Keep up to date with the most important developments in Financial Services Regulation in South Africa in April 2021.
Financial Sector Conduct Authority
Joint Standard 1 of 2021
On 31 March 2021, the Financial Sector Conduct Authority (FSCA) and the Prudential Authority (Authority) (collectively, the Authorities) published Joint Standard 1 of 2021, which deals with the requirements for Central Counterparty (CCP) Licence Applications. The Authorities published the consultation report undertaken during the making of Joint Standard 1 of 2021 (Joint Standard) which is set out in the comment matrix in the Schedule. They also prepared a "[s]tatement of the need for, intended operation and expected impact of the Joint Standard on requirements relating to central counterparty licence applications" which considered the responses received on the draft Joint Standard that was published for public comment on 4 December 2019.
The main objective of the Joint Standard is to prescribe the requirements that an applicant applying for a CCP licence in terms of the Financial Markets Act 19 of 2012 (FMA), and its Regulations (FMA Regulations) need to comply with in order to be licensed, and the information that must be contained in such an application.
The information that must accompany a CCP licence application, as set out in the Joint Standard, includes the following: (i) administrative information; (ii) founding documents of the applicant; (iii) additional information which must be contained in an application for a CCP licence; (iv) details of the compensation funds of the applicant; and (e) proof of compliance with the requirements under the FMA Regulations.
The consultation report, together with the statement of the need for, expected impact and intended operation of the Joint Standard, as contemplated in section 98 (1) of the Financial Sector Regulations Act (FSR Act), are published together with the Joint Standard on the websites of the FSCA and the Authority. The Joint Standard 1 of 2021 has been in force since 31 March 2021. To access this publication, click here.
FSCA warns the public against individuals impersonating Alexander Forbes
The FSCA recently received information from Alexander Forbes that it had discovered that certain people were fraudulently claiming to work for or with Alexander Forbes, and were requesting its clients and members of the public to supply or confirm their personal information through several platforms (including WhatsApp, direct phone calls, and email). They were promising additional payments for disclosure of personal information. Alexander Forbes confirms that it has no connection with these individuals. In addition, "Alexander Forbes will never request clients or members of the public to supply confidential information such as banking details in an e-mail, SMS, or WhatsApp message or direct phone call. Please do not share any personal information with anyone either via SMS, telephone or email."
The FSCA urges consumers to exercise caution and report any such requests for personal information immediately. To access this notice, click here.
Appointment of Unathi Kamlana as Commissioner of the Financial Sector Conduct Authority
On 22 April 2021, the Minister of Finance appointed Mr Unathi Kamlana as Commissioner of the Financial Sector Conduct Authority (FSCA). The appointment is for five (5) years and is effective from the date of assumption of duty, which is expected to be 1 June 2021.
Mr Kamlana is currently employed at the Prudential Authority of the South African Reserve Bank, where he is the head of department responsible for Policy, Statistics and Industry Support. He worked extensively on the implementation of the Twin Peaks reforms from 2011 to 2018, having been part of the original team that proposed the new and tougher system for regulating the financial sector. Ms Astrid Ludin is also appointed as a Deputy Commissioner of the FSCA and will assume her duties on the same date as Mr Kamlana. To access this media statement, click here.
South African Reserve Bank
Invitation to Comment on a Discussion Document on the Proposed Requirements for Funding in Resolution
The South African Reserve Bank (SARB) has published a discussion document for public comment entitled 'Proposed requirements for funding in resolution'. It is an expansion of the proposals set out in the 2019 discussion paper published by the SARB under the title 'Ending too big to fail: South Africa's intended approach to bank resolution'.
This discussion document outlines: (i) the proposed requirements for designated institutions to estimate, assess and develop ex ante funding arrangements to finance their liquidity needs and preserve the critical functions in a resolution; and (ii) the proposed arrangements to be put in place by the SARB as a participant in the financial safety net.
The SARB will publish a series of discussion papers focusing on the key aspects that will affect and facilitate the implementation of a resolution framework in South Africa. These discussion documents will become a regulatory instrument when the consultative process is concluded, and after promulgation of the Financial Sector Laws Amendment Bill. Comments on this discussion document are due by 3 May 2021. To access this discussion document, click here.
