On 5 March 2024, the Financial Sector Conduct Authority (FSCA) announced a Memorandum of Understanding (MoU) with the Department of Trade, Industry and Competition’s (DTIC) Broad-Based Black Economic Empowerment (B-BBEE) Commission. The announcement serves as a cautionary note regarding the B-BBEE Commission’s concern over, in its view, the inadequate submission of B-BBEE compliance reports by the financial sector.

The purpose of the MoU between the FSCA and B-BBEE Commission is to formalise and strengthen a relationship on issues of common interest, cooperation, collaboration, assistance and exchange of information. This is to fulfil their resultant responsibilities and obligations insofar as it relates to promoting the transformation of the financial sector.

In March 2023, the FSCA published its final “Strategy for Promoting Financial Sector Transformation” (the FSCA Transformation Strategy). It outlines how the FSCA aims to promote transformation within the current legislative framework, such as the B-BBEE Act and the Financial Sector Code, pending the finalisation of the Conduct of Financial Institutions (COFI) Bill for all financial institutions. In addition to this publication, the FSCA published a summary of the feedback received on the draft FSCA Transformation Strategy, and some key changes include:

A two-phase approach

• Phase 1 will focus on the role that the FSCA will play within the current legislative framework; and
• Phase 2 will focus on the role that the FSCA will play within the COFI legislative framework.

The FSCA’s jurisdiction extends widely, encompassing insurers, collective investment schemes, retirement funds, brokers, financial planners, and wealth managers. The FSCA intends to lower entry barriers by adjusting regulatory demands according to the risks and scale of financial institutions. It may introduce phased implementation of requirements and explore tiered licensing. Moreover, when existing regulations pose obstacles for small entities, the FSCA encourages stakeholders to motivate how certain requirements hinder entry.

Phase 2 will require financial institutions to have in place a transformation plan aimed at achieving targets set under the Financial Sector Code. Upon implementation of the COFI Bill, which is said to be tabled in Parliament this year, the FSCA will be empowered to make standards relating to transformation. These standards will aim to provide specific details on requirements for transformation plans. Currently, the FSCA does not have transformation objects as part of its regulatory regime, therefore, there are consequently no significant penalties for failing to meet the government’s transformation goals under existing legislation. As the regulatory body for all financial institutions, the FSCA will take a stronger stance on transformation by requiring them to submit plans for achieving it. A failure to comply with specific BEE thresholds outlined in these plans could lead to the FSCA withholding licenses.

Transformation plans during the licensing process

To stay within its designated mandate, the FSCA will base its transformation requirements on provisions outlined in the COFI Act (once implemented). Its mandate remains the enforcement of financial sector laws only, and not the Broad-Based Black Economic Empowerment Act 53 of 2003 (B-BBEE Act) or the Financial Sector Code, which are the responsibility of the B-BBEE Commission and Financial Sector Transformation Council (FSTC), respectively.

The impact of the inclusion of transformation in the licensing process can be summarised as follows:

• existing licensed institutions are expected to undergo a conversion process from their current sectoral licenses to licenses and authorisations governed by the COFI Act. As part of this conversion, these entities will likely be mandated to submit their transformation plans to the FSCA within a specified timeframe. The details on the new licensing framework, including the license conversion process will be communicated as the COFI Act is rolled out; and
• the FSCA will ensure that transformation plans encompass all relevant aspects of the Financial Sector Code for approval. There will be no preference given to specific elements.
• financial institutions will be required to have transformation plans in place, likely becoming a mandatory requirement. These plans, tailored to each institution’s business model, will be assessed during licensing to ensure commitment to transformation objectives and Financial Sector Code targets. Ongoing supervision will evaluate institutions’ performance against their transformation plans, with additional guidance provided as licensing frameworks are developed under the COFI Bill;

​Regulatory and supervisory actions

The FSCA has opted for a “proportionate approach” to transformation, abandoning a blanket requirement for a minimum Level 4 B-BBEE status. This approach entails exemptions and varying requirements based on factors such as turnover threshold, ownership structures, business models, and existing B-BBEE levels. By eliminating the Level 4 requirement, the FSCA aims to adopt a risk-based approach, concentrating resources where transformation is most needed. This includes entities with high B-BBEE ratings but poor performance in specific areas, those showing no progress in transformation, and those unable to justify their inability to achieve higher transformation levels. The possibility of establishing a minimum B-BBEE level in the future remains open, pending consultation.

