Financial Services Regulation – Monthly Update: June 2022

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

Notice of intention to cancel registration of a fund in terms of section 27(1) of the Pension Funds Act, 1956 (Act No. 24 of 1956)

On 17 June 2022 the Financial Sector Conduct Authority ("FSCA") published a notice (“FSCA RF Notice 10 of 2022”) of its intention to cancel the registration of funds in terms of section 27(1) of the Pension Funds Act, 1956.

It is proposing to cancel the registration of a list of funds set out in Annexure A of the notice. Any objections should be submitted to the FSCA in writing by 17 July 2022 to Jodine.Scholtz@fsca.co.za.

Notice of invitation to comment - Proposed amendments to Joint Standard 2 of 2020 - Margin requirements for non-centrally cleared over-the-counter derivative transactions

On 2 June 2020, the Prudential Authority (“PA”) and the FSCA (collectively “the Authorities”) published Joint Standard 2 of 2020 on the margin requirements for non-centrally cleared over the counter (“OTC”) derivatives transactions (“Joint Standard”).

The Joint Standard, which came into effect on 16 August 2021 is being amended in the following respects:

1. provisions to enable reporting from providers and financial institutions that are counterparties as defined in the Joint Standard;
2. provisions enabling the imposition of appropriate risk mitigation requirements by providers wanting to use non-cash collateral;
3. refinements to the provisions on quantitative portfolio margin models to clarify the application requirements on the historical data utilised for calibration, which are applicable to the entire identified period of historical data to be utilised for calibration purposes on the quantitative portfolio margin model;
4. refinements on the phasing-in of initial margin requirements to align with dates communicated in Joint Notice 1 of 2022; and
5. (e) aligning the terminology in the Joint Standard to that of the Financial Sector Regulation Act, 2017 (“FSR Act”).

On 13 June 2022, the Authorities published the following documentation in terms of the provisions of section 98 of the FSR Act:

1. the amendment notice - Annexure A;
2. the statement of need for, intended operation and expected impact (Statement) Annexure B;
3. the comment template – Annexure C; and
4. a marked-up version of the Joint Standard - Annexure D.

All interested persons are invited to comment on the amendment notice and Statement. All comments must be made using the comment template and emailed to FSCA.RFDStandards@fsca.co.za for the attention of Ms Lezanne Botha and to PA-Standards@resbank.co.za for the attention of Mrs Kalai Naidoo. Comments are due on or before 25 July 2022.

Draft Notice imposing levies on financial institutions in terms of section 15A(1) of the Financial Services Board Act, 1990, read with Regulation 2(3) of the Financial Sector Regulations, 2018

The FSCA published a draft notice on 9 June 2022 (“Levies for Financial Institutions, 2022”) in terms of which levies will be imposed on financial institutions and in respect of the levy year from 1 April 2022 to 31 March 2023. The Notice sets out the levies imposed in respect of individual financial institutions.

A financial institution can apply for an exemption from a provision of the Notice in writing to the Commissioner, Financial Sector Conduct Authority, at least one month before the date on which the exemption is to take effect.

Notice 465 of 11 August 2021 is withdrawn subject to the provision that, if a financial institution has not yet fully paid a levy and interest is due in terms of Notice 465, the provision making that debt due will not be withdrawn until the debt is fully discharged.

All interested persons are invited to make written submissions on the draft Notice to the Authority, using the comments template, on or before 22 July 2022 at FSCA.RFDStandards@fsca.co.za

National Credit Regulator v Dacqup Finances CC trading as ABC Financial Services – Pinetown and another (321/21) [2022] ZASCA 104

This decision was handed down in the Supreme Court of Appeal (“SCA”) on 24 June 2022.

The National Credit Regulator (“NCR”) is mandated under the National Credit Act (“NCA”) to monitor the consumer credit market to ensure that prohibited conduct is prevented. As part of this monitoring function, the NCR sends personnel on ‘scouting exercises’ to investigate credit providers. In 2018, whilst on a scouting exercise, an inspector from the NCR noted a sign advertising ‘instant loans’ outside the premises of Dacqup Finances CC (“Dacqup”). Dacqup is a registered credit provider which advances micro loans of up to ZAR 8 000.

The inspector was suspicious of the advert, because if loans were instant then it was unlikely that they would comply with the stringent affordability assessments required by the NCA. If the loans were not instant, the advert breached the NCA’s prohibition on misleading and deceptive advertising of credit. Upon inquiry, the inspector was informed that interest rates of 30% were levied on short-term loans, which greatly exceeds the statutory maximum of 5%. On the basis of this scouting exercise, the NCR launched an investigation and compiled a report concluding that the granting of credit by Dacqup was reckless as defined in section 80 of the NCA. The NCR applied to the National Credit Tribunal (the Tribunal) to deregister Dacqup as a credit provider.

