Mon, May 20, 2024

The official Financial Regulation Journal of SAIFM

In brief: banking regulatory framework in South Africa

Joz Coetzer and Marianna Naicker

Regulatory framework

Key policies

What are the principal governmental and regulatory policies that govern the banking sector?

In 2011, the National Treasury published a policy document titled ‘A safer financial sector to serve South Africa better’ (2011 Policy Document). The 2011 Policy document identified the following policy priorities for the financial services sector.Stability and soundness of financial institutions

The primary objective of the central bank of South Africa, the South African Reserve Bank (SARB), is to protect the value of South Africa’s currency in the interest of balanced and sustainable economic growth in South Africa. The SARB assesses the stability and efficiency of South Africa’s financial system.

The Financial Sector Regulation Act 2017 (FSR Act) commenced on 29 March 2018.

The FSR Act requires the SARB and other organs of state to coordinate their functions and the implementation of financial stability, and seeks to establish a regulatory and supervisory framework that promotes the following principles:

  • financial stability;
  • the safety and soundness of financial institutions;
  • the fair treatment and protection of financial customers;
  • the efficiency and integrity of the financial system;
  • the prevention of financial crime;
  • financial inclusion;
  • transformation of the financial sector; and
  • confidence in the financial system.

 Consumer protection and market conduct

The 2011 Policy Document contemplates improving market conduct regulation, including ramping up consumer education and introducing a retail banking services market conduct regulator. The FSR Act establishes the Financial Sector Conduct Authority, which is mandated to, among others, protect financial customers by promoting fair treatment of financial customers by financial institutions, including banks, and providing financial customers and potential financial customers with financial education programmes and otherwise promoting financial literacy and the ability of financial customers and potential financial customers to make sound financial decisions.Expanding access to financial services through financial inclusion

In terms of the National Treasury’s Budget Review 2018 (2018 Budget review), financial inclusion refers to the provision of regulated financial services to the segments of society that are exposed to unavailable or inadequate financial services in order to enable social and economic development, particularly for low-income people, women, the youth and small, medium and micro enterprises (SMMEs). This document contemplates that financial products and services should be available to, and used by, most South Africans and should be convenient, affordable, fair and trusted.

The Amended Financial Services Sector Code (Code) was published on 1 December 2017 in terms of the Broad-Based Black Economic Empowerment Act 2003. The Code applies to any person conducting, among others, the business of banking in the South African financial sector. The Code aims to broaden and hasten the transformation process by making financial services accessible to the previously unbanked and underserved. The Code targets empowerment financing and access to financial services in sectors such as affordable housing, black-owned or controlled SMMEs, agriculture and transformational infrastructure.

Among the initiatives planned pursuant to this policy objective is for government to provide further support to cooperative banks (member-owned financial institutions) and ‘dedicated banks’ (savings and loan financial institutions whose activities are limited to the funding of risk-free or lower-risk retail assets in order to reduce the bank-default risk of depositors), including Postbank. The 2011 Policy Document identified Postbank as among the financial institutions best suited to take the lead in satisfying the financial services needs of rural and lower-income communities in South Africa, and seeks to expand Postbank’s products and services to communities that have little or no access to commercial banking services. In terms of the 2018 Budget Review, Postbank has a temporary banking licence and an application for a full banking licence has been submitted to the SARB. Further, the Banks Amendment Bill, 2018, seeks to amend the Banks Act to allow state-owned companies such as Postbank to register and conduct the business of a bank.Financial integrity and combating financial crime

The 2011 Policy Document contemplates measures being taken to promote transparency to the financial sector by requiring financial institutions to conduct due diligence on their customers and maintain customer and transaction records that are accessible by supervisory and investigating authorities.Regulated institutions

What are the defining characteristics of a bank to be caught by the banking laws and regulations? Is non-bank fintech regulated differently?

