A lot has happened this month. Happy reading!
THE FINANCIAL SECTOR CONDUCT AUTHORITY (THE FSCA)
FSCA Regulation Plan
The FSCA issued its three-year Regulation Plan on 1 July.
Its stated regulatory framework focus areas are: conduct, integrity and efficiency of financial markets, and the cross-cutting sector developments.
These plans rely on the release of the Conduct of Financial Institutions (COFI) Bill, the FSCA’s Harmonisation Project, and the transition to the COFI Bill framework.
We’ve summarised the plans as briefly as possible below.
Banks: No banking-specific interventions are planned within the next three years. However, the COFI Bill requirements, including licensing and some of the financial markets regulatory framework developments, will have an effect.
Insurers: The final Cell Captive Conduct Standard is expected to be made this year.
The draft Joint Standard on Outsourcing by Insurers will continue to be completed this year.
Financial advisors and intermediaries: Draft amendments to the General Code of Conduct for financial service providers is expected to reach finalisation through Parliament soon. The draft amendments to the Fit and Proper Requirements will be incorporated into the COFI Bill.
The declaration of crypto assets as a financial product awaits final review of the results of the Request for Information on these products.
The FSCA will be proposing amendments to the FAIS Ombud Rules, specifically to increase the current jurisdictional limit of the FAIS Ombud, and will consult on this in due course.
Collective Investment Schemes (CISs): The FSCA will be initiating a process to develop a single Conduct Standard to enhance regulation of CISs, and expects to do this early in 2023.
A review of the classification of the assets that may be included in the portfolio of a CIS will be conducted in conjunction with the Prudential Authority at the end of 2022.
The FSCA will be initiating a review relating to suspensions and other liquidity management options for CISs to provide for more effective tools to manage liquidity issues in portfolios. Timelines are yet to be determined, as it is dependent on the above being resolved.
The current Pro-Forma Deed for the founding of a CIS is to be reviewed. Timelines will be determined once the other related CIS and COFI Bill developments have progressed.
Development of a CIS accounting framework, which will include portfolios. Consultation on this framework, will only be undertaken once COFI is promulgated.
Alternative Investment Funds: The FSCA will be developing standards for this previously unregulated sphere. The development work is to begin in 2023.
Retirement Funds: Technical work on pension fund financial statements and the development of a regulatory standard will be undertaken.
The Conduct Standard for Payment of Pension Fund Contributions is to be enacted as soon as National Treasury repeals Regulation 33.
The Conduct Standards for Conditions for investment in derivative instruments, Conditions for living annuities in an annuity strategy, and Communication of benefit projections to members of pension funds are nearing completion, and are likely to come into force later this year.
There are concerns about the knock-on effects of these changes, and this has caused the following draft instruments to be put on hold: Conduct Standard for cooperative financial institutions; amendments to the Policyholder Protection Rules under the Long- and Short-term Insurance Acts; amendments to the regulations under the Long- and Short-term Insurance Acts; a Conduct Standard relating to governance, fit and proper, and other requirements for CIS Managers; a Conduct Standard relating to advertising and marketing requirements for CIS Managers; and a Conduct Standard relating to culture and governance for pension funds.
The following FSCA projects are still underway, but do not have a definite timeframe: Development of a regulatory framework for central clearing in South Africa; Margin requirements for non-centrally cleared over-the-counter derivative transactions; Regulatory framework for the regulation of provision of benchmarks; Framework for reporting and public disclosure in relation to short sales; Conduct Standard for exchanges; and Joint Standard recovery plans for market infrastructures.
The following Joint Standards and regulatory interventions are still underway: Culture and governance; Information Technology governance and risk management; Cyber security and cyber resilience requirements and Information Technology-related Standards; Beneficial owners of financial institutions; Conduct Standard relating to financial consumer education initiatives; Conduct Standard regarding industry practices and treatment of lost accounts and unclaimed assets; Conduct Standard relating to open finance; and development of cross-sector licensing forms.
As the Greek philosopher Heraclitus said, “the only constant in life is change”.
Regulatory Exam fraud
In a press release issued on 30 June, the FSCA noted its concerns regarding fraud in respect of the FAIS regulatory exams.
The FSCA is aware of candidates buying forged or fake examination certificates, altering examination certificates, paying other persons to impersonate them to write the examinations, and bribing examination officials.
Our experience is that the system is watertight, and anyone attempting this type of activity will be found out.
It should also be noted that the only accredited body to conduct the exams is Moonstone. Candidates should deal with Moonstone directly as cases of fake examination bodies have also arisen.
Draft guidance on pension fund transfers
The FSCA has received multiple queries regarding the transfer of individual member interests between retirement annuity funds, and released a draft guidance note for comment.