Through this approach, the FSCA seeks to foster sustainable transformation while balancing regulatory imperatives, ultimately paving the way for a more diverse and resilient financial sector.

Mariam Ismail, Gabi Richards-Smith, Safiyya Patel, Zelda Swanepoel and Johan Henning

Dear SAIFM members,

We’re pleased to share important news concerning the recent establishment of the Corporation for Deposit Insurance (CODI) in South Africa. CODI, operational since 1 April 2024, the Deposit Insurance Scheme represents a significant step in enhancing the stability of our financial sector.

CODI is a subsidiary of the South African Reserve Bank (SARB) and has been created to safeguard qualifying bank depositors in the event of a bank failure. It manages the Deposit Insurance Fund (DIF), providing depositors with access to up to R100,000 of their deposits, funded by, among other options, monthly premiums and loan contributions by member banks. This measure aims to bolster public confidence in our banking system and reduce reliance on taxpayer funds in the event of a bank failure.

Under its mandate, CODI operates in alignment with various resolution strategies as determined by the SARB, thereby contributing to the overall financial stability of the country. Moreover, CODI’s establishment underscores the commitment to maintaining and enhancing financial stability in South Africa.

For further information, please click here.

In a significant development for non-EU banks operating in Europe, the Capital Requirements Directive VI (CRD VI) has reached its final stages. This legislation, part of the EU’s comprehensive Banking Package, brings about substantial changes that will impact how these institutions conduct their business within the EU.

One of the key provisions of CRD VI is the prohibition on non-EU banks providing cross-border “core banking services” into the EU. This includes activities such as deposit-taking, guarantees, and lending. While exemptions exist for certain transactions like intergroup dealings and reverse solicitation, these come with stringent conditions that must be met.

Non-EU banks must recognise the urgency of the situation and start preparing now to ensure compliance with CRD VI. With the legislation nearing its finalisation, there’s no time to waste. Early assessment and strategic planning are essential to navigate the complexities of the new regulatory landscape effectively.

Failure to prepare adequately could have significant consequences for non-EU banks, including disruptions to their European operations and potential regulatory penalties. By taking proactive steps to understand and address the requirements of CRD VI, these institutions can position themselves for success in the evolving European financial market.

UK Listing Rule Reforms – proposed new listing categories

The FCA published an updated draft of the proposed new UK listing rules (UKLR) on 7 March 2024 which included the second tranche alongside the original first tranche that was published in December 2023.

We previously reported on the first tranche of the draft UKLR (including the accompanying consultation paper CP23/31) and in particular its impact on companies currently listed or considering a listing on the Standard Segment of the Main Market (Standard List). The second tranche of the UKLR provides further detail on the proposed new transition category for companies currently listed on the Standard Segment which are not tracked to an alternative category. It also provides further detail on the proposed new categories for shell companies and international companies with a secondary listing in the UK. In general, these provisions are consistent with the proposals set out in the consultation paper that was published in December alongside the first tranche of the UKLR.

There has been no further update on when the UKLR sourcebook will come into force, but it is expected to be the beginning of the second half of 2024 (and two weeks after the final UKLR sourcebook is published).

On 26 April 2024 the FCA published Primary Market Bulletin 48, that consults on proposed changes to the FCA Knowledge Base to reflect the proposed changes to the listing regime. In this recent bulletin, the FCA confirms that it is proposing to send out notifications to issuers from mid-May 2024 informing them of the category that the FCA expects their securities to be mapped to (should the proposals be implemented). Issuers who believe that they have been incorrectly allocated will have four weeks to revert to the FCA.

The draft UKLR provides for 11 listing categories (five are new categories and six are retained categories from the current listing rules). Below we provide a summary of the key features and transitional arrangements in respect of the five new proposed categories.

Equity shares (commercial company) (ESCC) category – UKLR 5

This single listing category is intended to be the main category for commercial companies.

Existing companies currently listed on the Premium Segment of the Main Market (Premium List) will automatically be mapped to the ESCC category. Companies listed on other listing categories (e.g. Transition or Shell categories summarised below) will be able to apply to transfer to the ESCC category when appropriate and a modified eligibility process will apply.

The eligibility criteria for the ESCC category will be less onerous than for the current Premium List, for instance, the requirement of three years historical financial information and a clean working capital statement will no longer apply. The requirement for a minimum expected market capitalisation of £30m will however remain.

The continuing obligations will also be significantly reduced. An announcement will only be required on significant transactions (over 25%) or for related party transactions. No shareholder vote will be required for related party transactions or significant transactions (although will continue to be required on reverse takeovers).