The Banks Act regulates banking activities in South Africa, in summary, it states that no person shall conduct ‘the business of a bank’ unless such a person is a public company and is registered as a bank in terms of the Banks Act, or has been authorised by the Prudential Authority to conduct the business of a bank by means of a branch of a foreign bank. 

The Bank Act defines ‘the business of a bank’ as:

  1. the acceptance of deposits from the general public as a regular feature of the business in question;
  2. the soliciting of or advertising for deposits;
  3. the utilisation of money, or of the interest or other income earned on money accepted by way of a deposit:
    • for the granting by any person, acting as lender in such person’s own name or through the medium of a trust or a nominee, of loans to other persons;
    • for investment by any person, acting as investor in such person’s own name or through the medium of a trust or a nominee; or
    • for the financing, wholly or to any material extent, by any person of any other business activity conducted by such person in his or own name through the medium of a trust or a nominee;
  4. the obtaining, as a regular feature of the business in question, of money through the sale of an asset, to any person other than a bank, subject to an agreement in terms of which the seller undertakes to purchase from the buyer at a future date the asset so sold or any other asset; or
  5. any other activity which the Prudential Authority has, after consultation with the governor of the South African Reserve Bank, by notice in the Gazette declared to be the business of a bank.

The Banks Act defines ‘deposit’ to mean an amount of money paid by one person to another person subject to an agreement in terms of which:

  1. an equal amount or any part thereof will be conditionally or unconditionally repaid, either by the person to whom the money has been so paid or by another person, with or without a premium, on demand or at a specified or unspecified dates or in circumstances agreed to by or on behalf of the person making the payment and the person receiving it; and
  2. no interest will be payable on the amount so paid or interest will be payable thereon at specified intervals or otherwise, notwithstanding that such payment is limited to a fixed amount or that a transferable or non-transferable certificate or other instrument providing for the payment of interest on such amount mutatis mutandis as contemplated in this paragraph 2) is issued in respect of such amount.

For one’s activity to trigger any of paragraphs (1) – (2) of ‘the business of a bank’ above, the activity must involve the acceptance, advertising or utilisation of ‘deposit’ as defined above. 

Other financial services and fintech services and products fall within the ambit of the FSR Act, which governs the rendering of financial services and financial institutions other than banks.

In terms of the Financial Advisory and Intermediary Services Act 2002 (the FAIS Act), a financial services provider means any person who furnishes advice, or furnishes advice and renders services, or renders an intermediary service.

The Financial Intelligence Centre (FIC) and the National Payments System Department of the SARB issued a draft Directive 1 of 2019 and a draft FIC Guidance Note 102 as part of a joint consultation process on the administration of electronic funds transfers in accordance with recommendation 16 of the Financial Action Task Force (FATF) regarding ‘wire transfers’. The aim of the directive is to regulate domestic and cross-border electronic transfers in relation to accountable institutions (including banks) that facilitate or enable the source or receipts of these transfers or when they act as a broker in this regard. It further aims to permit the SARB to review certain transfers and determine if they threaten the National Payment System and it places an obligation on accountable institutions to disclose certain information regarding the origin of electronic fund transfers.

Fintech is not fully regulated in South Africa. The current regulations in the financial sector only provide guidance, the uniqueness of fintech requires further and specific regulation.

The Intergovernmental Fintech Working Group (IFWG) published its first Fintech Landscaping Report on 22 January 2020. The aim of the report was to make clearer the fintech market so that the regulator can understand and be able to manage the risk in the fintech space. The effect of the report is that there will be a fintech innovation hub and fintech database. This will be made up of a Regulatory Guidance that will provide information and clarity regarding financial services regulation; a Regulatory Sandbox that will offer regulatory relief within the existing legislative framework, to test innovative products and services; and an Innovation Accelerator that will explore innovation that can improve the regulatory environment or improve customer experience and access.

