April 2022 Legislative Update
There’s a lot coming out from the Financial Intelligence Centre (FIC) at the moment. It has even roped in the Prudential Authority (PA) and the Financial Sector Conduct Authority (the FSCA) to resolve issues in that poor report from the Financial Action Task Force (FATF). Let’s hope it’s effective.
The delay to the promulgation of Conduct of Financial Institutions (COFI) is only a brief reprieve. Make sure your governance structures and controls are in place.
If you deal in crypto assets, the regulators are becoming more focused on your operation. Let’s discuss how to fit your business into the conduct regulation structures.
THE FINANCIAL SECTOR CONDUCT AUTHORITY (THE FSCA)
FSCA financial sector outlook
The FSCA conducted a study on the outlook for the South African financial sector and released it on 5 April. The report considered data from 2015 to 2021, and noted specific effects brought about by the COVID-19 pandemic and the South African social, economic, and political situation.
Some key items in the report include:
- Digital adoption has increased, with more customers using banking apps and online banking platforms to perform transactions. The FSCA noted with concern the resultant heightened risks related to digital banking fraud.
- On average, the insurance industry has seen positive growth in gross written premiums between 2015 and 2020. The FSCA remains concerned about disclosure of changes made to policy wording and conditions and the efficient payment of claims. This can be attributed to the handling of business interruption claims processed in 2020, as a result of the COVID-19 lockdown. The FSCA considers the unrest experienced in July 2021 as necessitating discussions with insurers regarding uninsurable risks.
- Coverage of South Africa’s retirement industry remains an issue for the FSCA, given that approximately only seven to 10 million individuals have retirement savings products, out of an employed labour force of about 15 million.
- The South African investment and asset management industry has seen growth in consumer numbers, investment activity, and assets under management. Venture capital investment will be an area of focus for the FSCA in an effort to support the government’s goals regarding infrastructure development and the transition toward a sustainable economy.
- Crypto-trading has become a popular asset class in South Africa. Cryptocurrency platforms have operated outside the purview of regulators, but as we mentioned last month, they are considered a taxable asset and are to be included in the COFI regulatory framework.
Request for Information (RFI) on crypto assets
The FSCA has issued a notice to instruct financial services providers (FSPs) to complete a survey regarding their current and planned activity in crypto asset trading. Regular readers will remember our many cautions that this asset is indirectly in line to be included in the financial services conduct legislation.
We’ll complete the RFI on behalf of our retainer clients, but with a little information we can complete the RFI for any FSP – just get in touch. Note that the survey must be completed by 31 May 2022.
Extension to representative register submission requirements
FSCA Communication 19 of 2021 informed FSPs of the change in the method of submission of the representative register to the FSCA. In terms of the communication, the submission of representative registers in Microsoft Excel format will no longer be accepted after 31 March 2022, as all FSPs were required to integrate their systems with the FSCA web service by no later than 31 March 2022.
After consideration of numerous requests and the reasons provided, the FSCA has granted an extension until 30 June 2022 in Communication 11 of 2022.
FSCA fines and debars two individuals – a warning on ‘rent-a-KI’
On 6 April the FSCA released a press statement regarding its sanction of Renault Otto Kay and Melusi Christian Ntumba.
The breach centred around the trading activities of Smart Billion Investments (Pty) Ltd. Smart Billion pooled client funds and traded in contracts for differences (CFDs) on behalf of clients through an online trading platform, GT247 (Pty) Ltd. Clients deposited funds into Smart Billion’s bank account of which only a portion was transferred to GT247 for trading purposes.
The FSCA determined that Smart Billion did not render financial services honestly, fairly, with care or diligence, or in the interests of the clients or the financial services industry. It did not conduct proper accounting and auditing, nor did it handle client funds according to the requirements of the FAIS General Code of Conduct and Protection of Funds Act. This resulted in the suspension of the Smart Billion FAIS licence.
An aggravating factor was that Kay agreed to act as Smart Billions’ KI only to secure a FAIS license for Smart Billion. His only role was to oversee platform trading. The FSCA considered that Kay did not perform the responsibilities bestowed upon him as KI to ensure that Smart Billion had operational ability as an aggravating factor.
Ntumba, in his capacity as director, representative, and CEO of Smart Billion, did not observe the utmost good faith and did not exercise proper care and diligence with regards to client funds. In addition, he was instrumental in the contravention of section 2 and 10(1)(e)(i) of the General Code and certain financial sector laws, fund handling conditions, as well as the FAIS Fit and Proper requirements. An aggravating factor was that a miniscule amount of client funds was transferred to GT247, while the balance of the funds was used to repay clients and personal and/or business expenses.
Kay was given a penalty of R500 000 and debarred for five years. Ntumba received a penalty of R10 million and has been debarred for 10 years. The Serious Commercial Crime Unit is investigating a criminal case against Smart Billion.
We are regularly approached to find a “KI for rent” which we strongly discourage. In addition, most KIs realise the risk they take when signing up for such a role and decline – this will only add to their appropriate concern.
Updated preparation guide for RE1 and RE5
The FSCA has released an updated guide to assist individuals to prepare for the regulatory exams.
Anyone planning to write should ensure they refer to this new guide.
SOUTH AFRICAN RESERVE BANK (SARB)
Tokenisation in financial markets
The SARB, in collaboration with the Intergovernmental Fintech Working Group, released the Project Khokha 2 (PK2) report on 6 April, following the conclusion of the technical proof-of-concept (PoC).