A reduced sponsor regime will apply to this category.

Transition category – UKLR 22

Current Standard List companies (or those that were applying for a listing on the Standard List before the commencement date of the UKLR (known as ‘inflight’ applicants)) will automatically be mapped to this category unless they are eligible for admission to the Shell or International Secondary Listing categories (see below) (in which case they will not be eligible for the Transition category).

This category will be closed to new applicants and a company listed on this category will not be eligible for re-admission to it on completion of a reverse takeover. It would need to be admitted to the ESCC category (where it meets the eligibility criteria) or another market such as AIM or Aquis or be unlisted.

A sponsor is not required for this category unless the company is applying to transfer to a listing category that requires a sponsor (e.g. ESCC).

An ‘inflight’ applicant will have one year from the date on which the UKLR sourcebook comes into force to complete its entry to the Transition category (provided there has not been a material change to the applicant’s overall business proposition).

Companies on this category will be subject to the current listing rules applicable to Standard List companies. There is currently no fixed end date for this category although the FCA has noted that it may seek to remove it as issuer numbers reduce.

There will be a modified eligibility process for transfer from the Transition category to the ESCC although it is understood that the requirement for a minimum expected market capitalisation of £30m will remain.

International Secondary Listing – Equity shares (international commercial companies secondary listing) category – UKLR 14

A company will be mapped to this category if it is an overseas company (being a company incorporated outside the UK) with a ‘qualifying home listing’. The FCA have proposed this separate category to seek to accommodate non-UK incorporated companies where either domestic company law or rules flowing from their primary listing venue may make it more difficult to meet certain requirements proposed for the ESCC category.

This category will not apply to UK incorporated companies with a primary listing abroad as the FCA is keen to avoid this category being an open choice for commercial company issuers simply seeking to avoid certain rules of the ESCC category that they would be capable of meeting.

A ‘qualifying home listing’ is a listing of equity shares admitted to trading on an overseas regulated, regularly operating, recognised open market. There is no specific list provided although it is expected to include overseas exchanges that the FCA considers to be equivalent to the FCA regime (e.g. NYSE, TSX and ASX).

If an applicant’s qualifying home listing is not in its country of incorporation, the FCA may require an explanation of the reasons for establishing that listing elsewhere.

Unlike the Transition category, this category will be open to new applicants. The eligibility and continuing obligations generally replicate current Listing Rule 14 for Standard List companies with some additional requirements (for example, that once listed, the company must continue to comply with the applicable rules of the market of its qualifying home listing). The sponsor regime will not apply to this category.

Shell and SPACs category – UKLR 13

Companies will be mapped to this category from:

• a current Premium Listing of SPACs and cash shells (pursuant to current Listing Rule 6); or
• a current Standard Listing of SPACs and cash shells (pursuant to current Listing Rule 14)

provided they meet the UKLR 13 “shell company” definition. If they do not meet that definition, they will be mapped to the Transition category instead. A shell company for the purposes of UKLR 13 is defined as an issuer whose (a) assets consist solely or predominantly of cash or short-dated securities; or (b) predominant purpose or objective is to undertake an acquisition or merger, or a series of acquisitions or mergers.

UKLR includes provision for an “initial transaction” (as opposed to reverse takeover). Board and shareholder approvals will be required for an initial transaction. A shell company’s constitution must provide that if the company does not complete an initial transaction within 24 months of the date of admission (which may be extended by 12 months by public shareholder approval) it will cease operations and distribute funds to shareholders. There is also a requirement that binding arrangements are in place with an independent third party to protect the funds raised.

A sponsor will be required at the following times: at admission, on an initial transaction and where the company is applying for new shares to be admitted to listing.

Existing listed shell companies will have a transitional period of three years to either complete their operations or make the necessary changes to comply with the proposed additional requirements for companies in the Shell category excluding the obligation to ‘ring fence’ investor funds reflecting that it would be impractical to implement this retrospectively. The three-year transitional period will start from the date the UKLR come into force. For in-flight applicants admitted to the Shell category (which must occur within one year of the UKLR implementation date), the transitional period may be shorter than three years.

Non-equity shares and non-voting equity shares category – UKLR 16

This category will automatically retain companies with a current Standard Listing of non-equity shares and non-voting equity shares in current Listing Rule 14.

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This article was originally published on the Hill Dickinson website on 1 May 2024. Please click here to view the original article.