Due to South Africa’s membership of the G20 Group of countries and to adhere to global over-the-counter (OTC) derivatives reform, new OTC derivatives regulations were enacted in February 2018 under the Financial Markets Act 19 of 2012 (FMA). The regulations have defined OTC derivatives as an unlisted derivative instrument that is executed, whether confirmed or not confirmed, excluding foreign exchange, spot contracts and physically settled commodity derivatives. The regulations also specifically aim to regulate the conduct of OTC derivative providers, which have been defined as a person who, as a regular feature of their business and transacting as principal (1) originates, issues or sells OTC derivatives or (2) makes a market in OTC derivatives. Most South African and some foreign banks in South Africa will qualify as OTC derivative providers.

Do the rules vary depending on the size or complexity of the banking institution?

No. If the institution has any of certain characteristics it will be subject to regulation. Mutual banks and cooperative banks, however, have less stringent requirements compared to commercial banks.Mutual banks

Mutual banks report to the SARB, and have similar obligations as commercial banks under the FIC Act, FAIS Act, FSR Act and NCA legislation. However, the Mutual Banks Act, 1993 is a specific statute addressing the particular qualities and characteristics of mutual banks and their trading. 

In terms of section 9 of the Mutual Banks Act, no person shall hold himself out to be a mutual bank unless the person is registered as a mutual bank in terms of the Act. Mutual banks are required to have accumulated share capital and unimpaired reserve funds as prescribed. Moreover, liquid assets to a value not less than its aggregate liabilities must be held at all times, and such assets cannot be pledged or encumbered. All Mutual banks must annually apply for a licence from the Registrar.Co-operative banks

The Cooperative Banks Act, 2007 is the main legislation regulating cooperative institutions (CFIs) that are willing to register Cooperative Banks under the Act.

The Cooperative Banks Act applies to Cooperative Banks registered under the Act and to any cooperative registered under the Cooperatives Act that takes deposits and has 200 or more members, and hold deposits to the value of one million rand or more.Primary and secondary legislation

Summarise the primary statutes and regulations that govern the banking industry.Regulation and supervision of the South African banking sector

The legal framework for the regulation and supervision of the banking sector in South Africa consists of:

  • the Banks Act 1990 (Banks Act);
  • the Co-operative Banks Act 2007 (CBA); and
  • the Mutual Banks Act 1993 (MBA) together with the regulations, directives, circulars and guidance notes relating to each of the Banks Act, CBA and MBA:
    • the Banks Act regulates the business of public companies taking deposits from the public and related matters;
    • the CBA regulates deposit-taking financial services cooperatives that are capitalised by their members and qualify as cooperative banks;
    • the MBA regulates the operations of informal financial structures such as credit unions, building societies and stokvels (general savings, burial or investment societies) that qualify as mutual banks;
    • the National Payment Systems Act 1998 regulates the management, administration, operation, regulation and supervision of payment, clearing and settlement systems in South Africa; and
    • the Companies Act 2008 (Companies Act) regulates the organisation and management of companies generally.

Legislation concerning the oversight of the banking industry includes the following:

  • The South African Reserve Bank Act 1989 regulates the SARB and the monetary system in general.
  • The FSR Act regulates financial sector laws and regulators and provides for prudential standards applicable to, and the supervision of, financial institutions, including banks.
  • The Currency and Exchanges Act 1933 regulates legal tender, currency, exchanges and banking. The Regulations made under the Currency and Exchanges Act 1933 and published on 1 December 1961 limit the extent to which South African residents and companies may transfer funds abroad. The exchange control rules are also set out in the Currency and Exchange Manuals and related client guideline documents implemented with effect from 1 August 2016.
  • The Financial Institutions (Protection of Funds) Act 2001 sets out the laws relating to, the investment, safe custody and administration of funds and trust property by financial institutions.
  • The Promotion of Administrative Justice Act 2000 gives effect to the right to administrative action that is lawful, reasonable and procedurally fair and applies to any administrative action taken by a financial sector regulator in terms of the FSR Act or any specific financial sector law.

