The 2023 banking turmoil, which commenced in March 2023, stands as a significant system-wide banking crisis, unparalleled since the Great Financial Crisis (GFC), both in terms of its scale and scope. The crisis led to the failure of several banks and triggered a widespread loss of confidence in the resilience of banks, banking systems, and financial markets across multiple jurisdictions. Consequently, a range of public support measures was implemented in certain jurisdictions to mitigate the crisis’s impact. The report published by the Bank for International Settlements (BIS) on 5 October 2023 presents a comprehensive assessment of the causes of the banking turmoil, the regulatory and supervisory responses, and the preliminary lessons that have been learned from this crisis.
The Basel Committee has issued a consultative document on the disclosure of crypto asset exposure, aiming to enhance transparency and market discipline. This initiative introduces proposed standardised disclosure templates in a dedicated chapter, DIS55: Cryptoasset Exposures, within the Basel Framework. These templates are set to streamline disclosures and reduce information disparities among banks and stakeholders. The Committee seeks input from the public and market participants, including Pillar 3 disclosure users and preparers, to refine this framework. Comments should be submitted here by 31 January 2024, with the option for confidentiality upon request.
SAIFM took the opportunity to comment and make a submission on the Revised Draft Conduct Standard – Requirements relating to the provision of a benchmark (click here to read this submission). The SAIFM submission focused specifically on the skills and fit and proper requirements proposed in the Draft Conduct Standard. Due to our active participation in this regulatory process, we have been informed of the next steps, which is the issuing of a questionnaire to those utilizing, offering or contributing to benchmarks. SAIFM urges all members who have relevant information to please complete the questionnaire and facilitate the effective regulation of our financial markets. Click here for more information.
We refer to your comments to the Financial Sector Conduct Authority (Authority) on the Revised Draft Conduct Standard – Requirements relating to the provision of a benchmark, as published for public consultation in November 2022.
This serves as notification that the Authority on 02 November 2023 published the following documents on the Authority’s website:
– FSCA Communication 28 of 2023 (FM) – Publication of a Discussion Document on financial benchmarks and industry questionnaire – for public comment
– Discussion Document – Development of a framework for the regulation and supervision of financial benchmarks – Request for input
– Annexure A – Questionnaire – Discussion Document – Provision of a benchmark
As an interested party in the developments related to the regulation and supervision of financial benchmarks in South Africa, you are invited to complete the Questionnaire set out in Annexure A published with the Discussion Document and submit same in Word format to the Authority via email to FSCA.RFDstandards@fsca.co.za by 14 December 2023.
For further information regarding the FSCA Communication, please contact Roslynne van Wyk at FSCA.RFDStandards@fsca.co.za.
The Financial Stability Board (“FSB”) has published its report on 2023 Bank Failures: Preliminary lessons learnt for resolution which follows on from the report from the Basel Committee on Banking Supervision (“BCBS”) on the 2023 banking turmoil. The reports differ in subject matter, with the FSB examining preliminary lessons learnt for the key attributes framework for resolving global systemically-important banks (“G-SIBs”) and other systemically important banks, and the BCBS looking at prudential regulation and supervision. The main points include:
FSB Report
This report looks at the Key Attributes of Effective Resolution Regimes for Financial Institutions (“Key Attributes“) and how these held up during recent crises. Adopted in October 2011 and subsequently endorsed by the G20, the Key Attributes are 12 essential features that should be part of all resolution regimes, being:
scope;
resolution authority;
resolution powers;
set-off, netting, collateralisation, segregation of client assets;
safeguards;
funding of firms in resolution;
legal framework conditions for cross-border cooperation;
The report highlights a number of important issues for effective implementation of the international resolution framework to examine further, including the need for an ‘effective public sector liquidity backstop and operational readiness of banks to access it as a last resort’. Other important workstreams for G-SIB resolution include:
using resolution planning to address legal issues identified around cross-border bail-ins;
looking at the operation of a range of resolution options, including transfer and sale, both alone and in combination with bail-in; and
understanding the market impacts of bail-ins and the need for credible liquidity backstops and other frameworks that are visible to and easily understood by market participants and depositors.
When looking at non-G-SIB resolution, the FSB raises the need to explore:
whether the scope of resolution planning and associated loss-absorbing capacity requirements need expansion;
how authorities can be better prepared to deal with the increased speed of bank runs; and
implications of recent events for the role of deposit insurance in bank resolutions.