The FSCA seeks your input on the draft Conduct Standard for market infrastructures. Deadline for comments: 23 May 2024. Details and documents are available on the FSCA website. Contact Talita.Mshweshwe@fsca.co.za for queries. Please view the full communication here.

Your insights shape fair and efficient financial markets.

Please take a moment to review the latest communication from the Financial Sector Conduct Authority (FSCA), Communication 13 of 2024 (FAIS). This notice pertains to the submission of annual financial statements and other statutory returns by Financial Services Providers (FSPs). Below is a brief overview of the key updates outlined in this communication.

• Effective 1 April 2024, FSCA will only accept electronically uploaded submissions via the FAIS e-Portal.
• Manual and email submissions will no longer be accepted to enhance efficiency and tracking.
• FSPs must ensure accurate and complete information on the FAIS e-Portal.
• Access to the portal requires registration of Key Individuals and Compliance Officers.
• A user guide is provided for assistance in navigating the submission process.

For queries, contact Mr. Akashen Rampersadh at akashen.rampersadh@fsca.co.za.

Please click here to view the full communication notice.

In the recent communication, the FSCA unveils Communication 9 of 2024, focusing on the imperative of adopting Legal Entity Identifiers (LEIs) in South Africa. LEIs, 20-digit alpha-numeric codes, are pivotal in uniquely identifying financial institutions globally. This initiative, born from the aftermath of the 2008 financial crisis, aims to enhance transparency and mitigate systemic risks. The directive underscores the interconnectedness of global entities and the necessity of LEIs in bolstering financial stability. Published on 20th March 2024, this directive reinforces the FSCA’s commitment to fostering a robust and transparent financial ecosystem.

Please click here to read the full notice.

In accordance with the Financial Sector Regulation Act, 2017, the Deposit Insurance Regulations 2024, come into effect as of 1 April 2024. Under the auspices of the Minister of Finance and pursuant to sections 288(1) and 166AB(1)(b) of the Act, these regulations are crafted to fortify the resilience and safeguard the interests of depositors within the financial realm. Their enactment marks a pivotal stride towards fostering transparency and bolstering depositor confidence in the financial landscape.

Please click here for more information.

The Financial Sector Conduct Authority (FSCA) has unveiled one of its latest publications, focusing on sustainable finance consumer risks and the Sustainable Finance Roadmap for 2024. Divided into two parts, Part A of the report delves into the risks faced by financial consumers within the sustainable finance realm, outlining available consumer protection tools and responses. Part B outlines recent developments and planned actions within the FSCA’s Programme of Work on Sustainable Finance, emphasizing the authority’s pivotal role in ensuring credible and consistent information in South Africa’s financial market.

This publication builds upon the FSCA’s 2023 Statement on Sustainable Finance, which introduced a comprehensive work program supported by capacity building, research, stakeholder engagements, and regulatory framework development. Moving forward, the FSCA commits to engaging and collaborating with stakeholders to refine and integrate insights into the regulatory landscape.

Please click here to view the full press release.

In the dynamic landscape of financial services, the Fit and Proper Requirements under the Financial Advisory and Intermediary Services Act (FAIS) act as a foundation, ensuring that representatives represent the highest standards of honesty, integrity, and diligence.

Imagine giving an advisor your life savings just to find out later that they are not honest or have the necessary skills to manage your money properly. It’s a scary idea, but South Africa has strong protections to keep you safe from situations like this because of the Fit and Proper Requirements specified in the FAIS Act.

However, what really are these prerequisites? It’s not simply about having an impeccable criminal history. They are a comprehensive evaluation that explores each financial services company’s professional skills and moral compass. Let’s break it down:

Assessing Competence: Skills, Knowledge, Qualifications, and Licensing

Beyond the moral evaluation of character and integrity, the Fit and Proper Requirements delve into the competence of representatives. This includes an assessment of their skills, knowledge, and qualifications  forming a comprehensive criterion for determining ‘regulatory’ fitness.

Skills (Experience):

Imagine an advisor with years of experience managing portfolios through market ups and downs. Their proven track record showcases their skill in navigating financial storms. Their ability to tailor investment strategies to individual client needs showcases a high level of expertise.

In doing so, in a volatile market environment, the representative skilfully navigates economic uncertainties, making timely adjustments to client portfolios. Their experience allows them to provide strategic advice, ensuring clients’ financial goals are met even in challenging market conditions.