 Stability and soundness of financial institutions

  • The FSR Act has the objective of achieving a stable financial system that works in the interests of financial customers and that supports balanced and sustainable economic growth in South Africa.
  • The Financial Markets Act 2012 regulates financial markets, prohibits insider trading and other market abuses and regulates and controls securities trading.

 Consumer protection and market conduct

  • The National Credit Act 2005 (NCA) aims to promote a fair and non-discriminatory marketplace for access to consumer credit and to prohibit certain unfair credit and credit-marketing practices as well as reckless credit granting.
  • The Consumer Protection Act 2008 (CPA) promotes a fair, accessible and sustainable marketplace for consumer products and services (including banking services) and seeks, among others, to establish national norms and standards relating to consumer protection and to prohibit certain unfair marketing and business practices.
  • The Financial Advisory and Intermediary Services Act 2002 (FAIS Act) regulates the provision of financial advisory and intermediary services to clients.
  • The Competition Act 1998 (Competition Act) applies to the investigation, control and evaluation of restrictive practices, abuse of dominant position, and mergers.
  • The Promotion of Access to Information Act 2000 gives effect to the constitutional right of access to any information held by another person and required for the exercise or protection of any rights.
  • The Protection of Personal Information Act 2013, among others, establishes minimum requirements for the processing of personal information by public and private bodies, provides for the rights of persons regarding unsolicited electronic communications and automated decision-making and regulates the flow of personal information across the borders of South Africa.
  • The Electronic Communications and Transactions Act 25 of 2002, which facilitates and regulates electronic communications and transactions.
  • The Home Loan and Mortgage Disclosure Act 63 of 2000, promoting fair lending practices, which requires disclosure by financial institutions of information regarding the provision of home loans.
  • The Inspection of Financial Institutions Act 80 1998, providing for the inspection of the affairs of financial institutions such as banks and of unregistered entities conducting the business of financial institutions.

 Expanding access to financial services through financial inclusion

  • The Broad-Based Black Economic Empowerment Act 2003 establishes a legislative framework for the promotion of black economic empowerment. The Code published in terms of this legislation commits financial institutions to promoting transformation in the financial services sector.
  • The South African Postbank Limited Act 2010 establishes the Postbank Division of the Post Office to, among others, conduct the business of a bank that will encourage and attract savings among South Africans.

 Financial integrity and combatting financial crime

  • The Financial Intelligence Centre Act 2001 (FICA) seeks to combat money laundering activities and the financing of terrorist and related activities by, among others, imposing certain duties on institutions to identify and conduct due diligence in respect of, the clients with whom they have business relationships.
  • The Prevention of Organised Crime Act 1998 criminalises money laundering.
  • The Protection of Constitutional Democracy Against Terrorism and Related Activities Act 2004 criminalises terror financing.

Regulatory authorities

Which regulatory authorities are primarily responsible for overseeing banks?

Banks are regulated by the following entities:

  • The SARB is responsible for, among others, supervising the banking sector and ensuring the effective functioning of the national payment system. The oversight of the soundness of the domestic banking system and financial stability has been delegated to the Bank Supervision Department (BSD) within the SARB. The BSD is accountable to the Minister of Finance and is required to submit an annual report on its activities.
  • FICA establishes the Financial Intelligence Centre, which is required to supervise and enforce compliance with this legislation or any directive made in terms of this Act by accountable institutions, including banks, for purposes of its objective. The Financial Intelligence Centre is accountable to the Minister of Finance.
  • The National Credit Regulator is established in terms of the NCA to promote and support the development, where the need exists, of a fair, transparent, competitive, sustainable, responsible, efficient, effective and accessible credit market and industry to serve the needs of:
    • historically disadvantaged persons;
    • low-income persons and communities; and
    • remote, isolated or low-density populations and communities.

The National Credit Regulator is responsible for regulating the consumer credit industry by, among others, registering and suspending or cancelling the registration of credit providers, including banks. The National Credit Regulator is accountable to the Minister of Trade and Industry as the Minister currently responsible for consumer credit matters.

