Keep up to date on key financial services regulatory developments in South Africa in the third quarter of 2023.
PA Guidance Notices:
On 3 August 2023, the following proposed Guidance Notices were issued by the Prudential Authority (PA) for comment by interested parties. The commentary period closed on 13 September 2023:
1. PA: Proposed Guidance Notice on Climate-Related Risk Practices for Banks
The PA is aware that climate change may result in physical and transitional risks that could affect the safety and soundness of individual banks and could have broader implications for the stability of the whole banking system. The proposed
Guidance Notice on climate-related risk practices for banks (Guidance Notice), applicable to banks, branches of foreign institutions and controlling companies, advises on integrating climate-related risks into governance and risk management frameworks, including guidance on banks' internal capital adequacy assessment process. This Guidance Notice contains critical recommendations on banks' governance, risk management and Internal Capital Adequacy Assessment Process (ICAAP).
Boards of directors and senior managers, as key role players, are required to develop processes and policies for assessing the potential impacts of climate-related risks on their business model, overall strategy and business environment, as officials responsible for overseeing governance. It is important to note that climate-related risks in terms of this guidance note are regarded as
financial risks and
not as mere reputational risks. Senior management is therefore expected to treat climate-related risks appropriately.
Policy actions and initiatives to enhance domestic financial stability
The SARB continued to collaborate with the Financial Stability Oversight Committee to address some key risks to financial stability, in particular the way forward following South Africa's grey listing by the Financial Action Task Force in February 2023 and the possibility of secondary sanctions being imposed on South Africa.
Work continued on the implementation of the resolution and deposit insurance frameworks. The Corporation for Deposit Insurance became a legal entity on 24 March 2023 and will be fully operational from 1 April 2024. The SARB became the Resolution Authority for designated institutions on 1 June 2023, which was also when the resolution framework contained in the FSR Act became effective.
What is the impact on economic growth and inflation?
The SARB forecasts GDP growth of merely 0.3% in 2023, with load shedding expected to detract two percentage points from overall growth this year (assuming 280 days of load shedding at varying stages, but predominantly at stage 4). Load shedding is expected to ease to 150 days (lowering GDP growth by 0.8 percentage points) and 100 days (reducing GDP growth by 0.4 percentage points) in 2024 and 2025 respectively.
Severe stages of load shedding could also be inflationary as higher operating costs (from running diesel generators) are passed on to consumers and higher rates of wastage and spoilage, especially along food value chains, lead to possible goods shortages.
Financial Intelligence Centre Advisory – Failure to Comply with Directive 6 of 2023 Relating to the Submission of Risk and Compliance Returns
On 25 August 2023, the Financial Intelligence Centre (FIC) issued an advisory in relation to non-compliance with Directive 6 of 2023 (submission of risk and compliance returns) (Directive 6) (Advisory).
The FIC warned accountable institutions that Directive 6 constitutes a rule made by a supervisory body or by the FIC. Directive 6 creates enforceable obligations for accountable institutions falling within Directive 6's scope (legal practitioners, trust and company service providers, estate agents and gambling institutions), and has the same status as the Financial Intelligence Centre Act, 38 of 2001 and its associated Regulations.
Accountable institutions that have failed to comply with Directive 6 are non-compliant and may be sanctioned in terms of section 62E of the FIC Act. The Advisory serves as a final demand for accountable institutions to immediately submit the required information to the FIC, if they have not already done so.
Financial Services Regulation – Bi-Annual Tribunal Alert (January 2023 - June 2023):
1. Cherylise Fourie v Savy Brokers (Pty) Ltd Case No: FSP52/2022 (31 January 2023)
Reconsideration of a debarment of a financial services representative:
The Applicant was accused of fraudulent transactions as a representative of the Respondent, an FSP. The Applicant was provided with a charge sheet of her alleged transgressions and resigned on the morning of the hearing before the hearing could commence. The chairman of the disciplinary hearing proceeded in the Applicant's absence and found her guilty as charged and recommended that she be dismissed. On the same day, 28 April 2022, the Respondent informed the Applicant of the outcome of the disciplinary hearing and added that it would be approaching the FSCA for a debarment based on gross dishonesty. On 6 May 2022, the chairman considered the debarment in light of her findings during the disciplinary hearing and recommended that the Applicant be debarred and on 9 May 2022 the Respondent filed a debarment form with the Financial Sector Conduct Authority (FSCA).
The Applicant's attorneys immediately reacted by raising procedural issues in her debarment, which was followed by an application for reconsideration to the Financial Services Tribunal (Tribunal). The Tribunal found that the Respondent failed to comply with section 14(3)(a) of the Financial Advisory and Intermediary Services Act, 37 of 2002 (FAIS Act) which contains the procedural aspects that a Financial Services Provider ("FSP") must follow prior to a debarment of a representative and that the letter issued to the Applicant on 28 April 2022 was insufficient. It referred the matter back to the Respondent to follow the requirements set out in the FAIS Act.