Section 14(7)(a) of the Pension Funds Act provides that a retirement annuity fund may not prohibit such transfers, while section 14(7)(b) imposes various conditions regarding the remuneration intermediaries may receive in relation to such transfers. The FSCA feels the need for guidance to industry to ensure a consistent understanding and application of section 14(7)(b). It is anticipated that future regulatory reforms will resolve the current inconsistency.
Comments can be submitted to FSCA.RFDStandards@fsca.co.za by 2 August.
FAIS Ombud
On 6 July, the FSCA released a draft amendment to the Rules of the FAIS Ombud’s office.
The main change is the increase in the jurisdictional limit of the Ombud from R800 000 to R3 500 000. This makes sense as the original limit was put in place in 2004 and has not been amended since.
Comments are to be submitted to FSCA.RFDstandards@fsca.co.za by 19 August 2022.
PRUDENTIAL AUTHORITY (PA)
Annual Report
The PA released its Annual Report (which includes its financial statements) on 27 June.
The PA provides an extensive breakdown of its progress against its legislative objectives in the report – it has done well in achieving the standards.
SOUTH AFRICAN RESERVE BANK (SARB)
Annual Financial Statements and Report
The SARB released its Annual Financial Statements for 2021/2022 as well as its Annual Report at the end of June.
The SARB acknowledges the issues the South African economy faces, and should be commended on meeting its goals in terms of inflation management and financial stability given the circumstances.
NATIONAL TREASURY
Amendments to the Pension Funds Act to encourage infrastructure investment
National Treasury published the final amendments to Regulation 28 of the Pension Funds Act on 5 July, following two rounds of public comments in 2021.
Regulation 28 protects retirement fund member savings by limiting the extent to which funds may invest in a particular asset or asset classes, and prevents excessive concentration risk. The regulations widen the scope of potential investments for retirement funds, but continue to leave the final decision on any investment to the trustees of each fund.
The aim of the amendment is to enable longer-term infrastructure investment by retirement funds, by increasing maximum limits that funds may invest in. The amendments introduce a definition of infrastructure, and set a limit of 45% for exposure in infrastructure investment. In addition, the limit between hedge funds and private equity has been split and there will now be a separate and higher allocation to private equity assets, which has been increased to 15% from 10%.
Retirement funds are still prohibited from investing in crypto assets due to their excessive volatility and unregulated nature.
A limit of 25% has been imposed across all asset classes to limit exposure of retirement funds to any one entity (company) excluding debt instruments issued by, and loans to, the government of the Republic and any debt or loan guaranteed by the Republic.
In addition, asset allocation to housing loans granted to retirement fund members will be reduced from 95% to 65% in respect of new loans. This is meant to curb abuse of the housing loan scheme by fund members.
The amendments will take effect on 3 January 2023.
FINANCIAL INTELLIGENCE CENTRE (FIC)
High-Risk Jurisdictions Advisory
The FIC released another update on 30 June on jurisdictions that the Financial Action Task Force considers high risk.
The advisory noted that Accountable Institutions (AIs) should stop dealings with entities in the Democratic People’s Republic of Korea.
It also noted that AIs should apply higher risk and enhanced due diligence in their Risk Management and Compliance Plans (RMCPs) for entities in the Islamic Republic of Iran.
The FIC also published a list of jurisdictions under increased monitoring requirements.
These jurisdictions are: Albania, Barbados, Burkina Faso, Cambodia, Cayman Islands, Gibraltar, Haiti, Jamaica, Jordan, Mali, Morocco, Myanmar, Nicaragua, Pakistan, Panama, Philippines, Senegal, South Sudan, Syria, Turkey, Uganda, United Arab Emirates, and Yemen.
The FIC also noted that Malta is no longer subject to increased monitoring.
Let us know if you need assistance in updating your RMCP.
Draft public compliance communications (PCC)
The FIC released draft PCC 115 to provide recommendations on mitigating the risk of non-compliance with the broader activity-based sanctions obligations on non-proliferation of weapons of mass destruction.
The PCC also clarifies certain definitions related to non-proliferation financing of weapons of mass destruction, and sets out heightened risks scenarios or red-flag indicators.
Draft PCC 22A was released for consultation on 5 July. The PCC provides guidance from the FIC to AIs on their obligations in terms of FICA in relation to the Protection of Personal Information Act (POPIA). Note that it is not a joint document with the Information Regulator, but it is in line with our interpretations of both Acts.
Contact us if you would like to confirm that your processes are aligned.
By the time you read this, comments on both documents were already due. But let’s see what the results are.
COUNCIL FOR MEDICAL SCHEMES (CMS)
Employer broker appointments
Circular 35 of 2022 was issued on 27 June 2022. The CMS is proposing to change the conditions for the appointment of brokers by employers.