FSCA Press Release: Sanlam Collective Investments (RF) (Pty) Ltd signs an Enforceable Undertaking with the FSCA
The FSCA has taken regulatory action against Sanlam Collective Investments (RF) (Pty) Ltd (Sanlam) following its findings from an investigation into Sanlam and its administered fund, the Tresor Sanlam Collective Investment Equity Fund (the Fund). The investigation followed from a suspected breach of Board Notice 90 of 2014 (BN 90).
The FSCA found that the Fund failed to comply with BN 90 by investing in excess of the allowable 10% limit in listed security by referencing an incorrect benchmark that is not an index as defined in BN 90. In terms of the enforceable undertaking, Sanlam has agreed to (i) insert a factual note in its Minimum Disclosure Document, disclosing that the performance of the Fund from 1 December 2017 to 13 November 2020 was achieved due to non-compliance with BN 90; (ii) ensure that the correct index, as defined in BN 90, is disclosed in all marketing material distributed to investors; and (iii) ensure that all funds under its management comply with applicable provisions. This press release serves as an important reminder to the industry to ensure that they remain compliant and that the correct index, as defined in BN 90, is disclosed. This is particularly important in light of the proposed amendments to Regulation 28 of the Pension Funds Act 24 of 1956. To access this press release, click here. To access BN 90, click here.
Project to establish the Corporation for Deposit Insurance
The SARB published its first CoDI newsletter in which it shares progress on the establishment of a deposit insurance scheme for South Africa, the only G-20 country without explicit deposit insurance. The three focus areas of the CoDI project include the establishment of CoDI as a company, IT systems for data collection and pay-out and the legislative framework.
The next steps consider (i) establishing the shadow board to involve external decision-makers to facilitate key decisions and policy finalisation; (ii) publishing a discussion paper focusing on the use of the deposit insurance fund for the reimbursement of covered depositors; (iii) working with banks on the completion of a deposit insurance survey; (iv) publication of a request for proposals to appoint a vendor to assist with the development of CoDI's core system; and (v) participating with National Treasury in presentations to the Standing Committee on Finance (SCOF) on the Financial Sector Laws Amendment Bill (FSLAB). To access this newsletter, click here.
Financial Intelligence Centre
Publication of Public Compliance Communication No. 12A (PCC 12A)
The Financial Intelligence Centre (FIC) has issued PCC 12A which updates and replaces the previously issued PCC 12. PCC 12A provides guidance and clarity on what compliance activities can be outsourced by an accountable and reporting institution to a third-party service. Note that PCC 12A specifically applies to the interpretation and application of the FIC Act requirements and does not apply to the interpretation of other regulatory or supervisory bodies. To access PCC 12A, click here.
Publication of Public Compliance Communication No. 49 (PCC 49)
On 29 March 2021, the FIC published a guidance note on money laundering, terrorist financing risk and proliferation financing considerations relating to geographic areas. There are several indicators of money laundering (ML), terrorist financing (TF) and proliferation financing (PF) risks. As expressed in Guidance Note 7, these indicators, including the client, product or services, delivery channels and geographic areas, can help to formulate a comprehensive understanding of ML/TF/PF risks and to apply an adequate risk-based approach. The focus of this PCC is to elaborate on the ML/TF/PF threats and vulnerabilities posed by international geographic areas. The general principles expressed in this PCC should be applied to domestic geographic area risk considerations, where relevant.
An accountable institution is advised to review Guidance Note 7 for a further discussion on the application of a holistic approach to ML/TF/PF risk indicators. Accountable institutions should determine their risk appetite in relation to the ML/TF/PF risk associated with a geographic area. This would entail understanding the ML/TF/PF risk relating to the geographic area and the inter-connectivity with other ML/TF/PF indicators, as well as the effectiveness of controls that could be implemented to mitigate or manage this risk. It is not considered effective risk management if an accountable institution decides to de-risk the client and/or transaction only because the ML/TF/PF risk relating to the geographic area is high, without having considered all factors. To access PCC 49, click here.