After the Tribunal's ruling, the Respondent issued the Applicant with a notice on 17 August 2022 of its intention to debar her "as a consequence of [her] being found guilty of dishonesty and fraud during an internal disciplinary hearing held on 28 April 2022". It invited her to make written representations within seven days. The Applicant's response amounted to a bare denial with an alternative that the acts of which she stood accused did not amount to fraud but related to internal administration matters. The Applicant also stated that proper procedure was not followed, the charges were vague and that she was not provided with proper detail, including underlying evidence, on which the charges were based.
The Tribunal found that the refusal by the Respondent to provide the Applicant with the requested information based on the fact that the Protection of Personal Information Act, 4 of 2013 applied and that the information was either confidential or related to trade secrets was unlawful. It stated that although a party to administrative proceedings was not entitled to discovery, the refusal to provide basic information in order to prepare a proper defence was not only unreasonable, but also unlawful. Doing so is not possible in criminal, civil or administrative law.
Crucially, in this case, the Tribunal did not refer the matter back to the Respondent again, as it took the view that the Respondent was previously warned to follow proper procedure and would not be able to make a decision without it appearing to be biased. The Tribunal accordingly set aside the debarment of the Applicant.
2.Renault Otto Kay v Financial Sector Conduct Authority Case No: A19/2022 (6 February 2023)
Application for reconsideration of debarment of key individual:
The relevant jurisdictional fact for the imposition of an administrative penalty is the "contravention" of a financial sector law and for a debarment such a contravention must have been "in a material way". The applicable financial sector law and the regulatory instrument in this case was the FAIS Act and Board Notice 194 of 15 December 2017 (Board Notice) respectively. The Applicant was the CEO and one of the directors of Smart Billion (Pty) Ltd (Smart Billion). The Applicant was also the key individual of Smart Billion. Smart Billion had a Category I and II licence and was authorized to provide advice and render intermediary services for derivative instruments, shares, warrants, certificates and other instruments and bonds.
Members of the public invested funds in Smart Billion and these funds were deposited into Smart Billion's business bank account. Smart Billion used some of the funds to invest in a product on a platform that it was not licensed to use. The balance of client funds was used to pay clients' withdrawal requests. When a client requested a withdrawal, Smart Billion took deposits from other clients in the bank account of Smart Billion to pay the client who requested a withdrawal, which amounts to a typical pyramid or Ponzi scheme. Clients also received false financial statements from Smart Billion purporting to contain accurate information on accounts held in their names.
When the pyramid/Ponzi scheme collapsed, the Applicant resigned, the company was liquidated and the clients of Smart Billion lost millions. This case concerned the lack of continuous operational ability dealt with in terms the Board Notice. The Board Notice requires that a key individual must be able to adequately and appropriately manage or oversee the activities of the FSP "relating to the rendering of financial services". One of the functions is to have management policies, procedures and systems of corporate governance, risk management and internal controls in place to ensure compliance by the FSP with the FAIS Act and other legislation. A key individual must have the operational ability to effectively manage and oversee the financial services-related activities of the FSP or juristic representative and the financial services in relation to the financial product for which the key individual was approved or appointed.
The Tribunal found that the Applicant acted as a front, pretending to be a key individual of the company, but performing no functions as a key individual. The Tribunal said that statutes must be interpreted purposively and that one dictionary meaning of a word does not determine the meaning of the word within the Act as a whole. If a person fails to comply with a positive obligation of the law, they break, transgress or contravene the law, irrespective of whether the law imposes criminal sanctions for such a contravention. The Tribunal illustrated this by providing that professionals may be subjected to a financial penalty and struck off rolls for unprofessional conduct, irrespective whether their conduct amounted to a crime. The Tribunal stated that the Applicant showed no indication that he appreciated the seriousness of his failures as a key individual and accordingly dismissed the application.
3.
Abacus Insurance Limited v Prudential Authority Case No: PA4/2022 (29 March 2023)
A non-life insurer can ensure first and third-party risks:
This case was an application to reconsider the Prudential Authority's (PA) decision to reject an application in terms of section 26 of the Insurance Act, 18 of 2017 (Insurance Act). Abacus Insurance Limited (Abacus) is a traditional insurer that holds a non-life insurance licence qualifying it to underwrite third-party risks. Pepkor Group no longer had an insurance licence and therefore Pepkor Holdings Limited (Abacus's parent company) wanted Abacus to underwrite the Pepkor non-life risk portfolio. Abacus applied to the PA to vary its licence to add further classes and sub-classes to the licence conditions. Essentially, what Abacus was requesting was authorisation for underwriting third-party risks as well as its parent company's risks (first-party risks).