BCBS Report
The BCBS report is an assessment of the regulatory and supervisory responses to 2023’s issues, and not an indication of any planned revisions to the Basel Framework. As such, it focuses on:
Governance and risk management: the BCBS has identified shortcomings in basic risk management and a lack of appreciation of how build-ups of different risks are interrelated and have a compounding contagion effect. Business models were found to still be overly focused on growth and short term profitability, leading to unsustainable business models and compounded by poor risk culture and insufficient oversight.
Strong and effective supervision: the analysis of banks’ business models, and the identification of outliers, remains core to supervisory efforts, including the assessment of the viability/sustainability of those models.
Robust regulatory standards: including those addressed at ensuring robust corporate governance and internal risk management and controls. The need for tools that can drive real change and concrete action is also stressed.
Other initial lessons learnt and takeaways for regulation include:
questions to be asked about the design and calibration of the Basel III liquidity standards;
questions to be asked about the current regulatory treatment of IRRBB in the Basel Framework;
the treatment of held-to-maturity assets and the role of Additional Tier 1 capital instruments in the capital framework; and
the scope of application of the Basel Framework to internationally active banks on a fully consolidated basis.
Other Takeaways
While differing in focus areas, both reports stress the need to look at how toolkits should change in the light of the increased speed of liquidity outflows, and for the BCBS, of course, this leads to a discussion of whether liquidity supervision may also need to evolve. Unsurprisingly, both reports discuss the need for cross-border supervisory cooperation, involving significant information sharing and collaboration.
The World Federation of Exchanges publishes report “Promoting Sound Marketplaces – DeFi/CeFi, Crypto Platforms & Exchanges”.
The World Federation of Exchanges (WFE), the global body for exchanges and central counterparty clearing houses (CCPs)s, on 28 September 2023 set out six principles to promote sound marketplaces in crypto-trading in a new report.
The report, drawing on the collective experience of regulated market infrastructures as trusted guardians of public markets, makes six recommendations in light of issues that continue to affect the nascent crypto-currency industry which has suffered several high-profile controversies and collapses.
By applying regulatory principles that have been proven via established, trusted market infrastructures, governments and regulators can aid the crypto-trading sector to grow whilst protecting investors and ensuring orderly, fair and transparent markets.
The WFE’s analysis also found that whilst Decentralised Finance might bring innovation to financial products, crypto-trading platforms (CTPs) are frequently not as decentralised as they first appear, which presents some risks.
The WFE recommends that governments and regulators require CTPs to meet the high standards that all market participants expect and deserve. The recommendations are:
• Segregate market infrastructure functions within a CTP where appropriate such as limiting CTPs trading their own book or in potential conflict with their customers;
• Operate orderly markets by having in place systems and controls for broader risks, such as abusive trading, to protect integrity of price formation;
• Hold sufficient financial resources to meet expected operational stress events;
• Facilitate compliance with best execution requirements;
• Increase robustness of listing standards;
• Have appropriate governance and management requirements.
In the short term, the WFE recommends that CTPs disclose their regulatory status and do not describe themselves as exchanges until they are appropriately regulated and adhere to the standards listed above. All regulated market infrastructure providers adhere to the standards above.
By Jana Krause, Tax Counsel, Baker McKenzie Johannesburg
The South African Revenue Service (SARS) reviewed its VAT registration process in May this year, following an unusual increase in the number of VAT registrations and a significant spike in suspicious registrations. With immediate effect, SARS implemented changes to the VAT registration process in order to scrutinise new VAT registration applications more stringently.
VAT fraud
As VAT is an indirect tax, SARS relies on taxpayers to honestly collect VAT on their supplies of goods or services and pay this, net allowable deductions, to SARS. SARS doesn’t have real-time insight into the billions of daily transactions completed by over 950 000 active VAT vendors, and as such, it has historically been an easy way to commit VAT fraud.
VAT fraud can be committed in the simplest of ways. For example, a VAT vendor could charge its customers VAT but fail to pay that VAT to SARS, or it could claim input tax deductions in respect of non-allowable expenses or based on fictitious supporting documents, thereby obtaining an undue refund. An example of particular concern to SARS, is the registration of fictitious businesses that then claim undue refunds through the VAT return process.
VAT registration
SARS is tasked with collecting taxes on behalf of the government and is responsible for ensuring these taxes are not lost to fraudsters. For this reason, SARS generally employs stringent administrative policies, in conjunction with legal provisions, to curb VAT fraud. Consequently, the registration process has always been cumbersome for taxpayers.