Consultation Feedback Relating to the Draft Public Compliance Communication No. 111 (PCC 111)
The FIC previously issued Draft PCC 111 for consideration by all accountable institutions, supervisory and all other bodies in terms of section 42B of the Financial Intelligence Centre Act 38 of 2001, on 18 November 2020, with the consultation period ending on 18 December 2020. The FIC received responses from numerous commentators from different sectors, including motor vehicle dealers, insurance, banking, compliance consultancies, attorneys, and stockbroking industries. This document highlights the comments received from industry and the FIC's response. To access this document, click here.
Public Compliance Communication No. 50 (PCC 50)
This PCC provides guidance to those reporting on certain measures required for mitigation of loss of intelligence owing to the FIC: (i) where a report ought to have been filed and the reporter has failed to file this report with FIC, or (ii) where a defective report is filed with FIC. In both these instances the reporter is required to remediate the reporting failure as soon as possible. Note that a defective report includes a rejected report owing to validation failures or one in which the data is inaccurate or false. PCC 50 also provides guidance to reporters on the prevention, remediation and mitigation measures relating to reporting failures and gives clarity on the Directive 3 of 2014 (Directive 3) process to be followed (when applicable). To access Directive 3, click here. To access PCC 50, click here.
Case Law Developments
Financial Services Tribunal
Applications for the reconsideration of debarment of Financial Services Providers
Mudau v First National Bank (a division of FirstRand Bank Limited) Case No: FSP61/2020
The application concerned the reconsideration of a decision in terms of section 230 of the Financial Sector Regulation Act 9 of 2017 (FSR Act). The Tribunal dealt with the issue of the applicant's late application and lack of response to the information communicated. On the merits, the Tribunal found that it was undisputed that the applicant acted dishonestly when she certified certain documents as original copies without having seen the original documents. The applicant failed to ensure that she complied with the statutory requirements and her mandatory duties under the existing statutes, as well as her position as a commissioner of oaths. The application for reconsideration was dismissed. To access the decision, click here.
Mokoena v Liberty Group Limited Case No: FSP7/2021
The applicant had fraudulently used the client's personal information. She was dishonest in the disclosure letter, financial needs analysis, and record of advice by claiming to have conducted this analysis with the client and found a need for the investment and funeral plan. The Tribunal considered that there was nothing on the record to support the adjudicator's reliance on the fact that the respondent had repaid the client the premiums. Rather, the adjudication was based on the client’s complaint, a comparison between the client's signature and the signature on the forms, and other circumstances which corroborated the complainant’s allegations. The application was dismissed. To access the decision, click here.
Kruger v Liberty Group Limited Case No: FSP1/2021
The applicant made misrepresentations, among other things, that resulted in a loss or a potential loss to the value of approximately ZAR 150 000, being the commission payable for initiating policies for certain clients. The Tribunal rejected the arguments that these were administrative errors and found it implausible that the applicant had twice made a mistake by entering his own bank details on another client’s policy, with two different clients. The Tribunal found that applicant manipulated the system and acted fraudulently to earn commissions when he was financially strained. The application was dismissed. To access this decision, click here.
Ntongana v Standard Bank of South Africa Limited Case No: FSP70/2019
This case concerned an application to reconsider the debarment of a representative. From the facts, it appears that the applicant had acted dishonestly in confirming to her line manager that she was at work when it was later found that she absented herself without authorisation. She also made false statements by reporting sales that did not exist and misled her line manager about these accounts. The Tribunal set aside the debarment on the basis that a representative's dishonesty, negligence or incompetence must be sufficiently serious to impugn the representative’s honesty and integrity, which was not the case in this instance. The debarment of the applicant was subsequently set aside. To read the full decision of the Tribunal, click here.