Knowledge (Ongoing Learning): Just like technology, the financial world is constantly evolving. Continuous learning through industry certifications, workshops, and staying abreast of market trends reflects a representative’s commitment to expanding knowledge. This ongoing pursuit of expertise contributes to their competence. The representative actively seeks out opportunities for continuous learning, staying ahead in a dynamic financial landscape empowers them to leverage emerging trends for the benefit of their clientele.

Qualifications: Possession of relevant academic qualifications in finance, economics, investment management or a related field is a tangible indicator of competence. The list of qualifications under FAIS requirement or guidelines is extensive, however, the representative’s commitment to achieving and maintaining recognized certification underscores their dedication to professional competence.

While a strong foundation of academic degrees in finance is important, becoming a truly qualified advisor requires more. Besides completing the FAIS-mandated RE5 exam for regulatory awareness, additional certifications such as the JSE trader’s certificate or the Registered Persons Exams offered by SAIFM play a crucial role in enhancing specialised knowledge. Notably, achieving the status of a Certified Financial Planner (CFP®), a globally recognised benchmark in comprehensive financial planning, adds another layer of expertise. These specialised certifications underscore a commitment to refining one’s skill set and offering clients customised, knowledgeable guidance. In the end, obtaining acknowledged qualifications proves an unwavering dedication to professional growth and performance in the financial industry.

Ensuring Competence through Hypothetical Examples:

A moral assessment is required to determine whether a representative satisfies the requirements of being “of good character and integrity.” This ruling takes into account the representative’s actions in both their personal and professional lives. The differentiation between ‘character’ and’ reputation’ has significance, as character is established by an individual’s behaviour and intentions, whereas reputation is a reflection of external opinions.

Hypothetical Examples:

1. Case of Misappropriation: Imagine a representative who, in the course of their professional duties, is found to have misappropriated client funds for personal gain. Despite a previously unblemished reputation, this representative’s actions cast doubt on their integrity and adherence to ethical standards. The Fit and Proper Requirements would require a thorough assessment of this representative’s character and the potential consequences of their actions on clients and the industry.
2. Allegations of Fraudulent Activity: In another hypothetical scenario, a representative faces allegations of engaging in fraudulent activities, including manipulating financial records to mislead clients and the financial services provider. The Fit and Proper Requirements necessitate a comprehensive evaluation of the representative’s honesty and integrity. The moral judgment considers the gravity of the allegations, the impact on clients, and the overall trustworthiness of the representative.
3. Conflict of Interest Scenario: Consider a representative who fails to disclose a significant conflict of interest, such as holding undisclosed financial interests in products they recommend to clients. This scenario raises questions about the representative’s honesty, transparency, and commitment to acting in the best interests of clients. The Fit and Proper Requirements would scrutinize whether the representative’s actions align with the ethical standards expected in the industry.
4. Repeated Violation of Compliance Policies: In a parallel situation, a representative repeatedly violates compliance policies and procedures, demonstrating a disregard for established industry regulations. This pattern of behaviour triggers concerns about the representative’s commitment to upholding the integrity of the financial services sector. The Fit and Proper Requirements would demand a careful examination of the representative’s track record and the potential risks posed to clients and the industry.

Fairness in the Debarment Process:

Regardless of the particulars, the debarment process’s fairness is nevertheless of utmost importance. It emphasised that a fair process is essential but made it clear that an in-person debarment hearing is not required. The procedure must, at the very least, provide the representative a chance to address and refute the accusations made against them. The financial services provider may proceed with the decision to debar if the representative does not reply.

The debarment process under FAIS stands as a method to ensure that representatives adhere to the highest standards of honesty and integrity. By navigating the Fit and Proper Requirements, the industry can safeguard its reputation and maintain the trust of clients. Hypothetical examples illustrate the importance of upholding moral judgments and ensuring a fair and transparent debarment process. In essence, the process serves as a guardian of the industry’s integrity, reinforcing the commitment to ethical conduct and client protection.

Conclusion:

Integrity and competence—the Fit and Proper Requirements—are the cornerstones of ethical behaviour in the financial services sector. The fictitious instances highlight how important credentials, expertise, abilities, and licensure are in guaranteeing representatives’ competency. The industry may instil confidence in clients and stakeholders while upholding its integrity by adhering to these extensive requirements. The Fit and Proper Requirements are a staunch defender of the industry’s ethical standards because they place equal emphasis on professional skill and moral judgement.

Disclaimer:

This article provides general information on the hypothetical examples and scenarios related to skills, knowledge, qualifications and debarment process under the Financial Advisory and Intermediary Services Act (FAIS). Please be aware that the information provided is for illustrative purposes only. For more information please refer to the Act.