Keep up to date on the most important Financial Services Regulation developments in South Africa during September 2021.
Financial Sector Conduct Authority
FSCA Communication 18 of 2021 (Banks) – Conduct of business supervision
On 1 September 2021, the FSCA published Communication 18 of 2021 (Banks) about the Conduct of Business Supervision.
The communication applies to all banks, mutual banks and branches of foreign banks which may decide to close, permanently or temporarily, the "physical points of presence" that they use to distribute their products and services to customers (i.e. face-to-face infrastructure) to refurbish or convert the premises to self-service branches.
In terms of the communication, the FSCA now expects to be notified when a branch (including Automated Teller Machines (ATMs)) are closed permanently or temporarily (i.e. longer than 30 days) or are transformed into self-service branches.
The motivation is that the FSCA would like to ensure that banks have, prior to closure or transformation, conducted the necessary assessments to ensure fair outcomes for customers.
To expand on this, the Communication acknowledges that there is a move towards digitisation and a cashless society. However, the decision to cut down on the physical brick and mortar structures of banks has an impact on vulnerable customers who still rely on having access to physical cash.
The Banks are now obliged to conduct a robust needs analysis of the customers that use the specific branch or ATM under consideration, including an analysis of the impact of the proposed closure on them, as well as alternative channels that customers may use and how communication of the closure will be made to them.
The analysis needs to be submitted to the FSCA for consideration no less than six months prior to the planned closure.
FSCA warns the public against Binance Group
On 3 September 2021, the FSCA published a notice warning the public to be cautious when dealing with the entity, "Binance Group". The entity is not authorised to give any financial advice or render any intermediary services in terms of the Financial Advisory and Intermediary Services Act (the FAIS Act) and therefore the public does not have a claim of recourse against anyone.
Binance, a cryptocurrency exchange which is currently the largest exchange in the world in daily trading volume of cryptocurrencies, responded on Twitter, stating that it does provide financial advice or brokerage financial services. It denied any affiliation with the entity mentioned above. Binance Group has previously faced regulatory authorities in Singapore, Japan, Italy and the UK, amongst others, who have issued similar compliance warnings.
FSCA: Joint Guidance Notice 1 of 2021 on the application of section 5 of the Insurance Act, 2017 on foreign entities insuring first party risks
This Joint Guidance Notice provides guidance on the application of section 5(1) read with section 5(2) of the Insurance Act, 2017 (the Act) which is read together with Joint Guidance Notice 1 of 2019, in the context of foreign entities insuring “first party risks" in the Republic. It confirms the view of the Prudential Authority (PA) and Financial Sector Conduct Authority (FSCA) (collectively referred to as the Authorities) that only a licensed captive insurer under the Act may conduct insurance business in relation to “first party risks" in South Africa.
In the Joint Guidance Notice 1 of 2019, the Authorities provided clarity on the application of section 5 of the Act and set broad parameters for determining whether a foreign re/insurer was conducting “insurance business" in the Republic, as defined in the Act. One of these parameters included that a foreign re/insurer soliciting insurance business from a South African-based customer is acting directly in the Republic and would be regarded as conducting insurance business in terms of section 5(2)(b) of the Act. However, when a South African-based customer seeks and secures re/insurance with a foreign re/insurer of its own accord directly, the re/insurer will not be regarded as conducting insurance business in the Republic, as defined in the Act.
This notice sets out the definitions of “captive insurer" and “first party risks" (as defined in the Act). When a foreign entity meets these definitions, the entity would be regarded as conducting “insurance business" in the Republic in terms of section 5 of the Act and must therefore be licensed under the Act.
South African Reserve Bank / Prudential Authority
Money Market Sub-Committee – Tri-party collateral management concept position paper
The purpose of this position paper is to provide the implementation principles for the Tri-party Collateral Management (TCM) framework. The market participants had expressed a need to optimise and mobilise the collateral assets held with the South African Reserve Bank (SARB) for the secured funding provided. This need emanates from the continued growth in the demand for collateral in the South African financial markets, mostly as a result of strengthened regulatory requirements such as the Basel III and Financial Markets Act 19 of 2012.