Ntsane v Liberty Group Limited Case No: FSP9/2021
This case reiterates the importance of properly communicating proceedings to representatives who are facing debarment. The basis for the application for reconsideration is that the applicant had no knowledge of the charges against her nor of the process that was followed, and that the process was therefore fatally flawed. From the facts, it appears that the employer (the respondent) communicated with the applicant via her work email address and, when she was no longer employed by the respondent, it communicated with her via her personal email address. The Tribunal held that the respondent had sufficiently communicated with the applicant and that she was aware of the proceedings instituted against her. The application for reconsideration was dismissed. To access this decision, click here.
Application for reconsideration of Pension Funds Adjudicator determinations
National Tertiary Retirement Fund v Mbhele and Others Case No: PFA/78/2020
This case concerned an application for reconsideration of a decision in terms of section 230 of the FSR Act. The application for condonation of the second respondent was dismissed because of a lack of merit. The Financial Services Tribunal (Tribunal) held that it does not operate as a body of first instance and the issue raised was not the subject of a complaint before the Pension Fund Adjudicator (PFA). To access this decision, click here.
Affordable Adventures and Others v Grellier and Others Case No: PFA57/2020
This application was instituted by the applicants, the employers and the member applicants of the Dynamic SA Umbrella Pension and Provident Fund and the IF Umbrella Pension and Provident Funds (the Funds). The applicants sought a reconsideration of the PFA's decision not to investigate the complaint referred to her by the applicants. The PFA refused to entertain the complaint on the basis that, prior to the lodgement of the complaint, proceedings were instituted in a civil court based on the same subject matter. The Tribunal held that the PFA's decision to not entertain the complaint was justified and confirmed the position in respect of section 30 H(2) of the Pension Funds Act, which limits the Adjudicator from investigating a complaint if proceedings have been instituted in a civil court on the same subject as the investigating matter. To access the full decision, click here.
Letrush Steel and Engineering Supplies v PFA Case No: PFA83/2020
The applicant (employer) applied for the reconsideration of a determination made by the PFA in favour of the first respondent, the complainant (employee). The employee did not receive contributions during the disputed period as he did not fall under the scope of the bargaining council for that period. The Tribunal held that the PFA did not comply with the audi alterum partum rules and reiterated them. The Tribunal noted that a PFA is an administrator in terms of the Promotion of Administrative Justice Act 3 of 2000.
An administrator must give a person: (i) adequate notice of the nature and purpose of the proposed administrative action; (ii) a reasonable opportunity to make representations; and (iii) a clear statement of the administrative action. The determination was set aside and referred back to the PFA for reconsideration. To access the decision, click here.
Peter Bedford Nortier and PFA Case No: PFA84/2020
The applicant applied for the reconsideration of a determination by the PFA in terms of section 30M of the Pension Funds Act. The complaint is that the applicant was not satisfied with how the living annuity was invested (i.e., the portion of his retirement capital which was being allocated to his individual sub-account within the living annuity capital account). He attempted to instruct the Fund on how it should deal with his sub-account. When that failed, he elected to have his living annuity transferred to another fund.
The Fund refused, with reference to General Note 18 issued by the South African Reserve Services (SARS) under the Income Tax Act. The General Note did not permit a split of the retirement capital held by the Fund on the date of retirement between two providers. The Tribunal considered that on 26 February 2021, the SARS withdrew or repealed General Note 18. The withdrawal follows the determination and does not affect its decision. There is nothing to show that the withdrawal has any retrospective effect. This means that the determination cannot be set aside because of the latest developments. The application was dismissed. To access the decision, click here.
Sibusiso Virtus Ngcobo v PFA Case No: PFA82/2020
It was undisputed that the applicant had not received notifications before the determination was made, which was also issued during the lockdown period. The Tribunal considered that it is entitled to take notice of the fact that the Post Office is inherently dysfunctional and the PFA is requested to provide guidelines on ways to effectively notify parties that complaints are laid against them and for telephonic and electronic follow-ups. The determination was set aside, and the matter was referred back to the PFA for reconsideration.To access the decision, click here.