Before COVID-19, applications for VAT registration could only be submitted at a SARS branch, either by the taxpayer or by an appointed representative, such as a registered tax practitioner. Supporting documents had to be manually submitted during this appointment; the taxpayer or practitioner had to print hundreds of pages of documents to prove the taxpayer existed and was legally obligated to register or qualified to register voluntarily. The documents would be scanned and uploaded to SARS’ system, with the application often having to be vetted through an inspection of the business or via further reviews. If anything was unclear, a new appointment had to be scheduled. It could take between three and twelve weeks to register for VAT.
Changes
During COVID, taxpayers were prohibited from visiting SARS branches and the VAT registration process moved online. This allowed taxpayers to complete an online application form, upload supporting documents and, where necessary, attend a SARS virtual appointment to verify identities and documents. Taxpayers were able to obtain a VAT registration number within days. VAT registrations remained online after the pandemic, however, SARS may request that the applicant present themselves at the SARS branch for validation, accreditation and manual document submission.
Impact
SARS has committed to a three-week VAT registration turnaround but combined with the time taken for an accreditation appointment, the process still takes about six to eight weeks. The impact of delayed VAT registrations is considerable. For example, small to medium businesses often can’t secure work if they are not VAT registered, and one of the first requirements for tenders is that the parties be VAT registered. In practice, many entities miss tender deadlines due to delays in VAT registration. Many corporate transactions are also jeopardized because of delays in VAT registration. This impacts not just single transactions, but continued trade and investment transactions made into South Africa by multinational organisations.
Solutions
It makes sense for SARS to implement a simplified VAT registration process, and this worked well during COVID. As indicated by SARS, it also worked well for fraudsters. It appears that SARS now uses sophisticated risk engines to identify potentially fraudulent VAT registrations filed online, and such applicants are requested to visit a SARS branch. But no technology is foolproof, and honest taxpayers could be negatively affected. SARS could consider speeding up the registration process and conducting thorough audits on the first few VAT returns to ascertain registration validity and authenticity. However, there is a capacity challenge, and honest taxpayers could get more frustrated if SARS held back VAT refunds while audits were completed.
Another solution is to digitise tax reporting. Many jurisdictions, including some African countries, are implementing some form of tax digitisation. By using electronic or virtual fiscal devices and the compulsory issuing of e-invoices, authorities have real-time insights into billions of transactions. This would not eliminate fraud, but it would minimise opportunities to defraud the fiscus through VAT, improve governance, simplify audits and assist in inter-governmental data sharing.
It may have been a good move for SARS to tighten the VAT registration process, with the impact on taxpayers understood but not necessarily welcomed. If SARS is eager to grow the tax base, however, it should also consider other options to minimise VAT fraud.
The World Federation of Exchanges (WFE) has published a white paper on 18 September 2023 on the role ‘market-based finance’ plays in people’s futures. Inspired, in particular, by how share markets combat the effects of inflation, ‘Financing the Future’ examines the importance not just of long-term investment, but of having public policy that promotes it, rather than works against it.
The WFE notes that market-based finance and credit channels play distinct and complementary roles in supporting economic growth, acting as twin engines, and that regulatory and other policy could do more to respect that distinction, as present policy shows signs of confusing the two.
A key part of the paper’s purpose is to look at the nature of short-run risk, contrasting it with concerns about systemic stability that can arise in the credit world. We challenge the idea of applying prudential rules to markets that are only appropriate to credit and banking channels. In credit channels, risks can easily become systemic in nature and require measures such as capital rules. In market-based finance, this is the rare and manageable exception, and in all other cases the wrong type of rules are not just unnecessary but damaging.
False equivalence between the two very different forms of finance has already led to perverse outcomes, including the LDI crisis of 2022. It threatens the operation of the collective investment schemes through which most people have access to long-term returns.
Share markets have performed well over time and through recent turmoil, such as the pandemic. In 2020, these markets were resilient in both new issuance and the ability to continue to buy and sell stakes in companies as the economy continued to evolve.
Market-based finance includes bonds – which bring a further dimension to investor possibilities while avoiding some of the opacity of credit markets – and derivatives, which bring the flexibility to fine-tune risk profiles over horizons chosen by investors, whether individuals or collective asset managers. But shares remain the key to financing the future.
Nandini Sukumar, CEO at the WFE, said: “Both credit markets and share markets have a place in the financial system and are needed for different financing requirements. To enable share markets to deliver their potential in funding future growth opportunities (including net zero transition), the appropriate policy support is required.”
Richard Metcalfe, Head of Regulatory Affairs at the WFE, said: “The WFE believes that a clear and coherent risk-reward analysis should lie at the heart of public policy towards all forms of finance. It is wrong and counterproductive to take the risk-reward characteristics of one part of the financial system and apply it to another part, whose different profile makes the system safer and sounder.”
