Financial Services Regulation Monthly: Update April 2022

​​​​Keep up to date on the most important Financial Services Regulation developments in South Africa during April 2022.

Commencement of Financial Sector Amendment Act, 2021

The Minister of Finance published the commencement of sections 2, 3, 12 and 58 of the Financial Sector Laws Amendment Act 23 of 2021 (FSLAA). The sections are in effect as of 29 April 2022.

Sections 2, 3, 12 and 58 deal with amendments to the provisions of the Insolvency Act,1936, Mutual Banks Act, 1993, and Financial Sector Regulation Act, 2017.

In regard to the Insolvency Act the amendments clarify that the provisions of the Financial Sector Regulation Act, 2017, apply to the liquidation or sequestration of the estate of a designated institution. The amendments to the Mutual Banks Act provide that the Prudential Authority may issue guidance notes and directives. The FSLAA amends Schedule 2 of the Financial Sector Regulation Act, 2017 (FSR Act) which sets out the financial sector laws the responsible authority for those laws by inserting the objectives of the FSR Act and allocating the responsibility of the objectives to the Prudential Authority, Financial Sector Conduct Authority and South African Reserve Bank.

Request for Information – Crypto Asset-Related Activities Performed by FSPs

The Financial Sector Conduct Authority (FSCA) has requested that all Financial Services Providers (FSPs) complete an electronic survey by no later than 31 May 2022.

FSCA Information Request 3 of 2022 (FAIS) instructs FSPs to furnish the FSCA with information about their current activity in the crypto asset environment. The FSCA intends to use the information from the survey to make more informed decisions about the potential future regulation of crypto asset-related activities.

FSPs should be aware that failure to provide the information requested by the FSCA constitutes an offence under section 267 of the Financial Sector Regulation Act 9 of 2017.

The Information Request, which includes a link to the electronic survey, is available on the FSCA’s website (www.fsca.co.za) under Regulatory Framework > Notices > FAIS Notices > 2022.

FSCA Risk Assessment – Collective Investment Schemes (CIS) and Financial Advisory and Intermediary Services (FAIS) Sector

The FSCA recently released the findings of the risk assessment it conducted on the CIS and the FAIS sectors in respect of money laundering (ML), terrorism financing (TF) and proliferation financing (PF). The FSCA assessed the ML/TF/PF risks for the period 1 April 2018 – 31 December 2020.

The primary objective in conducting the sector risk assessment is to identify and understand ML/TF/PF risks and other criminal offences targeting the non-bank financial sector in South Africa. The FSCA evaluated three areas: criminal threats, vulnerabilities and consequences, as recommended by the Financial Action Task Force (FATF).

Money launderers may abuse financial products such as a participatory interest in a CIS, other investments or a life insurance product to wash their illicitly-acquired gains. Although many CISs, other investment or life insurance products are not flexible enough to be the first vehicle of choice for money launderers, as with other financial products, there is a risk that the funds that are used to invest in CISs, other investments or to purchase life insurance products may be the proceeds of crime. There is also a risk, although a limited one, that funds withdrawn from a CIS, other investments or life insurance products could be used to fund terrorism.

Criminal Threat

The overall criminal threat environment in FAIS sectors was assessed as “low.”

Vulnerabilities

The overall vulnerability environment was assessed as “medium”.

Consequences

The consequences of ML/TF/PF in these sectors are also assessed as “medium.” The FSCA assessed the overall ML/TF/PF risks in the CIS sector and Category II (discretionary) and III (administrative) FSPs in the non-bank financial services sector as “medium.” Category I (renders financial services other than the financial services mentioned in Categories II, IIA, III and IV) and IV (Assistance Business) FSPs remain low risk for ML/TF/PF.

How should CIS Managers and FSPs use this sector risk assessment?

Firstly, CIS managers and FSPs should consider the risks identified in the report with specific regard to red flags, trends and typologies and vulnerabilities. Secondly, CIS managers and FSPs should review and update their own risk assessments, based on the results in the report. Finally, CIS managers and FSPs should manage and mitigate the potential ML/TF/PF risk exposure of their businesses.

In addition to identifying and monitoring risk factors that may apply to their individual businesses, the risk assessment also seeks to assist Accountable Institutions in reporting suspicious transactions or Anti-money laundering and/or the Combating of Financing of Terrorism-related matters to the FIC and the FSCA respectively.

The FSCA Regulatory Strategy: 2021-2025

The FSCA published its five-year strategy, which is valid from 14 December 2021 to 31 March 2025.

Over the next three years, the FSCA will focus on the following strategic objectives:

1. Improve industry practices to achieve fair outcomes for financial customers
2. Act against misconduct to support confidence and integrity in the financial sector
3. Promote the development of an innovative, inclusive, and sustainable financial system
4. Empower households and small businesses to be financially resilient
5. Accelerate the transformation of the FSCA into a socially-responsible, efficient, and responsive organization.