The FSR Act establishes the following new entities to regulate all financial institutions, including banks:

  • The Prudential Authority is established within the administration of the SARB to promote and enhance the safety and soundness of financial institutions and market infrastructures and to protect financial customers against the risk of financial institutions failing to meet their obligations.
  • Provisions regulating the Ombud Council were scheduled to take effect on 1 April 2019, pursuant to which the Ombud Council will be empowered to recognise ombud schemes and oversee alternative dispute resolution processes for complaints about financial institutions in relation to financial products, financial services and services provided by market infrastructures. In terms of Government Notice No. 142 of 18 March 2019, the Commencement date of the provisions relating to the Ombud Council were postponed to take effect on 1 September 2019. Another Government Notice No. 1130 of 30 August 2019 postponed these provisions to take effect on 1 April 2020, and the effect of this notice was that the Financial Services Ombud Schemes Act that was due to be repealed on 1 September 2019 remained in full force and effect until 1 October 2020. A further Government Notice 356 of 24 March 2020 was published in terms of which the commencement of the provisions relating to the Ombud Council are scheduled to take place on 1 April 2021 and the repeal of the Financial Services Ombud Schemes Act is effective 31 December 2020.
  • The FSCA is replacing the Financial Services Board (FSB). The FSB was established in terms of the Financial Services Board Act 1990 to supervise compliance with laws regulating the following (without affecting the operation of a bank’s business as a bank):
    • financial institutions, including banks, that deal with trust property as a regular feature of their business; and
    • the provision of financial services.

Accordingly, the FSB Act regulates South Africa’s non-banking financial services industry.

The Financial Sector Conduct Authority is, subject to the concurrence of the SARB, responsible for making standards:

  • that impose requirements on providers of payment services; or
  • aimed at assisting in maintaining financial stability.

The Financial Services Board Act will be entirely repealed once the FSR Act is fully implemented. The Financial Sector Conduct Authority is responsible for enforcing the provisions of the FAIS Act.

Upon implementation of the FSR Act, the Prudential Authority, the Financial Sector Conduct Authority, the National Credit Regulator and the Financial Intelligence Centre will be subject to the directives of the Governor of the SARB in the event that the governor determines that a specified event or circumstance is a systemic event (an event that may reasonably be expected to have a substantial adverse effect on the financial system or on economic activity in South Africa).

The National Consumer Commission, established in terms of the Consumer Protection Act 68 of 2008 (CPA), whose responsibilities include enforcement of the CPA.

The Information Regulator established in terms of the POPI Act, whose responsibilities include monitoring and enforcing compliance with the provisions of the POPI Act by public and private bodies pertaining to data protection in South Africa and ensure the protection of personal information that is being processed by such bodies.

Banks and controlling companies are only allowed to appoint auditors approved by the PA. Where a bank or controlling company is unable to appoint an auditor that has been approved by the PA, the PA will appoint an auditor for the bank or controlling company (sections 61 and 62, Banks Act).Government deposit insurance

Describe the extent to which deposits are insured by the government. Describe the extent to which the government has taken an ownership interest in the banking sector and intends to maintain, increase or decrease that interest.

The CBA requires the establishment of the Cooperative Banks Deposit Insurance Fund for purposes of compensating members of cooperative banks (that paid contributions to the fund) for deposits lost as a result of a cooperative bank having been unable to repay the deposits from its members, up to a percentage or amount determined by the Minister of Finance. The Minister of Finance must also prescribe the deposit insurance contributions that are payable by cooperative banks. At the time of writing, the Minister of Finance has not prescribed the applicable amounts of contributions payable to, and compensation payable from, the Cooperative Banks Deposit Insurance Fund.