Application for reconsideration of a decision taken by the FSCA
Justin Fletcher v FSCA Case No: A16/2021
The applicant applied for the reconsideration of the quantum of an administrative penalty of ZAR 1.5 million imposed on him by the respondent. Section 167 of the FSR Act provides for the imposition by the FSCA of administrative penalties. The applicant’s case was that the penalty should have been ZAR 500 000 and not ZAR 1.5 million. The applicant had already paid the “admitted” amount and payment of the balance was suspended pending the finalisation of this application.
In respect to the unlawful conduct and the consequent administrative penalty, the Tribunal considered that the applicant had foreseen the possibility that his conduct may be regarded as unlawful but nonetheless proceeded. The application was dismissed. To access the decision, click here.
Supreme Court of Appeal
Pelham Stephanus Bothma & Others v Tertius Bothma N.O & Another (Case No. 748/2019) [2021] ZASCA 46 (15 April 2021)
This decision was determined in terms of the law of contract. On appeal before the Supreme Court of Appeal (SCA), the issues were the meaning of ‘clean sand’ as used by the parties, whether the material delivered by the appellants was clean sand and whether it was delivered as specified in the settlement agreement. The principles of interpretation of legal documents were restated and it was held that only admissible evidence of context may be led.
The SCA reiterated the approach to the judicial interpretative exercise as the process of attributing meaning to the words used in a legal document. In addition, 'interpretation is no longer a process that occurs in stages but is essentially one unitary exercise.' This entails attributing meaning to the words used by the parties as they would be understood in context by a reasonable person.
In light of the mutual accusations by the parties in this case on the presentation of inadmissible evidence, the SCA considered the following principles: (i) the integration (or parol evidence) rule remains part of our law; (ii) interpretation is a matter of law and not of fact, therefore interpretation is a matter for the court and not for witnesses; (iii) the rules about admissibility of evidence do not depend on the nature of the document (whether statute, contract or patent); and (iv) where evidence may be admissible to contextualise the document, it must be used as conservatively as possible. To access the full decision of the SCA, click here.
Fintech
Facebook-backed digital currency Diem is planning to trial this year
The Facebook-backed digital currency Diem (formerly Libra) is planning to launch a trial later this year. In the trial, each stablecoin will be pegged to the US dollar. Diem will have capabilities for users to exchange money amongst themselves and they may be able to use it as a form of payment for goods and services. Facebook's current plans include multiple coins, each tied to a specific national currency, as well as a coin tied to multiple nation-state currencies.
Some criticism following the creation of Diem include its potential destabilisation of the global monetary system, money laundering and privacy concerns linked to Facebook's previous data security scandals. At present, discussions with Swiss regulators regarding a payment licence are ongoing and would have to be completed successfully for the Diem trial to launch this year. To access the article, click here.
Africa quick to take to digital currencies
Governments around the world are weighing the feasibility and inherent risks against the potential economic value of central bank digital currencies (CBDCs) as they receive attention by financial authorities. The IMF approved five African countries to issues digital currencies. Notably, the South African Reserve Bank (SARB) began CBDC experimentation in 2016, and the Bank of Ghana aims to publish the findings of its work on CBDCs in 2021.
In 2020, blockchain data analytics firm Chainalysis published its Global Cryptocurrency Adoption Index, listing Kenya, South Africa and Nigeria among the top 10 crypto-adopting nations in the world. African consumers use cryptocurrencies as a mechanism for managing currency devaluation and avoiding high transaction costs. However, at present, their regulatory status is uncertain and varies from country to country in the region. To access the article, click here.
Mirror Trading International CEO hit with provisional sequestration order
Mirror Trading International was a scheme that claimed to offer automated trading services, initially in forex, and later in cryptocurrency derivatives. According to Chainalysis, MTI was declared the biggest cryptocurrency scam of 2020. MTI was unsustainable, as it was a pyramid scheme which used the money of new entrants in the scheme to pay the people at the top of the multilevel referral network.
The alleged founder and CEO of Mirror Trading International (MTI), Johann Steynberg, has been provisionally sequestrated in the Polokwane High Court. Anyone who wants to oppose the sequestration has until 20 July 2021 to provide reasons why the provisional sequestration order should not be made final. The hearing to decide MTI's final provisional liquidation order is set for 31 May 2021. To access this article, click here.