The framework being proposed is envisaged to play a role in alleviating the following Collateral Management challenges: (i) increased requirements for secured securities finance transactions; (ii) increased demand for high-quality liquid assets (HQLA);(iii) increased scarcity of HQLA due to limited re-use of collateral assets; and (iv) increased disclosure requirements for collateral usage, collateral inventory management and visibility on the re-use of collateral assets.
The closing date for comments was 30 September 2021.
Joint Media Release
Joint Standard on Outsourcing by Insurers in terms of section 98 of the FSR Act
The PA and FSCA have jointly issued the draft Joint Standard on Outsourcing by Insurers, which sets out the minimum obligations of an insurer when outsourcing material business functions or activities to third-party service providers, to ensure that outsourcing does not impair the prudent management of an insurer's business.
The draft Standard therefore applies to all licensed insurers (including micro-insurers), other than Lloyd's and branches of foreign re-insurers.
The Statement of Need notes that proper governance around outsourcing of business activities is integral to the risk management and internal control of the insurers, as outsourcing of material functions can pose various risks to the licensed insurer. If not properly managed, these risks can have adverse effects on the strategic objectives of the insurer which can in turn lead to poor policyholder outcomes.
The Insurance Act specifically requires insurers to adopt and implement an effective governance framework that adequately protects the interests of their policyholders. The purpose of the draft Standard is to manage the risks associated with outsourcing material activities and functions, and will assist the authorities to achieve their regulatory objectives.
Historically, Directive 159A.i (issued by the FSB) set out the regulatory framework governing outsourcing by insurers. This was replaced by Prudential Standard GOI 5 which was issued by the PA as the responsible authority for the Insurance Act. This change resulted in the outsourcing of insurers falling within the scope of the PA, but it created a gap from a conduct perspective. The intention now is to repeal GOI 5 and replace it with the proposed Joint Standard, thus placing all the outsourcing requirements into a single instrument.
The draft Joint Standard was drafted considering the provisions in GOI 5. The Insurance Core Principles were issued by the International Association of Insurance Supervisors (IAIS).
Comments should be submitted through the template provided as Annexure D on or before 26 October 2021.
National Treasury
National Treasury publishes for comment draft regulations designating provision of benchmarks as a financial service
The Minister of Finance published the draft regulations designating "provision of benchmarks" as a financial service for public comment on 1 September 2021.
The draft Regulations propose to designate the "provision of a benchmark" as a financial service in accordance with section 3(3) of the FSR Act. They also specify that the FSCA is the authority responsible for the regulation, supervision and oversight of the financial service of the "provision of a benchmark" in accordance with section 3(5) of the FSR Act.
In terms of section 288(1)(b) of the FSRA, which empowers regulations to provide for procedural and administrative matters necessary to implement the provisions of this Act, some specific powers and duties are given to the FSCA in relation to the provision of benchmarks. These will enable the FSCA to effectively regulate and supervise the financial service of the “provision of a benchmark".
According to National Treasury, benchmarks play a key role in the financial system's core functions of pricing and allocating capital and risk. “Benchmark" and “provision of a benchmark" are defined in section 1(1) of the FSRA. The provision of a benchmark is not currently regulated by any financial sector law.
Instances of the manipulation of benchmarks have highlighted their importance and vulnerabilities. The integrity of benchmarks is critical for the pricing of many financial instruments, and the management of financial risk. Doubts about the accuracy and integrity of benchmarks may undermine financial confidence, cause significant losses to financial customers, and distort the economy. It is essential to ensure the integrity of benchmarks and the benchmark-setting process.
It is necessary that the provision of benchmarks is designated as a financial service in terms of the FSRA as provided for in the draft Regulations, to enable benchmarks to be appropriately regulated and supervised by the FSCA, in alignment with international standards such as the IOSCO Principles for Benchmarks in financial markets of 2013 (Financial Stability Board) and the EU benchmark regulations (BMR).
The draft Regulations are not intended to directly regulate the SARB as administrator of two key benchmarks, the South African Overnight Banking Rate and the Johannesburg Interbank Average Rate, as international standards set by the EU's Benchmark Regulations do not typically extend to central banks. It is intended that the regulation would focus on other benchmarks used in the South African markets.