The SARB published a discussion paper in May 2017 entitled ‘Designing a deposit insurance scheme for South Africa’, which motivates the need for an explicit, privately funded deposit insurance scheme for South Africa and presents for public discussion proposals on the key design features of such a deposit insurance scheme. There is currently no deposit insurance mechanism employed in the banking sector in South Africa.

The government of South Africa does not own any interest in the banking sector other than in relation to the state-owned Postbank that is being established.

On 11 June 2020, the cabinet approved the tabling of the Financial Sector Laws Amendment Bill 2020 in Parliament. The Bill is an element of the Twin Peaks reform of the financial regulatory system applicable to the financial sector. It introduces a crucial part to the regulatory system on how to deal with a failing bank or other systematically important financial institution, to protect financial stability in a way that reduces reliance on the fiscus. The Bill will reinforce and strengthen financial stability in South Africa.

The Bill enables South Africa to meet the essential international standards following the 2008 Global Financial Crisis, as supported by G-20 countries and outlines in the FSB document Key Attributes of Effective Resolution Regimes for Financial Institutions (Key Attributes), which sets out the international standard for resolution regimes to deal with the problem of banks that are thought of as ‘too big to fail’.

The first part of the Bill introduces a comprehensive framework for resolving all banks as well as non-bank systematically vital financial institutions that may be ‘too big to fail’. The second part sets out the provisions to introduce, for the first time, a precise industry-funded deposit insurance scheme to protect qualifying depositors’ funds up to a specific limit once a bank fails. The ‘resolution and deposit insurance framework’ contained within the Bill encompasses a variety of fundamental policy objectives that include:

  • public funds will no longer be the default origin of funding used to bail out failing banks and other large financial institutions;
  • a deposit insurance scheme will be established and managed by the SARB through a newly established Corporation for Deposit Insurance;
  • losses incurred as a result of the failure of a financial institution will in the first instance be borne (through the bail-in) by shareholders and creditors who are able to assess their investment risks and who had benefited from profits gained by the institution as a going concern;
  • the SARB will get additional legal tools to make sure that crucial services continue and that stability is maintained in the event of a material failure;
  • following international best practice, a modified creditor hierarchy for financial institutions falling within the scope of the envisaged framework is introduced, in terms of which covered depositors will rank as preferred creditors; and
  • the protection of vulnerable depositors is an essential element of the financial safety net in any country, and also contributes to financial stability. Qualifying depositors will be guaranteed up to an amount of 100,000 rand per depositor.

Transactions between affiliates

Which legal and regulatory limitations apply to transactions between a bank and its affiliates? What constitutes an ‘affiliate’ for this purpose? Briefly describe the range of permissible and prohibited activities for financial institutions and whether there have been any changes to how those activities are classified.

In terms of the Banks Act, a bank must manage its business so that the aggregate of the following amounts less the excess amount of qualifying primary and secondary capital and reserve funds, does not at any time exceed 10 per cent of the bank’s aggregate amount of deposits, current accounts and other creditors:

  • its investments in debentures or preference shares of any of its associates (other than subsidiaries of which the main object is the acquisition and holding or development of immovable property), a bank or mutual bank, which debentures or preference shares are not convertible into ordinary shares;
  • its advances to any such associates; and
  • its guarantees or other instrument relating to the liabilities or contingent liabilities of such associates.

For the purposes of this provision an ‘associate’ in relation to a bank refers to:

  • any subsidiary or holding company of that bank, any other subsidiary of that holding company and any other company of which that holding company is a subsidiary; or
  • any juristic person to whom the board of directors is accustomed to act in accordance with the directions or instructions of that bank, including any trust controlled or administered by that bank.

The terms ‘holding company’, ‘subsidiary’ and ‘control’ have the meanings given to them in the Companies Act.