Litigation history

The Tribunal found that Dacqup had engaged in prohibited conduct and ordered it to pay an administrative fine of ZAR 300 000 and appoint an auditor, at its own cost, to assess all credit agreements from three years prior to the investigation. On appeal to the High Court, Dacqup did not appeal the merits but raised two points in limine. Hence, the High Court was called on to determine:

1. Whether the NCR had reasonable suspicion to initiate an investigation; and
2. Whether the order to appoint an auditor was ultra vires.

Dacqup argued that the words ‘instant loans’ could not trigger reasonable suspicion as the phrase could reasonably be understood to mean that Dacqup acts ‘promptly, swiftly or speedily’ yet lawfully. The High Court accepted this reasoning and said that if the NCR wanted to establish whether Dacqup’s conduct was unlawful, the inspector should have actually requested a loan, posing as a customer. The High Court also took the view that the allegation that Dacqup was charging 30% per month in interest was not the basis for the complaint and that the investigation on the basis of mere signage did not constitute reasonable suspicion. Without considering the merits, the High Court therefore upheld Dacqup’s appeal.

Appeal to the Supreme Court of Appeal

On appeal to the SCA, the key issue was whether there was reasonable suspicion to initiate an investigation. The SCA said that the bar is set low for the initiation of a complaint in a regulatory environment. Given that the purpose of the NCA includes protecting consumers from unscrupulous lenders, reckless credit and over-indebtedness, the bar should in fact be set even lower, as the initiation of complaints serves to protect consumers.

The SCA found that although the phrase ‘instant loans’ may mean ‘swiftly’ it was reasonable to interpret it as ‘happening immediately, without delay’. Hence the interpretation of the inspector was a reasonable one, as well as a probable one in the context of the micro-lending industry. The SCA held that the suspicion was founded on both contraventions: the advert and the 30% interest rate. It was also held that the approach taken by the High Court conflated the notion of reasonable suspicion with prima facie evidence. To expect the inspector to actually request a loan amounted to requiring prima facie evidence, whereas the standard required was only a reasonable suspicion.

Outcome

The SCA upheld the appeal with costs. The SCA also noted that the High Court’s order that the NCR pay Dacqup’s costs contravened a long-established principle in our law that costs should not be awarded against a statutory body fulfilling its statutory duties, as long as its conduct was not mala fide.

The Prudential Authority v Maimela (31932 of 2020) [2022] ZAGPJHC 346

This decision was handed down on 26 May 2022.

Facts

In accordance with sections 11 and 12 of the South African Bank Act, 1989 (“the Banks Act”), the Deputy Registrar of the Banks ("Registrar") instituted and appointed investigators to conduct an inspection of the operations of the TV1 scheme in South Africa. The TV1 Scheme was receiving deposits from members of the public without being registered as a bank or mutual bank.

The investigators discovered 5 742 members or distributors of the TV1 scheme spread across the nine Provinces, with the majority in Kwa-Zulu Natal. In order to oversee and supervise the repayment of all funds acquired by Mr Maimela (“the Respondent”) in connection with the alleged violation of the Banks Act, the Registrar appointed an administrator on 2 December 2014. The respondent received funds from a number of TV1 scheme participants and members, in two of his bank accounts. At the time of the conclusion of the investigation these funds were no longer in the Respondent's bank accounts. One of the bank accounts had 65 transactions recorded, 60 of which were inflows and five outflows, and the other account had 2 849 inflow transactions compared with 2 693 outflow transactions, with sums reaching more than ZAR 1 million.

The administrator was also required to establish the precise amount that the Respondent was said to have illegally obtained, the identities of the individuals from whom these monies were obtained, the locations of any such funds or assets that such funds were converted into, kept, or could be located, and to take all reasonably necessary steps to ensure and expedite repayment of the funds. The administrator was also required to notify the prosecuting authority of any suspected criminal activity. During his inquiry, the administrator discovered that the Respondent had unlawfully gained ZAR 195 400 in his bank accounts but was unable to identify the individuals who had deposited those funds.

The Respondent refused to pay the ZAR 195 4000 demanded by the Registrar in a directive sent to him on 2 December 2016. In a letter dated 18 August 2018, the Prudential Authority demanded payment of ZAR 415 668.21 from the Respondent, which included interest and costs associated with the inspection. On October 23 2018, the Respondent responded, not disputing this amount, but claiming that he only owned the accounts with the TV1 scheme funds and did not take part in its operations.