Comments are due by 13 October 2021.
Parliamentary Monitoring Group
Pension Funds Amendment Bill: briefing on public submissions & discussion
By the end of August, there was some progress on the Pension Funds Amendment Bill. The Standing Committee on Finance was briefed by Parliament's legal services – represented by Ms Noluthando Ntlokwana - on the submissions received on the Bill. Ms Ntlokwana said the submissions made were on policy issues, no legal issues were raised and therefore no legal inputs could be made.
Access this committee briefing here.
Fintech
BIS Innovation Hub and central banks of Australia, Malaysia, Singapore, and South Africa will test CBDCs for international settlements
The Bank for International Settlements Innovation Hub, the Reserve Bank of Australia, Bank Negara Malaysia, Monetary Authority of Singapore, and the SARB will be collaborating to test the use of central bank digital currencies (CBDCs) for international settlements. Project Dunbar is an experiment that could lead to a more efficient global payments platform. This study follows after the SARB confirmed at the end of July that it had embarked on a feasibility study of CBDCs.
The aim of the study is to develop prototypes for shared platforms that will enable international settlements with digital currencies issued by multiple central banks and to allow direct transactions between institutions, thus reducing costs and increasing speed. The results of the study are likely to be published early next year.
Access this Joint Media Release here.
Alternative Finance Trends in SA and the Implications for Financial Regulators
The term “Alternative Finance" refers to financial products and services that are developing outside the traditional, regulated banking and capital market sectors. They are often offered to customers using digital channels, instruments, and systems.
Typical Alternative Finance instruments include: (i) asset-based finance; (ii) equity-based finance; (iii) alternative debt; and (iv) hybrid instruments.
Globally, China initially dominated the global alternative finance market until 2018, when the rest of the globe increased its share. Although Alternative Finance remains largely unregulated, many jurisdictions have taken notice of this financial activity and begun to develop bespoke regulation.
The top four Alternative Finance use-cases identified in the study include: (i) invoice trading; (ii) crowd funding; (iii) balance sheet lending; and (iv) P2P marketplace lending.
The study identified several key enablers to unlocking the potential of Alternative Finance, including digital and financial literacy, a sound financial system, the development of bespoke and enabling Alternative Finance regulations, and internet connectivity.
A list of considerations was identified for financial regulators to reflect upon, aimed at minimising the risks and eliminating the barriers to entry around Alternative Finance activities. These considerations include addressing risks relating to consumer protection, cyber security and data privacy, money laundering and other risks as well as barriers such as lack of awareness, lack of enabling regulations and the lack of innovative products.
Access this paper here.
Consultation Paper: Sort-at-source in the National Payment System
The purpose of this Consultation Paper is to solicit stakeholders' insight on the practice of sort-at-source. Stakeholders are requested to provide the SARB with information on how sort-at-source operates (i.e. use cases, challenges and drivers of sort-at-source), and to comment on the proposed recommendations and/or to propose effective measures to address sort-at-source.
Sort-at-source refers to the practice of sorting payment instructions based on multiple holders of destination accounts and submitting them directly to the holders of the destination accounts or requesting clients to pay directly into specific accounts (e.g., third-party payment providers' (TPPPs) or beneficiaries' accounts). This bypasses the clearing system, which is undertaken through regulated acquiring or sponsoring relationships. However, sort-at-source does not include payment transactions in which the payer and beneficiary are clients of the same participants holding the destination accounts or stores of value (i.e. onus transactions).
The outcome of the consultation process should enable the SARB, as the primary regulator of the NPS, to provide legal certainty and a policy position that includes all the necessary interventions to address the practice of sort-at-source. This should ultimately enhance the efficiency, integrity and safety of the NPS as well as achieve the interoperability goal outlined in Vision 2025.
Stakeholders are encouraged to comment openly and are assured that their personal and organisations' details and views will be treated confidentially and will not be shared with other parties. The SARB will only share consolidated/aggregated information with relevant parties (e.g. National Treasury) as part of the process of developing an appropriate policy position.
Stakeholders must submit their comments on this Consultation Paper by 15 October 2021. Comments can be addressed to npsdirectives@resbank.co.za.