The Prudential Authority must approve any transaction by a bank or its associate to:

  • establish or acquire a subsidiary within or outside South Africa or enter into an agreement having the effect that any company becomes its subsidiary within or outside South Africa;
  • invest in a joint venture within or outside South Africa if the investment (alone or together with one or more investments already made by the bank in that joint venture) results in the bank being exposed to an amount representing more than 5 per cent of its capital and reserves and to make any further investment for so long as the bank is exposed. A joint venture means a contractual arrangement between two or more persons, one or more of whom is a bank or a controlling company, in terms whereof the parties undertake an economic activity that is subject to their joint control;
  • open or acquire a branch office outside South Africa;
  • acquire an interest in any undertaking having its registered office or principal place of business outside South Africa;
  • create or acquire a trust of which the bank is a major beneficiary outside South Africa;
  • establish or acquire any financial or other business undertaking under its direct or indirect control outside South Africa;
  • establish or acquire a representative office outside South Africa; or
  • create or acquire a division within or outside South Africa by means of an arrangement or agreement with any person having the effect that such person conducts his or her business through or by means of the division.

A bank or its controlling company must disclose to the Prudential Authority details of:

  • any subsidiary it has established or acquired;
  • any joint venture it has invested in;
  • an undertaking it has acquired an interest in; or
  • any trust or financial or other business undertaking it has established or acquired.

The Banks Act prohibits a bank from:

  • holding shares in any company of which such bank is a subsidiary;
  • lending money to any person against security of its own shares or of shares of that bank’s controlling company;
  • before provision has been made out of profits for any amount representing the cost of organisation or extension or the purchase of a business or a loss (including a loss originating from the sale of an asset) or bad debts:
    • opening any branch or agency or any further branch or agency; or
    • paying out dividends on its shares; and
    • concluding a repurchase agreement in respect of a fictitious asset or an asset created by means of a simulated transaction;
    • purporting to have concluded a repurchase agreement without:
    • such agreement being substantiated by a written document signed by the other party thereto; and
    • the details of such agreement being recorded in the accounts of the bank as well as in the accounts, if any, kept by the bank in the name of such other party; or
    • paying out dividends from its share capital without the prior written approval of the Prudential Authority.

A bank must hold all its assets in its own name, excluding any asset that:

  • is held pursuant to a bona fide hypothec to secure an actual or potential liability;
  • is held in the name of another person with the written approval of the Prudential Authority; or
  • falls within a category of assets designated by the Prudential Authority as assets that may be held in the name of another person.

Regulatory challenges

What are the principal regulatory challenges facing the banking industry?

The FSR Act requires the SARB, in collaboration with other organs of state, to ensure financial stability. Differences in interpretation of the new regulatory requirements pursuant to the FSR Act and related legislation may cause disputes. For instance, the FSR Act grants the Prudential Authority broad powers to require a bank to take action to avoid risks arising from, among others, conducting its business in an improper or financially unsound way or the likelihood of the bank contravening a financial sector law, being involved in a financial crime or causing or contributing to instability in the financial system. The implementation of such provisions of the FSR Act may require banks to implement new internal processes and procedures or otherwise restrict their powers and actions, and banks may wish to challenge such restrictions.

Notwithstanding the above, the SARB continues to hold the view that due to the inherent risk of crypto assets, and the unregulated nature of crypto assets, crypto assets cannot be classified as legal tender and as a result thereof crypto assets are not, and until the SARB decides otherwise will not be guaranteed by the SARB; crypto assets operate independently from the central bank and users. A merchant may refuse to accept crypto assets as a payment instrument without being in breach of the law. Currently the SARB does not oversee, supervise or regulate crypto assets. The IFWG aims to direct and develop a regulatory framework regarding crypto assets in South Africa. Amendments to the current regulatory framework are however still in the infancy stages.Consumer protection

Are banks subject to consumer protection rules?