In the circular, the CMS proposes the following:
- Where an employer appoints a broker on behalf of employees, they must appoint a minimum of three brokers to allow employees the freedom to choose any of the appointed brokers as and when the employees wish.
- The appointment of the brokers must follow an open, transparent, and competitive process.
- The appointment of the brokers must be for a reasonable fixed period (no specific term is provided).
- Employers should be aware that appointing and terminating a broker is subject to monitoring and enforcement by the Registrar.
Comments are to be submitted to f.maphanga@medicalschemes.co.za by the extended deadline of 31 August 2022.
INFORMATION REGULATOR (IR)
Media briefing: Progress a year since POPIA enforcement powers and taking over PAIA from SAHRC
The IR held a live media briefing with certain media outlets on 29 June 2022.
Below are some of the highlights of the briefing:
- From July 2021, the IR has received and pre-investigated more than 700 complaints related to direct marketing. The investigations revolve around unsolicited electronic communication and consent, justification, and objection. POPIA, the NCA, the CPA, and ECTA place obligations on responsible parties, credit providers, and direct marketers to give data subjects opportunities to object to the processing of information and to unsolicited electronic communications (i.e. to opt-in/out). Responsible parties should make use of both options to make sure that the data subject understands and knows what he or she is consenting and objecting to.
- Notification was sent to the IR by the National Credit Regulator (NCR) on its report on the sale of personal information (PI) by entities – names, surnames, ID numbers, contact numbers, credit scores, and consumer debt review statuses. This is in violation of POPIA, and entities were warned not to buy or sell such marketing lists or face the consequences. The IR has commenced a systemic investigation on the sale of databases.
- Data breaches: The IR has received more than 330 reports since July 2021. Where there has been a security compromise or where the Regulator believes there is processing of PI which is not compliant with any of the processing conditions, the IR is conducting its own “initiative assessments”. As reported in the media, assessments are being conducted on WhatsApp, TransUnion, and the Department of Justice and Constitutional Development. The IR advised that these assessments are at an advanced stage.
- The IR has established a dedicated “security comprise unit” due to the high prevalence of data breaches to conduct extensive investigations or assessments into security compromises suffered or experienced and issue reports with findings and recommendations. These reports will in effect be “enforcement notices”, and failure to comply with enforcement notices will attract sanctions (i.e. fines).
The question-and-answer session:
- The IR was allocated an amount of R100 million. It hinted that this isn’t enough, so we should expect the remainder of the budget to be from administrative fines in order to fund the expenses of forensic audits.
- Research is being done on security firms, their surveillance, and processing of PI. It is believed that there are significant amounts of over-processing of PI (CCTV, private property CCTV, and street CCTV) by Vuma, armed response security firms, and others. Guidance or regulations should be expected, as there is little regulation in this area of our daily lives. There is precedent from Austria, and we believe that this will be used by the IR in any enforcement actions of this nature.
The full media briefing can only be accessed via the IR’s website on its home page.
We will summarise the PAIA section of the media briefing next month.
THE FINANCIAL SERVICES TRIBUNAL (FST)
Decision – Martin Lourens v Discovery Life Ltd
The decision revolves around the application for reconsideration of the debarment of Martin Lourens.
The reasons for the debarment of the Representative by Discovery were as follows:
- Being in breach of section 3 of the General Code of Conduct for not entering into an agreement.
- Failing to disclose a conflict of interest and the persona financial benefit he would receive, and thus being in breach of section 3(1)(c) of the General Code of Conduct.
- Being in breach of section 13 of the FAIS Act by providing advice and intermediary services where he was not authorised to do so.
- Failure to provide financial services honestly, fairly with due skill, care and diligence in terms of section 2 of the General Code of Conduct.
- Being in breach of sections 6A(2)(a) and 13(2)(a)(i) of the FAIS Act read together with section 8(1) of Determination of Fit and Proper Requirements for Financial Services Providers – BN194 of 2017 (i.e. failing to meet the fit and proper and good standing requirements).
One of the Representative’s arguments concerned the meaning of advice. He alleged that he did not provide the complainants with advice, but with factual information.
The question was posed as to whether the Representative “gave factual advice relating to procedure, description, or objective information about the … product or whether he (at least impliedly) recommended, guided (showed the way), or proposed that the product was appropriate to the particular investment objectives, financial situation, or particular needs of each complainant.”
Three of the clients were existing clients of Discovery who had been serviced by the Representative for many years. They sought his advice on their retirement plans and investments. The fourth was referred to the applicant by one of the others for advice on his pension pay-out. The chairman of the FST found that there was accordingly a fiduciary relationship between the applicant and the complainants, and that the Representative guided a complainant from the beginning to the end, thus, facts “morphed into advice”. Advice had been given, and the referral was “but a step in the process to earn commission”.