Intended Outcome​s

The Regulatory Strategy document sets out the intended outcome for each strategy.

Strategic Objective 1: Improve industry practices to achieve fair outcomes for financial customers

The intended outcomes for strategic objective 1 are:

• Good conduct and Treating Customers Fairly (TCF) principles embedded consistently across the financial sector
• Conduct risks mitigated.

The intended outcome for strategic objective 2 is to maintain trust in the financial sector.

Strategic objective 3: Promote the development of an innovative, inclusive, and sustainable financial system

The intended outcomes for strategic objective 3 are:

• Support transformation in the financial sector
• Deepen financial inclusion of low-income households and small businesses
• Enable greater competition and contestability in the financial system
• Foster sustainable finance and investment in the financial sector.

Strategic objective 4: Financial customers able to make better and more informed financial decisions

The intended outcome for strategic objective 4 is:

• Financial customers able to make better and more informed financial decisions

Strategic objective 5: Accelerate the transformation of the FSCA into a socially-responsible, efficient, and responsive organization.

The intended outcomes for strategic objective 5 are:

• Operational excellence embedded across all functions of the FSCA
• FSCA is recognised and trusted by financial institutions, financial customers, financial sector ombuds and other financial sector regulators in South Africa and internationally.

Inaugural Strategic Objectives

The FSCA noted its progress in achieving its inaugural strategic goals. The Regulatory Strategy provided updates on the completion of the inaugural strategic objectives:

• Strategic Objective 1: Building a new organisation

The FSCA noted the following achievements:

• implemented a new operating model
• data-driven digital strategy adopted; supported by new strategies and policies (information strategy, cybersecurity strategy, cloud strategy.)
• encouraged financial institutions to treat customers fairly and to take visible,significant action against individuals who endanger their financial well-being or the integrity or efficiency of financial markets.

• Strategic objective 2: An inclusive and transformed financial sector

The FSCA noted the following achievements:

• MOU entered into with Financial Sector Transformation Council
• Draft COFI Bill provisions amended to allow FSCA more clearly to support Financial Sector Code targets, regulatory and supervisory frameworks
• Financial Inclusion Strategy developed (to be published in 2022) to guide FSCA operations and support National Treasury’s National Financial Inclusion Policy
• Transformation Strategy developed to guide FSCA operations (to be published in 2022).

• Strategic objective 3: A robust regulatory framework that promotes fair customer treatment

The FSCA noted the following achievements:

• Various conduct standards and joint standards developed
• Development of enterprise-wide risk-based supervisory framework near completion
• Draft omni Conduct of Business Returns developed (to be published for consultation).

• Strategic objective 4: Informed financial customers

The FSCA noted the following achievements:

• Developing draft conduct standards for consumer education
• Co-ordinated activities with national consumer protection forums and committees
• Conducted research on consumer behaviour

• Strategic objective 5: Strengthening the efficiency and integrity of our financial markets

The FSCA noted the following achievements:

• Conduct Standards and Joint Standards developed, including:

• Conduct Standard for Authorised OTC Derivative Providers
• Joint Standard on Margin requirements for non-centrally cleared over-the-counter derivative transactions
• Joint Standard on Requirements relating to Central Counterparty Licence Applications
• Conduct standard for exchanges, to address issues of interoperability (published for consultation)

• Participation in “Global Legal Entity Identifier Foundation" meetings
• Published discussion paper on short selling
• Exemption criteria framework for external market infrastructures being drafted, together with a determination and equivalence framework.

• Strategic objective 6: Understanding new ways of doing business

• The FSCA, with the Intragovernment Fintech Workgroup, launched a Regulatory Guidance Unit, a Regulatory Sandbox, and an Internal Innovation Hub
• FinTech department published joint papers and reports with the IFWG (SA FinTech Landscape Report; Crypto Assets Working Paper; Non-traditional Data Report; Suptech report)
• Published report on Open Finance.

Relationship with other local regulators

In carrying out its regulatory and supervisory functions, the FSCA works closely with the Prudential Authority, the SARB, the National Credit Regulator, the Financial Intelligence Centre, the Council for Medical Schemes, and other local regulators. The strategy document noted that the FSCA has agreements in place with the various regulators with which it engages.

The strategy document noted that the FSCA's partnership with the FIC has been greatly improved to ensure early identification of money laundering and terror funding, which jeopardize the financial sector's integrity and South Africa's international reputation as a strong, resilient, stable, and developing market. The FSCA, in collaboration with the FIC, is working hard to ensure that South Africa has strong anti-money laundering and counter-terrorist financing (AML/CFT) enforcement measures in place.