PK2 built on the SARB’s experimentation with distributed ledger technology (DLT) in collaboration with industry participants Absa, FirstRand, JSE Limited, Nedbank, Standard Bank, as well as technical and support service providers trialling DLT for interbank payments settlement.
The exercise also explored tokenisation, and demonstrated the impact that building a platform for a tokenised security would have on the existing participants in the financial market ecosystem, essentially showing that there is the potential to reduce both costs and complexity.
The report highlights several legal, regulatory, and policy implications regarding the legal status of the wholesale central bank digital currency (wCBDC) token and wallets, and the feasibility of designating the wCBDC’s DLT as a settlement system.
The wToken implemented in the PoC could potentially be defined as a stablecoin used for wholesale settlement, and the policy response to wTokens would therefore have to align with broader regulatory approaches to stablecoins. Should the central bank decide to allow wTokens into production, some of the practical considerations would be whether to designate such arrangements as an alternate settlement system and/or how such payment systems should interface with the real-time gross settlement system. Further considerations would include the potential systemic importance of the wToken and its governance and operating models.
In addition, a systemically important stablecoin arrangement, primarily used for making payments (transferring tokens between users), would be expected to adhere to all the relevant principles for financial market infrastructures.
PRUDENTIAL AUTHORITY (PA)
Vetting of ultimate beneficial owners (UBOs) and directors
The PA released proposed directives to banks intended to force banks to conduct due diligence and criminal checks on their UBOs and directors.
This is to meet the conditions laid down by the FATF in its review of South Africa’s anti-money laundering system.
Demarcation regulations: 2022 escalation of policy benefits
National Treasury and the FSCA released the escalated policy benefits for health policies and accident and health policies under the Long-term Insurance Act, 52 of 1998 and the Short-term Insurance Act, 53 of 1998.
They have been escalated by the Consumer Price Index annual inflation rate as of 1 April 2022.
FINANCIAL INTELLIGENCE CENTRE (FIC)
Draft risk management and compliance plans (RMCPs) replacement guidelines
The documents are intended to guide Accountable and Reporting Institutions on the replacement of their RMCPs using these documents to develop a consolidated version rather than using the fragmented guidance and public compliance communications (PCCs) previously issued. The guideline will enable development and implementation of an “Apex RMCP” for Accountable Institutions (AIs) and Reporting Institutions (RIs).
Once the PCC is finalised, we will be able to assist AIs and RIs to replace their RMCPs.
FIC releases industry-specific reports
The FIC released four industry-specific reports on 31 March. The sectors were: trust services providers, lender of money against the security of securities (securities lending), motor vehicle dealers, and the gambling sector.
The targeted reports aim to assist the various sectors in complying with their obligations in terms of the FIC Act. We recommend affected entities read the reports and amend their RMCPs accordingly. Let us know if you need assistance.
Administrative sanctions against motor vehicle dealerships
The FIC issued sanctions against two motor vehicle dealerships on 29 March.
Both cases were due to the dealerships not reporting cash transactions over R24,999.99, and the penalties totalled nearly R1 million!
We remind AIs and RIs to set up these controls and follow them. Get in touch if you need some guidance.
PCC 52 – exchanges
The FIC released PCC 52 on 25 March 2022.
The objective of the PCC is to assist authorised users of exchanges in applying effective risk management and customer due diligence in engagements with their clients. The requirements should be read in conjunction with FIC Guidance Note 7.
Those familiar with the FIC Act and guidelines will notice that the types of AIs are different but the requirements are the same.
South African national terrorism financing risk assessment
A report on South Africa’s national terrorism financing risk assessment was released by the FIC on 12 April.
South Africa’s efficient financial system, geographical location, and liberal stance on immigrants and world politics puts it directly in a position of focus for terrorism financing (i.e. where money is routed to terrorists through our financial system or borders).
There are no specific instructions to AIs or RIs, but it makes for sobering reading. Not taking action to upgrade RMCPs based on this will only lead to more stringent legislation.
FSP business continuity and bank accounts
We have recently noted instances where FSPs’ signatories on bank accounts are limited. This becomes a matter of concern when the sole signatory passes away, and the deceased is the sole shareholder or member of the FSP.
We recommend your Business Continuity Plan and its practical measures take this into account. Get in touch if you need some guidance.
CMS suspension of Glopin Health Consultants (Pty) Ltd appealed
Last month we reported on the suspension of Glopin’s accreditation by the CMS. Glopin lodged an appeal with the CMS’ Appeal Board on 18 March 2022.
On 22 March 2022 the CMS released a statement noting the appeal and allowing Glopin to remain as an accredited healthcare brokerage until the appeal has been determined.
INFORMATION REGULATOR (IR)
TransUnion data breach
The IR media statement regarding the TransUnion data breach, expresses its dissatisfaction with TransUnion’s response, and indicates that the IR will conduct its own assessment into the appropriateness of TransUnion’s security measures.
It would seem that most affected data subjects will have received either an SMS or an email from TransUnion on 7 or 8 April 2022 offering a one-year free subscription to TrueIdentity. Anyone taking up the offer will need to redeem their voucher by 1 July 2022. When the free one-year subscription lapses, TransUnion will provide a TrueCredit subscription until December 2023.
Upon completion of the registration process, affected data subjects will have access to the following features: ID Monitor, ID Restore, ID Recover, Credit Report PLUS Alerts, and Score.
It should be noted that TrueIdentity and TrueCredit are a part of TransUnion. TrueCredit provides data subjects with credit reports and credit scores from TransUnion, Experian, and Equifax. These credit bureaus all have something in common…
TransUnion provided an update on 11 April 2022.