ltd on 1 February 2022. This is nearly a year after Truck World appealed the sanction which was not upheld. The sanction amount of R2,664,812 related to 204 transactions exceeding the R24,999.99 threshold not being reported.

This sanction could have been avoided if Truck World had set up controls and actively managed its transaction reporting requirements. The services of a suitable compliance practice would certainly not have amounted to the cost of the fine, and would have removed a great deal of stress!

COUNCIL FOR MEDICAL SCHEMES (CMS)

Demarcation regulations exemption

The original Demarcation Regulations aimed to provide clarity on the responsibility for supervision of medical scheme and health insurance products, and to ensure that health insurance products do not undermine the activities and benefits provided by medical schemes.

The CMS released Communication 9 of 2022 on 25 January 2022 to extend the exemption for insurers to align their products with the Demarcation Regulations.

The CMS issued a transitional arrangement known as the Exemption Framework in March 2017 allowing insurers until 31 March 2019 to make the necessary changes. In March 2019, insurers were provided a further exemption to 31 March 2021 provided they resubmitted the applications. In August 2020, the CMS again extended the exemption in terms of the Exemption Framework to 31 March 2022.

Insurers that were previously granted an exemption in terms of the Exemption Framework need to resubmit applications to renew their exemptions and extend the exemption period to 31 March 2024 by 29 March 2022.

Insurers who miss this fourth extension will have to align their health benefit products by 31 March 2022.

INFORMATION REGULATOR (IR)

Employees taking confidential information to a competitor

Two cases have come across our desks this month, so we decided to unpack the unfortunate and often misguided case of an employee leaving and taking information to a competitor organisation.

Scenario: An employee leaves your employ either amicably or otherwise or gives notice of their intention to resign. A month or two later, a substantial amount of business starts migrating. The question is, what recourse does the former employer have?

The Protection of Personal Information Act (the POPIA) seems to be silent on the liability of former employees, unlike the UK Data Protection Act, section 55 (Mark Lloyd vs ICO – June 2016). Section 19 states that a responsible party must secure the integrity and confidentiality of personal information in its possession. This does not bode well for employers.

The Cyber Crimes Act (section 7(1)) on the other hand states that the unlawful acquisition, possession, provision, receipt or use of password, access code or similar data or device which is acquired, possessed, provided to another person or used by any person unlawfully and intentionally, is guilty of an offence (Cyber Crime) and would be liable on conviction to a fine or to imprisonment for a period not exceeding 10 years or to both a fine and imprisonment. We are of the opinion that the employer would have to prove that the employee acted unlawfully and intentionally.

We asked the Information Regulator for guidance. Its representative suggested that “recourse for an employer could be by way of employment contracts with clauses drafted specifically for protecting personal information.” This means an employer would have a legal basis to act against the former employee as long as it was provided for in their employment contract. The new employer could also be liable for “illegally acquiring” personal information as is the case in other jurisdictions. As this type of behaviour is prevalent in South Africa, The POPIA may be amended accordingly.

While we wait for precedence, the following steps should be considered:

• Make your employees aware that a criminal prosecution could be brought against them if personal information is misappropriated by them.
• Employees could draw attention to contractual provisions to protect their business in the end of employment termination letter.
• Keep a careful watch over an employee’s activities on any electronic systems during the notice period given by either party
• Implement mechanisms that will allow you to monitor whether employees are accessing high volumes of data.
• Review your contracts to include clauses that protect your business’s personal information.

Contact us if you need some advice.

PROPERTY PRACTIONERS REGULATORY AUTHORITY

The Property Practitioners Act, 22 of 2019 commenced on 1 February 2022. The Act’s aims are to provide:

• for the regulation of property practitioners.
• for the continuation of the Estate Agency Affairs Board as the Property Practitioners Regulatory Authority.
• for the appointment of the members of the Board and matters incidental thereto.
• for the appointment of the chief executive officer and other staff members of the Authority.
• for transformation of the property practitioners sector.
• for the establishment of the transformation fund and establishment of the research centre on transformation.
• for compliance with and enforcement of the provisions of the Act.
• for the continuation of the Estate Agents Fidelity Fund as the Property Practitioners Fidelity Fund.
• for consumer protection.
• for the repeal of the Estate Agency Affairs Act, 1976.

If property services are part of your service offering, let us know if you need some assistance.

FROM A-PROOFED

It’s at this point of the Legislative Update where most of you stop reading. This time, you’re allowed to! There won’t be any extra reading for you for the next two months as Kim prepares for and recovers from retina surgery in March.

If there’s anything you’d like Kim to write about for the April Legislative Update, please send her an email (kim@a-proofed.co.za)