Other than the provisions of the NCA, the CPA and the FAIS Act, banks are subject to scrutiny by competition authorities of their compliance with the provisions of the Competition Act regulating restrictive market practices. The Competition Act prohibits, among others, an agreement between, or concerted practice by, firms directly or indirectly fixing a purchase or selling price or any other trading condition. On 15 February 2017, the Competition Commission filed a complaint referral initiating proceedings against certain banks at the Competition Tribunal alleging that the banks had entered into an agreement or engaged in a concerted practice to fix bids, offers and bid-offer spreads and to allocate customers and suppliers in respect of trade in the US dollar-rand currency pair. At the time of writing, the Competition Commission has indicted 23 banks (some local and some foreign) for fixing the rand-dollar exchange rate.

On 3 July 2020, the FSCA introduced the Conduct Standard for Banks (the Standard). This regulatory framework allows the FSCA to critically and promptly supervise the market conduct of the banking sector ins South Africa, in accordance with its mandate as set out in the FSR Act. The Standard establishes high-level requirements to be adhered to by the banking sector aimed at ensuring the fair treatment of financial customers.

Section 5(1)(d) of the Standard required a bank to make sure that the terms, conditions and requirements in a contract between the bank and its retail financial customer are not unfair. Section 5(2) clarifies that, while not limiting the prohibition in section 5(1)(d), a term, condition or requirement in a contract will be unfair if it:

  • would cause a material and unreasonable imbalance in the parties’ rights and obligations under the contract;
  • is not reasonably necessary to safeguard the legitimate interests of the financial institution, that would be unjustly advantaged by the term, condition or requirement;
  • would result in an unfair outcome (financial or otherwise) to a retail financial customer if it was applied or relied on;
  • unreasonably require a retail financial customer, whether as a condition to enter into a transaction or otherwise to waive any right or release the bank of any obligation or liability.

Future changes

In what ways do you anticipate the legal and regulatory policy changing over the next few years?

Notices recently published by the National Treasury schedule the remainder of the FSR Act to come into force by April 2021. Provisions regulating, among others, ‘significant owners’ came into effect on 1 January 2019, in terms of which certain arrangements involving persons having the ‘ability to control or influence materially the business strategy of the financial Institution’, require the prior written approval of the Prudential Authority, which must be satisfied:

  • that the arrangement will not prejudicially affect the prudent management and financial soundness of the bank; and
  • that the significant owner meets the applicable fit and proper person requirements to be issued by the Prudential Authority.

‘Financial conglomerates’ are also being regulated, with effect from 1 March 2019, pursuant to which the Prudential Authority may designate members of a group of companies as financial conglomerates and impose additional prudential obligations on the holding company of a designated financial conglomerate, including:

  • requiring the holding company to be a non-operating company and determining its governance and management arrangements;
  • restricting the financial and other exposures of the financial conglomerate; and
  • setting reporting requirements.

A study on South Africa’s bank practices was recently prepared by the World Bank and published for public comment by the National Treasury. The report is titled ‘South Africa Retail Banking Diagnostic: Treating Customers Fairly in relation to Transactional Accounts and Fixed Deposits’. The report assesses the conduct of retail banks and makes recommendations that are intended to inform the FSCA’s approach to regulating the way that banks treat their customers in emerging market conduct regulations. The report identifies potential shortcomings in bank conduct and recommends, among others, ensuring that banks:

  • focus on suitability for customers when developing account and deposit products;
  • create transactional accounts that respond to the needs of low-income customers; and
  • improve the disclosure of timely, clear and comparable information to account and deposit product customers.

The National Treasury also published the Conduct of Financial Institutions Bill for public comment by 1 April 2019. The Bill aims to improve market conduct in South Africa by streamlining the financial sector laws that regulate the conduct of financial institutions, and to implement policy, including in relation to the fair treatment of financial customers.

The Prudential Authority and the Financial Sector Conduct Authority, as the responsible authorities for certain financial sector laws in terms of the FSR Act, are expected in future to issue:

  • prudential and conduct standards;
  • guidance notices on the application of the applicable financial sector laws; and
  • interpretation rulings confirming the interpretation or application of specified legal provisions.

Law stated date

Correct on

Give the date on which the information above is accurate.

February 2021.

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