If you were asked a question relating to South African financial regulatory requirements in the past year, you would do well to ensure that you have a copy of the most recent version of the relevant statute or legislation, subordinate legislation and any proposed amendments each time. The number of amendments to South Africa’s financial regulatory landscape in the past 18 months is truly mind-boggling! South Africa’s financial sector is currently governed by legislation which is widely considered to be fragmented and cumbersome. This is because the regulatory framework includes numerous distinct pieces of primary legislation which each apply to specific types of financial institutions (which include exchanges, clearing houses, securities depositories, trade repositories, credit ratings agencies, insurance companies and pension funds) or certain financial activities.
In order to align with international developments and to consolidate the South African approach to financial sector regulation, South Africa is in the process of implementing the so-called “Twin Peaks” approach to financial sector supervision. The Treasury has expressed that it seeks to implement the transition of the South African financial sector regulation to a Twin Peaks model in two phases. Phase 1 commenced with the enactment of the Financial Sector Regulation Act in August 2017 as well as the creation of the Prudential Authority and the Financial Sector Conduct Authority in April 2018. The Treasury has confirmed that existing sector-specific legislation will remain in place for an interim period (Phase 1) and will be systematically amended and replaced by uniform rules and standards which will apply to all financial sector participants (Phase 2).
The Prudential Authority and the Financial Sector Conduct Authority
As part of Phase 1, the existing industry specific legislation has been allocated to one of the new regulators (as set out in Schedule 2 of the Financial Sector Regulation Act as the principal regulatory authority. Broadly speaking, the Prudential Authority is responsible for legislation previously administered by the Banks Supervision Department of the South African Reserve Bank as well as for the supervision of the prudential standards relating to insurers and market infrastructures and the Financial Sector Conduct Authority is responsible for legislation which was previously administered by the Financial Services Board (including supervising the conduct of financial advisors and intermediaries, pension funds, collective investment schemes, insurers and market infrastructures, such as securities exchanges). The designated primary regulator is to act as the licensing authority and primary supervisory authority for the particular legislation during Phase 1. However, both regulators will have the power to exercise supervisory powers and to apply and enforce the industry specific legislation on a financial institution. In this regard, the Prudential Authority will do so in respect of prudential aspects and the Financial Sector Conduct Authority will do so in respect of market-conduct related issues.
The Financial Sector Regulation Act provides the new regulators with supervisory and enforcement powers in addition to the powers afforded to the relevant regulator under the existing industry specific legislation. These new regulators will also be able to issue new standards under the industry specific legislation. Accordingly, the mandates of the new regulators are viewed as being broader than those of their predecessors. This may be considered an inevitable and necessary shift in light of the country’s experience following the curatorship of African Bank in 2014 and recent allegations of misappropriation in relation to VBS Mutual Bank.
Benefits of the New Twin Peaks Model
It is anticipated that most of the sector specific legislation will be replaced and consolidated through the enactment of the Conduct of Financial Institutions Act which forms part of the next phase of implementing the Twin Peaks model in South Africa. It is intended that the consolidation of the legislation in this industry will introduce consistency in the treatment of financial sector participants and in the experience of financial sector customers, and that it will prevent uncertainty in future regarding which industry specific legislation applies (if any) and which regulator has jurisdiction over a participant in the financial sector.
There have already been a sweeping number of amendments and proposed amendments to industry specific financial sector legislation, which seek to cater to the transitional period and the establishment of the new regulators. These include:
- the introduction of a new Insurance Act, the repeal of certain sections of the Short-Term Insurance Act and Long-Term Insurance Act and amendments to the corresponding insurance regulations;
- proposed amendments to the Banks Act, Mutual Banks Act, Insolvency Act, Financial Markets Act and Financial Sector Regulation Act dealing with the resolution of certain designated financial institutions;
- proposed amendments to the Financial Sector Regulation Act introducing the concept of “Deposit Insurance” and a policy paper from the Treasury regarding the proposed deposit insurance scheme for South Africa;
- amendments to the Financial Markets Act dealing with, among other things, the regulation of trade in certain over the counter derivatives; and
- the restructuring of the Ombuds system for various financial subsectors.
Watch out for our next post where we will discuss the material issues raised by the above amendments or proposed amendments. We will also alert you to any new developments coming through in 2019.