The PA declined the application on the grounds that the Insurance Act implicitly prohibits "traditional insurers", insurers who are not captive or cell captive insurers, from underwriting both first-party and third-party risks. The Prudential Authority also argued that allowing a traditional insurer to conduct both first-party and third-party business under the same licence would create a potential conflict of interest.
The Tribunal did not agree with the PA's "unbusinesslike" interpretation of the Insurance Act. It said that there was no provision in the Insurance Act which expressly prohibited a traditional insurer from underwriting first-party risks. The Tribunal also disagreed with the PA's reliance on the fact that the Insurance Act defines "first-party risks" in relation to captive insurers and cell-captive insurers. It stated that the definition did not confine the insurance of first-party risks only to captive insurers and cell-captive insurers. According to the Tribunal, this only attributed a meaning to first-party risks in respect of those insurers. With regard to the 'implied prohibition', as argued by the PA, the Tribunal stated that it would result in a conclusion that only cell captive insurers could insure third-party risks and that view was not sustainable in law.
Finally, the Tribunal noted that the PA has powers under the Insurance Act to mitigate any perceived risks in respect of a traditional insurer underwriting first-party and third-party risks. As a result of this decision, traditional insurers can insure both first- and third-party risks under one licence.
4.Borwa Financial Services (Pty) Ltd & another v The Pension Funds Adjudicator & Constance Conty Sibulele Case No: PFA1/2023 (21 April 2023)
Audi alteram partem in withholding pension benefits:
The second Respondent, Constance Conty Sibulele (Sibulele), by virtue of her employment was a member of a provident fund that Borwa Financial Services (Pty) Ltd (Borwa) managed. Sibulele was dismissed in July 2021 and was entitled to a withdrawal benefit from the fund. Borwa subsequently requested the fund to withhold the withdrawal benefit due to pending litigation. The fund withheld payment of the benefit. When she later attempted to claim her benefit and was unable to do so, she lodged a complaint with the Pension Funds Adjudicator (Adjudicator) who found that the board of the fund acted in breach of their fiduciary duties towards Sibulele and failed to comply with basic procedural requirements before exercising their duty to withhold. Borwa brought an application for reconsideration in terms of section 230 of the Financial Sector Regulation Act, 9 of 2017 (FSR Act) to the Tribunal.
The Tribunal held that the fund did not comply with the
audi alteram partem rule. Before the fund made the decision to withhold the withdrawal benefit, it ought to have complied with the following procedural requirements. The fund should have:
- Notified Sibulele that it had received a request from Borwa to withhold her pension benefits;
- Informed her of Borwa's case against her; and
- Given her the opportunity to respond to Borwa's case against her.
Given that the fund did not notify Sibulele that her benefit was being withheld, the Tribunal upheld the Adjudicator's decision and confirmed that Borwa did not comply with the
audi alteram partem rule which is a rule of natural justice. The Tribunal accordingly dismissed the application.
5.
Mpho Caroline Masebe v Standard Bank of South Africa Limited Case No: FSP49/22 (30 May 2023)
What constitutes a representative as defined in the FAIS Act:
This was an application in terms of section 230 of the FSR Act for a reconsideration of Standard Bank's decision to debar the Applicant based on her failure to disclose significant historical employment details with Standard Bank. Shortly after the Applicant was offered employment, it transpired that she had withheld information pertaining to her previous employment with Standard Bank and the crucial point that she was dismissed for dishonesty and was listed on the Register for Employees' Dishonesty System (REDs). Standard Bank subsequently dismissed the Applicant and notified her of her debarment.
The Tribunal was tasked to consider what constitutes a "representative" in assessing the lawfulness of the Applicant's debarment. It stated that, in order to be considered a representative of an FSP, a person must act in terms of a contract or mandate granted by the FSP and must be registered as a representative by the authorized FSP.
The Tribunal found that the listing in REDs was irrelevant in the matter as the listing had already expired before the Applicant was recruited. The Applicant was not a registered representative of Standard Bank when it was discovered that she withheld important information about her previous employment with Standard Bank. Importantly, the Tribunal made a submission that the mere fact that a person was employed by a bank did not translate into that person being a "representative" of the bank, as the appointment of a representative is a deliberate process which comes into effect when that person is registered as representative of a FSP and given a mandate to act in that capacity.
The Tribunal emphasised that labour relations issues do not constitute sufficient cause for debarment. A debarment must be based on non-compliance with the provisions of the FAIS Act. The applicant's debarment was therefore set aside.