Instead of responding positively to the notice requesting repayment of ZAR 415 668.21, the Respondent filed a lawsuit in the Gauteng Division of the High Court in Pretoria, citing the Prudential Authority as the second respondent, asking the court to order that only funds that TV1 scheme participants had paid into his account, but had not transferred to participants and instead remained under his control and for his benefit, constituted funds that were repayable. Due to the failure of the Respondent to comply with the Registrar’s directive to repay the amount stated in the notice, the Prudential Authority invoked the provisions of section 83(3) of the Banks Act, and section 8 of the Insolvency Act, 1936 (“the Insolvency Act”), and launched sequestration proceedings.

Order sought by the applicant

The Prudential Authority sought an order placing the Respondent's estate under provisional sequestration and a Rule Nisi calling on any interested party to appear before the Court and show cause why final sequestration should not be granted.

Judgment

In addressing the legal question of whether the Respondent had carried on the business of a bank or a mutual bank in contravention of the Banks Act, the Court considered section 83(1) of the Banks Act. This section provides that where the Prudential Authority is satisfied that a person has obtained money by carrying on the business of a bank without being registered, the Prudential Authority may in writing direct that person to repay all money obtained and, to the extent the money is not repaid, any interest on amounts owing.

The Respondent maintained that he was never involved in the TV1 scheme's operations and that his parents used all the funds that participants and members of the scheme had paid into his bank accounts to support him. In addition, he argued that the Prudential Authority had failed to identify and submit the information of the individuals who made deposits into his account, making it impossible for the Registrar to ascertain the precise amount the Respondent actually received illegally.

The Court rejected the Respondent's arguments. Although various TV1 scheme investors made deposits into his bank accounts, the Respondent did not refute this. In accordance with his parents' instructions, he claimed that the funds were paid in multiples of ZAR 2 700 and routed via his bank accounts to maintain himself. The Respondent had allowed his bank account to be used to receive and transact moneys as a bank in the furtherance of the business of the TV1 scheme in contravention of the South African Reserve Bank Act, 1989. In addition, the Respondent acknowledged in a letter from his attorneys dated 23 October 2018 that the money claimed by the Registrar had been placed in his accounts by participants in the TV1 scheme. Nothing hinged on the Prudential Authority's inability to identify the individuals who made deposits into the Respondent's bank accounts up to this point.

Because the Respondent admitted in his responding affidavit that the ZAR 195 400 deposited in his account could be easily returned over the course of 18 months, the court determined that he had committed an act of insolvency, as defined by the Insolvency Act. Nevertheless, the Respondent had not yet paid the specified sum, and the money had since disappeared from his bank accounts. Given that he had a chance to present his financial situation, his income sources, and the properties he owned to the court, but had chosen not to do so, and that the applicant's money was no longer in the Respondent's bank accounts, the court concluded that the respondent was unable to pay his debts. As a result, the applicant was entitled to the order requested in the motion notice.

The Prudential Authority was granted the order.

Ioannides No. And Others v Western National Insurance Company Limited and Others 2022 JDR 1480 (FB)

A decision was handed down on 23 May 2022 in the Free State High Court.

The Applicants were the trustees of the Caramello’s Trust (the “Trust”), which operates and does business at its Caramello’s outlet at the Preller Plein Shopping Centre in Bloemfontein. The Trust obtained an insurance policy from the First Respondent, an insurance company, in February 2019. In May 2021, when a fire damaged property on the premises, the First Respondent declined to indemnify the Trust in terms of the insurance policy. The First Respondent’s reasons for the decline were that the aforementioned policy was void because the Trust had failed to disclose an incident in 2018 when it was double compensated for water damage.

Background to the dispute

It was common cause in the papers that in April 2018, the Trust suffered water damages to the insured premises. The Trust submitted a claim to Renasa Insurance Company ("Renasa"). At the same time, the Bean & Bagle Restaurant, trading as Caramello’s, submitted a claim to the insurer of its contractor for the same damage for which compensation had been claimed from Renasa. Both insurers paid for the same damage. In October 2018, Renasa wrote to the Trust and claimed repayment on the basis that the claim had been fraudulent and cancelled future business. The Trust repaid the amount to Renasa. This history was not disclosed to the First Respondent, who averred that had it been aware of the double claim it would have not insured the Trust. Such a double claim is treated in the insurance industry as a ‘moral risk’ to which companies are not prepared to extend insurance cover.

Arguments before the High Court

When the First Respondent declined to indemnify the Trust on these grounds, the Trust sought final relief in the High Court on the basis that it had no duty to disclose the double claim. The Trust claimed that it was only required to disclose “its full claims history and/or losses to the First Respondent for the preceding three years” and was only required to answer the questions posed to it by the First Respondent. The First Respondent argued that an insured party must make a proper disclosure to enable the insurer to make a proper assessment of the risk.

The moral risk of a double claim

In assessing the arguments before it, the Court accepted that the insurance industry treats conduct which causes two insurance companies to make payment in respect of the same damage to be a moral risk which insurers are not prepared to insure. This information is material and the Trust was therefore obliged to disclose it to the First Respondent. The Court endorsed the view that the double claim constituted a moral and material risk and that the First Respondent would not have insured the Trust had it been aware of such a double claim.

