South Africa’s financial sector is currently undergoing significant regulatory reform, which will likely result in the establishment of a “twin peaks” model of regulation in the near future through the enactment of the Financial Sector Regulation Bill at some point during 2016.
This article summaries the outcomes of the past few years of reform efforts since the Government first announced its reform program in 2011, looking at: the institutions that will be established, the importance of financial stability and the enforcement and review mechanisms that will be put in place when the reforms are passed. It also provides an overview of further reforms of the financial sector that are in the pipeline.
Recent financial sector reform
Twin peaks institutional model
The Director-General of the National Treasury – Lungisa Fuzile – recently told the Association for Savings and Investment South Africa Conference:
We remain committed to seeing a financial sector, which is transformed and supports financial inclusion. We would like to see a financial sector, which continues to innovate, but also treats customers fairly and properly through offering them the right products and services. We would like to see a financial sector, which continues to be well regulated and therefore embraces the good intentions behind the Twin Peaks model of supervision. We are keen on a sector which continues to support key government initiatives on infrastructure without compromising hard earned investor or client’s savings.
The twin peaks regulatory model gives responsibility for financial sector regulation to two separate independent bodies:
- The existing Financial Services Board will be reconstituted as the Financial Sector Conduct Authority (FSCA). The FSCA will have the role of enhancing and supporting the efficiency and integrity of financial markets and protecting financial customers, including by promoting fair treatment of them.
- A new body, the Prudential Authority, will have responsibility for prudential regulation of financial institutions. The focus of its work will be enhancing the safety and soundness of financial institutions and market infrastructures (such as stock exchanges) and protecting financial customers against the risk that those institutions will fail to meet their obligations. The Prudential Authority will be an independent body but, because of the close linkages between its work and the role of the South African Reserve Bank (SARB), the Authority will be located within SARB’s administrative framework and SARB will provide the Authority’s resources.
The Bill requires the two agencies to cooperate in carrying out their roles.
A centrepiece of the reforms is the ability of the Prudential Authority and the FSCA to make wide-ranging prudential and conduct standards to apply to financial institutions.
- Prudential standards will be aimed at ensuring the safety and soundness of financial institutions. They will be able to impose requirements on financial institutions including in relation to capital adequacy, minimum liquidity, “fit and proper persons” and risk management.
- Conduct standards will be directed towards ensuring efficiency and integrity of financial markets and protecting and treating financial customers fairly. They will be able to impose requirements on financial institutions including in relation to “fit and proper persons”, disclosure, risk management and governance, as well as the design and suitability of – and marketing and distribution of - financial products and services.
It remains to be seen how the new FSCA will craft these “product suitability” standards and how it will balance the need for innovation and risk taking against the objective that financial institutions treat customers fairly through offering them the right products and services.
The reforms also focus on the improved arrangements for monitoring and managing “financial stability”, which means that financial institutions are able to provide – and continue to provide – financial products and services without interruption and there is confidence that that will occur. SARB has overall responsibility for financial stability, and the reforms include a number of new powers for SARB as well as new consultative bodies to advise SARB in carrying out this mandate.
Enforcement and review mechanisms
The reforms provide the two regulatory bodies with a comprehensive set of investigation and enforcement powers, including directives, enforceable undertakings and administrative penalties.
They also set up a new Tribunal, which will have extensive powers to review or reconsider regulated decisions. However, the Tribunal will only be able to substitute its own decision in very limited situations. In addition, the reforms provide for an ombud scheme, including the establishment of an overarching Ombud Council.
Once these reforms are implemented, we expect a further round of reforms to bring sectoral laws into line with the current reform agenda and to effect the Government’s objective of “treating customers fairly” in the financial sector.
In addition, work is underway to create a comprehensive scheme for dealing with financial institutions in distress (resolution). This work comes on the back of the failure of at least one bank recently, and will be guided by developments in overseas jurisdictions, particularly the UK.
It is expected that this work will be concluded by the end of 2016 and will include reform measures such as “bail in” arrangements, regulators’ ability to step in prior to insolvency and a deposit guarantee scheme to protect customers of financial institutions that fall into distress.