Relationship with international organisations

The regulatory plan outlines the FSCA's participation in worldwide standard-setting and other relevant bodies' operations. The FSCA has signed bilateral MoUs with many jurisdictions in addition to being a signatory to the IOSCO and the SADC multilateral MoUs. The MoUs are designed to make information sharing and collaboration between regulators easier and more efficient. The FSCA also takes part in the operations of African regulatory agencies, such as those in the SADC region, particularly the CISNA.

Decisions

André Scholtz and Margaretha Scholtz v The Pension Fund Administrator and the Seventh Day Adventist Church Pension Fund (Case no: PFA1/2022)

This was a decision of the Financial Services Tribunal (Tribunal) that dealt with time limits for the lodging of disputes. The applicants, Mr and Mrs Scholtz (the Applicants), were both employed by the Southern Union of the Seventh-Day Adventist Church. The Church is a participating employer of the Fund, the second respondent. The applicants became, by reason of their employment, members of the Fund. The Fund is not a contributing fund, meaning that employees do not contribute, only the Church does so.

Here is a brief summary of the pertinent facts. The couple was married in 1966. Mr Scholtz reached normal retirement age in 2009 but did not retire. In 2010 the couple was divorced. In January 2011 Mrs Scholtz reached normal retirement age and she retired. In 2012 Mr Scholtz retired. In July 2014 the Applicants alleged that they were co-habiting from this date as if married because they reconciled and lived at a property obtained jointly in 2004 (six years before their divorce). In April 2018, the Applicants sought a ruling from the Seventh Day Adventist Fund (the Fund) that the surviving partner would be entitled to the surviving spouse’s pension under the rules of the Fund. The director of the Fund responded on 18 April 2018 and stated that since both individuals were taken over as singles by the insurer, the request was rejected. In May 2018, the Applicants informed the director of the Fund that they were unhappy with her response and intended to “appeal”. This resulted in the Applicants writing to several officials in the Fund during the course of 2018. Finally, in November 2020, after much to-ing and fro-ing, the Board responded to the Applicants, rejecting their appeal. On 14 June 2021 the Applicants filed their complaint with the PFA. The PFA dismissed their complaint on 6 October 2021, finding that it was time barred because of the letter of 18 April 2018. On 17 January 2022 an application for reconsideration was filed.

The time limits for lodging complaints with the PFA are set out in section 30I of the Pension Funds Act 42 of 1956. Section 30I provides that the Pension Funds Adjudicator (Adjudicator) shall not investigate a complaint if the act or omission to which it relates occurred more than three years before the date on which the complaint is received by him or her in writing. Subsection 2 states that provisions of the Prescription Act, 1969 relating to debt apply in respect of the calculation of the three-year period referred to in subsection one.

The Tribunal explained that the reference to the Prescription Act in sec 30I relates to “the calculation of the three-year period” and nothing else. The PFA deals with “complaints” as defined in section 1, and not necessarily “debts”, the subject of the Prescription Act with a specific meaning. There is a difference between a time bar and prescription. In this case, Parliament found it convenient to use the time calculation in the Prescription Act for calculating the time bar. It did not incorporate the Prescription Act into the Pension Funds Act. The Fund, in answer to the complaint before the PFA, raised a time barring defense. The applicants, in their reply, did not address the issue squarely but said that since their complaint was ongoing that decision could not determine the onset of “prescription”.

Recalling their complaint, namely the failure by the Fund to provide them, when they retired, with joint-and-survivors dependents' pensions payable to a surviving spouse if one spouse pre-deceased the other, the decision of the PFA is justified.

The Applicants, at the time of their respective retirements, applied their pension funds to obtain single life policies. The act or omission to which the complaint relates occurred when the Fund arranged the single life policies instead of policies that also covered surviving spouses. Since the parties were not married or in another recognized relationship, it could hardly have been otherwise. The applicants knew or had to know, even without considering their positions at the time, that the policies did not provide for death benefits but were single life annuities. One may at this stage refer to the complaint that the Fund had failed to advise the Applicants properly and, having failed in its fiduciary duty, it should be liable for a surviving spouse pension.

Qualifying Spouse

The matter is complicated by the fact that the Applicants are really seeking a declaration of rights depending on future facts, namely whether the survivor could qualify for death benefits. It does not involve any discretion of the Fund or the PFA but depends on the interpretation of the Rules in the light of common-cause or assumed facts.

The question whether the surviving spouse is a Qualifying Spouse will, obviously, only arise on the death of either member. The pertinent issue is whether either applicant can be a Qualifying Spouse at all.

The golden thread in the rule is that a survivor’s benefit requires a fixed marriage (in the broader sense) beginning at least two years before the deceased member’s retirement and continuing until his/her death. It is “the marriage” (not “a marriage”) which must have taken place two years prior to retirement, and which must still exist when the member dies.

It was common cause that the legal marriage concluded before 30 April 2010 came to an end and the possibility of relying on this legal marriage predating retirement was therefore excluded. The parties can never again be joined in that marriage.

The Tribunal dismissed the complaint for procedural and substantive reasons.