The First Respondent was not obliged to indemnify the Trust in the circumstances and the application was accordingly dismissed with costs.

Guidance Note issued in terms of section 6(5) of the Banks Act to assist bank groups in the implementation of anti-money laundering and combating the financing of terrorism programs

On 15 June 2022 the South African Reserve Bank ("SARB") issued a guidance note to inform banks and controlling companies of practices related to the implementation of anti-money laundering and combating the financing of terrorism ("AML/CFT"). Every bank and controlling company is required to have in place board-approved policies and comprehensive risk-management processes and procedures, to contribute to the safety and soundness of the bank or controlling company and prevent them from being used for money laundering or similar unlawful activities.

The Guidance Note Recommendation 18 of the Financial Action Task Force ("FATF") provides that financial institutions should implement programmes for AML/CFT purposes, which should be applied equally in their foreign branches and majority-owned subsidiaries. Requirements for such preventative measures are dealt with in the Financial Intelligence Centre Act ("FIC Act"), which requires a risk-based approach to matters of customer due diligence. The Basel Committee on Banking Supervision Guidelines ("BCBS") further emphasises that consolidated risk management policies are administered on a group-wide basis across international operations. The Guidance Note therefore serves to inform and assist banks with more information about effective group controls.

Among other matters, the Guidance Note advises banks on the following implementations and requirements:

AML/CFT group controls in banks' and controlling companies' foreign operations

• The Guidance note clarifies that, under section B of the Regulations, banks are required to declare that they comply with local AML/CFT laws in their area by completing Form BA 099A.
• Banks are required to effectively implement adequate AML/CFT group controls in the operations of their foreign entities, and the higher of AML/CFT standards issued in South Africa or the relevant host country must be applied by the bank. The bank must inform the Financial Intelligence Centre ("FIC") and the PA in writing if the host country does not permit the implementation of measures required under FICA. The host country must also inform the group AML/CFT function when it is enforcing laws that are stricter than those found in the home country.
• A group's AML/CFT function must have a structured AML/CFT programme which is regularly communicated to foreign subsidiaries. Group-wide AML/CFT programmes and standards must be consistent and cover a broad range of topics relating to group standards and policies. Where databases are centralised within the group, adequate documentation of such functions is required so that these functions are monitored across the group and not just at a local or centralised level.

Implementation of group controls

• The Guidance Note states that, to implement group controls effectively and in a timely manner, banks are required to have sufficient and adequate skills and resources available. Additional procedures should be implemented to inform stakeholders and home banks of any risk event that affects the sound management of money laundering and terrorist financing.

Group audit and compliance functions

• Assurance as to the effectiveness of implementation of group controls can be provided through the group audit and compliance functions, as well as appropriately skilled external third parties. The Guidance Note highlights the key role that group audits play in effective controls, noting that the group audit plan must reflect a risk-based approach.

Oversight and monitoring of group compliance functions

• A group AML/CFT officer for group-wide compliance is important for effective risk mitigation. The group oversight function in respect of the AML/CFT operations and controls in foreign subsidiaries must have adequate access to pertinent risk data held by host countries.
• The Guidance Note therefore recommends that banks and controlling companies should be authorised to share information about their customers with their head offices or parent bank.

Privacy and access to information

• In terms of section 37 of the FIC Act, no restriction on disclosure of information affects compliance by an accountable institution such as a bank, in relation to:
1. reporting obligations and access to information;
2. measures to promote compliance by accountable institutions; and
3. compliance and enforcement.
• Section 38 of the Protection of Personal Information Act, 2014 ("POPIA") exempts certain functions which are performed to protect members of the public against:
1. financial loss due to dishonesty, malpractice or improper conduct by persons providing banking, insurance or other financial services; or
2. dishonesty, malpractice or improper conduct by persons authorised to carry on a profession or other activity.

On-site inspections

• Effective group-wide controls must be implemented for on-site inspections, during which home country supervisors should not face impediments. The Guidance Note provides that on-site visits to host jurisdictions assist in ensuring that there are effective group controls. The effectiveness of group-wide control of inspections as well as the AML/CFL policies and procedures must be assessed.

Continuous training

• Effective and ongoing training of staff at host and home country banks is an effective tool for ensuring effective implementation of group controls.
• The implementations contained in the Guidance Note are in line with the requirements in Regulation 39, 36(17) and 50 of the Regulations relating to Banks (“the Regulations”). Regulation 38(4) of the Regulations states that when the PA considers that a bank’s risk assessment policies are inadequate, it may require the bank to strengthen its risk management policies or internal control systems. The Guidance Note is useful tool for ensuring regulatory compliance on risk management.