Keep up to date on key Financial Services Regulation developments in South Africa in April 2023.
The FSCA publishes Final Strategy for Promoting Financial Sector Transformation
On 30 March 2023, the Financial Sector Conduct Authority (FSCA) published its final strategy for promoting the transformation of the financial sector, in line with its Regulatory Strategy 2021-2025. The strategy outlines how the FSCA will promote transformation within the current legislative framework, pending the finalisation of the Conduct of Financial Institutions (COFI) Bill, and how it will give effect to future proposals relevant to transformation once the COFI Bill is enacted.
Key changes made in the final strategy include the following:
- Clarification of the legislative frameworks that guided the development of the strategy
- The draft strategy document only identified the B-BBEE Act and the Financial Sector Code as the primary legislative instruments for promoting the transformation of the financial sector.
- The final strategy document states that the legislative framework depicted in the document is not exhaustive.
- Reconsideration of the proposal to introduce a minimum Broad-Based Black Economic Empowerment (B-BBEEE) Level 4 requirement
- The draft strategy required all financial institutions with annual revenue of over ZAR 10 million to have a B-BBEE Level 4 score or a transformation plan demonstrating how they will reach this level within five years;
- The final strategy document does away with these requirements. It opts for a proportionate approach to transformation, which entails implementing a risk-based approach, focusing resources on where there is the greatest need for transformation efforts.
- Clarification on the impact of transformation requirements on new institutions entering the market
- The FSCA states that transformation plans will have to be submitted with licence applications. It will provide further details on what plans should entail in advisories such as guidance notes and conduct standards.
The Transformation Strategy and Response Document are available on the FSCA's website.
Financial Intelligence Centre Act, 2001 (FICA): Publication of Directive 6, 7 and 8
The Financial Intelligence Centre (FIC) published Directives 6, 7 and 8 in March 2023. These directives are issued pursuant to section 43A of FICA.
Directive 6: Submission of a risk and compliance return to the Financial Intelligence Centre by specified accountable institutions that are designated non-financial businesses and professions (ie legal practitioners, trust and company service providers, estate agent and 'person who carries on the business of making available a gambling activity')
Directive 6 applies to accountable institutions that are designated as non-financial businesses and professions listed in items 1, 2, 3 and 9 of Schedule 1 of FICA. The directive relates to the submission of a risk and compliance return to the FIC. Essentially, relevant accountable institutions must submit information to the FIC in a risk and compliance return showing their understanding of money laundering, terrorist financing and proliferation financing risks and their assessment of compliance with obligations in terms of FICA. This information will help the FIC to understand the levels of risk awareness and compliance of these institutions with FICA, and the money laundering, terrorist financing and proliferation financing risks they face.
The risk and compliance return covers the reporting period from 1 April 2022 to 31 March 2023, including both dates. The return must be submitted to the FIC no later than 17:00 on Wednesday, 31 May 2023. The return is automated. Relevant institutions must populate the information directly using a link available on the FIC website. Non-submission of the return may result in administrative sanctions.
Directive 7: Submission of a risk and compliance return to the Financial Intelligence Centre by specified accountable institutions (ie credit providers, Postbank, high value goods dealers, SA Mint Company and crypto assets services providers).
Directive 7 applies to accountable institutions listed in items 11, 14, 20, 21 and 22 of Schedule 1 to FICA. They are obliged to submit a risk and compliance return to the FIC as described above. Relevant institutions must answer all questions based on their understanding of the risks and their implementation of current risk-based controls in line with FICA. The return covers the reporting period from 1 January 2023 to 30 June 2023, both dates inclusive. It must be submitted to the FIC no later than 17:00 on Monday, 31 July 2023.
Finally, Directive 8 requires accountable institutions to screen prospective and current employees for competence and integrity, and scrutinise employee information against the targeted financial sanctions lists. This is intended to identify, assess, monitor, mitigate and manage the risk of money laundering, terrorist financing and proliferation financing. Please see an article about the FIC's Employee Screening Directive.
FSCA: Draft Conduct Standard (Financial Markets) – Requirements relating to the Reporting and Disclosures of Short Sales (Conduct Standard)
The FSCA published the draft Conduct Standard on requirements relating to the reporting and disclosure of short sales in March. Submissions of comments on the draft Conduct Standard must be made in writing, using the submission template available on the FSCA's website, by 17 May 2023 to this email address:
FSCA.RFDStandards@fsca.co.za. If the Standard is adopted, it will come into effect six months after the date of publication.
Currently, there are no requirements to report on or disclose short sales on exchanges. The aim of the Conduct Standard is to close this gap and develop a framework prescribing disclosure and reporting requirements in line with international best practices. This framework will provide early warning signs of a build-up of large short positions, which would alert the FSCA to potential market abuse or emerging systemic risks. It will enable the FSCA to effectively monitor the market and take appropriate action, where necessary.
The Conduct Standard applies to authorised users and exchanges in relation to the short sales of listed securities. The Conduct Standard prohibits authorised users from executing short sale transactions without a satisfactory securities lending agreement providing for an equivalent amount of securities to be available for settlement on settlement date. The Standard imposes a duty of good faith on authorized users undertaking short sale transactions and instructs them to act transparently, with "integrity, honestly, fairly, and with due skill, care and diligence". Chapter 3 of the Conduct Standard delineates the reporting obligations of authorised users, and Chapter 4 imposes disclosure obligations on exchanges in relation to short sale transaction data and significant net short positions.
FSCA: Draft Conduct Standard (General) – Requirements for Financial Institutions providing Education Initiatives
On 31 March 2023, the FSCA published, in accordance with section 98(1)(a)(iv) of the Financial Sector Regulation Act, 2017, the draft Conduct Standard (General) - Requirements for Financial Institutions providing Education Initiatives (Conduct Standard).
The FSCA identified a need to set a common minimum standard to which all consumer financial education initiatives provided by financial institutions must conform. The draft Conduct Standard sets baseline requirements for financial institutions when providing consumer financial education initiatives.
The Conduct Standard is aimed at:
- The protection of financial customers by providing them with initiatives that promote financial education and literacy and help them to make sound financial decisions about their personal finances, as well as the financial health of their small businesses.
- Ensuring financial education initiatives, or other activities promoting financial education and literacy, are appropriate to achieve the intended outcomes.
- Ensuring a financial institution providing financial education takes reasonable steps to ensure appropriate standards of behaviour, governance and oversight when developing content, implementing monitoring, evaluating and reporting on the effectiveness, efficiency and appropriateness of financial education initiatives, including reporting to the FSCA.
Importantly, a financial institution may not use a financial education initiative or its content for:
- excessive marketing of a specific brand or financial institution, to the extent that the marketing or branding overwhelms the educational content; or
- marketing a financial product or financial service.
Financial institutions will also be required to report information on the provision of financial education initiatives to the FSCA in compliance with the draft Conduct Standard.
The draft Conduct Standard will come into effect nine months after the date of its publication. This standard, together with a supporting statement, are available on the FSCA’s website at
https://fsca.co.za.
Submissions on the draft Conduct Standard must be submitted in writing, using the submission template to the draft Conduct Standard, on or before 15 May 2023 to the FSCA at
FSCA.RFDStandards@fsca.co.za.