The Financial Sector Conduct Authority (FSCA) has released a draft Equivalence Framework for Financial Markets and a draft Determination outlining requirements for external central counterparty and external trade repository license applications. These documents are open for public consultation.
Purpose:
This communication serves to inform stakeholders of the FSCA’s publication of the draft Equivalence Framework and Determination for public consultation.
The Equivalence Framework outlines the FSCA’s approach for assessing the equivalence of a foreign jurisdiction’s regulatory framework with that of the Financial Markets Act, 2012 (FMA) and the Credit Rating Services Act, 2012 (CRSA).
The Determination provides guidance on the application process for external central counterparty and external trade repository licenses.
Comments Invited:
Stakeholders and interested parties are encouraged to provide feedback on these drafts by November 20, 2023. Comments should be directed to “Talita Mshweshwe” using the provided comments template via email at FSCA.RFDStandards@fsca.co.za.
James George, Compliance Manager at Compli-Serve SA
The present financial landscape is filled with challenges for South African financial institutions. Amidst shifts in the market, technological advancements, and regulatory changes, a perfect storm of risk and compliance issues emerges. Disruptions caused by developing technologies, evolving business models, and shifting ecosystems add further turbulence to the mix.
To navigate this storm and achieve their objectives, financial institutions need strategic choices and thorough preparation. Adopting a visionary approach can help them sail through these difficulties and secure a safer passage to a more stable environment.
The report released earlier this year by Finextra, “The Future of Risk Management and Compliance 2023” offers insights from industry experts. These provide a comprehensive understanding of the pressures and complexities financial institutions face. And prove why enhanced compliance is essential.
As we launch into the last few months of the year and financial institutions brace themselves for a regulatory tempest fuelled by dynamic changes in various sectors, here are eight key compliance focus areas to keep in mind:
1. Machine Learning and Artificial Intelligence: The increasing use of these technologies in the financial sector necessitates comprehensive regulatory frameworks to mitigate risks and ensure ethical usage.
2. ESG (Environmental, Social, and Governance): The growing emphasis on environmental sustainability, social responsibility, and robust governance practices requires compliance with ESG standards to meet investor and regulatory expectations.
3. Crypto Assets: Rising concerns around digital currencies prompt regulators to establish guidelines to mitigate associated risks, ensuring a harmonious integration of these novel assets into the global financial ecosystem. As the digital landscape evolves, it becomes imperative for stakeholders to stay abreast of these changes, fostering a culture of adaptability and forward-thinking. This proactive approach not only safeguards investors but also paves the way for innovations that can redefine the contours of modern finance.
4. Digital Payments: As digital payments surge in South Africa, regulatory bodies prioritise ensuring secure, private, and efficient payment systems. With the recent FATF greylisting of South Africa, there’s an added emphasis on monitoring certain transaction patterns or sources more closely. This greylisting serves as a caution, urging the nation to address specific deficiencies in its financial systems. While not an outright blacklisting, it underscores the importance of strengthening anti-money laundering measures and combating the financing of terrorism. This move aims to ensure the continued growth and integration of digital payment solutions in a secure and compliant environment.
5. Counter Terrorist Financing and Anti-Money Laundering: Compliance with regulations aimed at combating terrorist financing and money laundering is critical to preserve the integrity of the global financial system.
6. Data Privacy: Evolving privacy laws and consumer concerns highlight the importance of protecting customer data and adhering to data privacy regulations. In this digital age, businesses must prioritise transparent data handling practices and robust security measures to maintain trust and foster a culture of accountability, ensuring that customers’ personal information remains both confidential and secure.
7. Operational Resilience and Cybersecurity: Building resilient operational systems, implementing robust cybersecurity measures, and safeguarding customer data are critical to prevent cyber-attacks. According to a recent report by Mimecast, 52% of South African companies were harmed by a ransomware attack during the last year. While this could mean any company, financial institutions are particularly vulnerable due to their client data among other factors.
8. Operational and Credit Risk: In simple terms, as technology and business methods evolve, it’s vital to have strong safety measures in place to avoid potential pitfalls. At the same time, keeping a close eye on lending practices ensures that loans remain manageable and safe.
To navigate this impending storm, financial institutions must take proactive measures. Staying informed on regulatory developments is important alongside enhancing risk management frameworks and investing in technology and talent to protect the future of your business. Other good steps to take include collaborating with regulators and industry peers and fostering a culture of compliance as a matter of ongoing priority.
