The topic that has most people talking this month (other than what type of back-up energy solution they’re installing) is the release of the FSCA’s Transformation Strategy – which has less to do with the FSCA and more to do with the financial services industry. Read on…
And don’t forget to complete your CPD!
THE FINANCIAL SECTOR CONDUCT AUTHORITY (THE FSCA)
Continuous Professional Development (CPD)
A reminder that the CPD deadline is 31 May 2023. Affected Key Individuals and Representatives need to ensure they have achieved their hours (as per their categories) and have this recorded in their competence register by then.
Also, make sure to send the updated register to your Compliance Officer.
We’d recommend you sign up with AC Develop to make the whole process easier. Contact charmaine@acdevelop.co.za or eric@acdevelop.co.za if you’re interested.
FSCA Transformation Strategy
Anyone who has read (or, more likely, watched the movie) JM Barrie’s “Peter Pan” will be reminded of the overwhelming dread Captain Hook felt when he heard ticking. That’s how many financial institutions feel every time someone mentions “transformation”. However, that’s where the analogy stops, as most financial institutions are not bloodthirsty pirates (the FSCA’s opinion excluded).
After releasing a draft Transformation Strategy for comment, the FSCA released its finalised Transformation Strategy at the end of March. Financial institutions should no longer dread Hook’s giant crocodile – you shouldn’t fear something you can see and deal with.
Unlike in most legislative changes, where we get the full set of comments as well as the responses, the accompanying response document has been tailored by the FSCA. In fact, the FSCA’s response document is a far more informative document, and is worth reading to get a proper understanding of the framework.
Most of the requirements are pertinent to corporate entities which should have no issue meeting the requirements if they don’t already. The strategy does state that the FSCA will make allowances based on proportional requirements such as turnover, ownership structures, business models, and achieved Broad-Based Black Economic Empowerment (B-BBEE) levels. Standards dictating these requirements will be introduced under the Conduct of Financial Institutions (COFI) legislation once it is promulgated. It does state that the standard will not specify the B-BBEE level as was previously envisaged, because the FSCA understands that the business models of many financial service providers (FSPs) are at the maximum B-BBEE capacity they can reach.
New licence applicants will need to submit a transformation plan with their application. Financial institutions should make sure these plans are carefully considered as the FSCA has the authority to implement enforceable undertakings and penalties should it choose.
Currently licensed entities should take note that they will be required to submit a transformation plan with their relicensing application when COFI is finally promulgated.
The documentation notes that the FSCA as an organ of the state is compelled to implement these requirements, and that its engagements on this issue in future will be with other organs of the state and similar bodies.
Draft conduct standard on financial education initiatives
The FSCA released a draft standard for financial institutions that provide financial education to consumers.
The standard aims to implement behavioural and base line requirements for financial institutions providing the education.
Our concern is that this legislation might actually result in a reduction of the amount of consumer education, as many institutions will be wary of falling foul of regulation where they are simply trying to “do the right thing” and will not take on the risk.
The most useful clause we noticed was that consumer education cannot be used as a façade for marketing – allegations that it has will lead to further investigation.
Comments are to be sent to FSCA.RFDStandards@fsca.co.za by 15 May 2023.
Draft Conduct Standard – Reporting and disclosure of short sales
The FSCA released a draft conduct standard for comment relating to planned requirements to stipulate there be a form of disclosure when entering into a ‘short’ sale transaction. The aim is to bring better stability and transparency to the market, and to attempt to mitigate the inherent risk in short sale transactions.
This follows on from the FSCA’s publication of the “Discussion paper on the implementation of a short sale reporting and disclosure framework” on 20 November 2018.
Comments must be sent to FSCA.RFDstandards@fsca.co.za by 17 May 2023.
PRUDENTIAL AUTHORITY (PA)
Habib Overseas Bank Limited placed under curatorship
The Minister of Finance placed Habib Overseas Bank Limited under curatorship on 26 March 2023.
Over the past four years, the PA intensified its supervision of Habib Overseas Bank because of identified weaknesses in the bank’s governance process, its internal control environment, as well as the various investigations and reviews which have repeatedly confirmed the bank’s non-compliance with a number of financial sector regulations. This non-compliance also relates to significant findings relating to breaches of exchange control regulations.
The Minister of Finance has appointed PricewaterhouseCoopers Inc. (PwC) as the curator, with Craig du Plessis as the representative of PwC.
Habib Overseas Bank remains liquid, with a liquidity coverage ratio above the regulatory requirement, and there are no immediate concerns for depositors.
The governance challenges and reasons for this curatorship are not related to the recent difficulties with banks in the United States and Switzerland.
Deregistration of inactive retirement funds
The FSCA released its report on the deregistration of inactive retirement funds on 28 March.
This follows the Deregistration or Cancellations Project initiated in 2007 to deregister any retirement funds that no longer had members, assets or liabilities, or a properly constituted board. The project was put on hold in 2013 due to various litigations and judgments by various courts.
The report outlines this journey, and clarifies the new requirements for the deregistration of funds in future.
Proposed Directive to banks
The PA released a proposed Directive to banks as well as their auditors. The Directive relates to the capital treatment of investments in insurance businesses.
The PA notes that the Directive aims to preserve the integrity of the capital structures of banks with investments in insurance businesses by ensuring that the capital resources of the respective bank and insurance entities be appropriately separated.
The Basel Committee on Banking Supervision gave effect to this by prescribing that investments in insurance entities and/or subsidiaries, among other entities, be outside the scope of regulatory consolidation for consolidated reporting purposes.
The proposed Directive specifies the manner in which the regulations relating to banks must be applied by banks with significant investments in insurance entities, where the bank owns more than 10% of the issued common share capital or where the entity is an affiliate.
PA quarterly newsletter
Click here to read more on the things the PA thinks it needs to make the industry aware of: from the training of chartered accountants to a list of its publications over the last quarter.
FINANCIAL INTELLIGENCE CENTRE (FIC)
Compliance returns by Accountable Institutions (AIs)
The FIC released Directives 6 and 7 in the Government Gazette on 31 March 2023.
Directive 6 instructs AIs that are non-financial businesses and professions to submit a compliance return regarding their understanding of money laundering, terrorist financing, and proliferation of financing risks to the FIC by 31 May 2023.
Directive 7 instructs credit providers, the Postbank, dealers in high value goods (i.e. goods more than R100,000, which includes motor dealers), the South African Mint, and entities providing, advising, or trading in crypto assets to submit a similar return by 31 May 2023.
Employee screening by AIs
The FIC released Directive 8 and the related Public Compliance Communication 55 as guidance on 31 March 2023.
Directive 8 instructs AIs to screen employees for competence and integrity, as well as to scrutinise employee information against the targeted financial sanctions lists. The screening is the same as the due diligence conducted on clients, and must be conducted periodically.
We would recommend screening be conducted no less than annually for low-risk employees, and more frequently depending on the increased levels of risk of the employee.
This will also need to be documented in AIs’ Risk Management and Compliance Plans, and they will also potentially need to amend the employment conditions or contractual arrangements.
We will be in contact with our affected retainer clients regarding a screening programme and updated plans.
State Forensic Capability Department
The FIC has set up an internal department which is called the State Forensic Capability (SFC) unit.
The SFC unit aims to assist law enforcement and other authorities in their pursuit of impactful fraud, corruption, and other financial criminal matters, and was set up in response to the grey listing.
We’re sure that this initiative will assist in turning the situation around.
SOUTH AFRICAN RESERVE BANK
Corporation for Deposit Insurance (CODI) becomes a legal entity
CODI became a legal entity as of 24 March 2023.
The CODI’s primary responsibilities are establishing, maintaining, and administering a deposit insurance fund to protect banks’ covered depositors and inform the depositors of its benefits and limitations should a bank be placed into resolution.
The CODI is developing secondary legislation which specifies the cover limit for depositors. The secondary legislation will be passed through a parliamentary process and published by National Treasury in 2023.
The Reserve Bank has also taken the time to release a newsletter which describes its activities in accessible terms for depositors.
NATIONAL CREDIT REGULATOR (NCR)
Notes on the Consumer Credit Market Report
The NCR released a summary of the credit market data between October and December 2022.
The information generally shows a reduction in credit extension on assets and an increase in credit facilities and short-term credit. In addition, the debtors books all increased. That isn’t good for the economy, as it shows that consumers are tightening their belts or using credit just to get by, and that many consumers are struggling to service their debt.
OMBUDSMAN FOR SHORT-TERM INSURANCE (OSTI)
The OSTI has changed its physical address to 110 Oxford Road, Houghton Estate, Johannesburg.
This means that the OSTI, the Ombudsman for Banking Services, the Credit Ombudsman, and the Ombudsman for Long-term Insurance will all be based at the same address. This is another of the steps towards amalgamating the various ombuds’ offices.
FSPs will be required to update their disclosure documents and complaints policies should they mention this information.
FINANCIAL SERVICES TRIBUNAL
Another debarment reconsideration case simply sent packing by the tribunal as the applicant had already been found guilty of committing fraud to the tune of R600,000!
INFORMATION REGULATOR (IR)
Outcomes of complaints and assessments
The IR released a media statement on 5 April 2023.
In it, the IR provides the statistics of its Promotion of Access to Information Act and Protection of Personal Information Act complaints, and highlights some of its cases. Read it if you want some insight into the methods and mindset of this regulator.