A snapshot of the financial services sector in 2015 demonstrates its importance in the South African economy illustrating that financial institutions manage over R12 trillion in assets, with gross value added of services contributing 8% of GDP. The fourth biggest contributors to the sector are retirement funds.
The Financial Sector Regulation Bill (FSR Bill) and related Financial Sector Levies Bill, which will implement the Twin Peaks model for financial regulation and supervision, establishes a Financial Sector Conduct Authority (FSCA) with the stated objectives of “promoting fair treatment of financial customers; promoting financial education and capability; enhancing and supporting the efficiency and integrity of the financial system; and assisting in maintaining financial stability”.
The creation of the FSCA was seen to be imperative after National Treasury identified various issues relating to inter alia the conduct of business in the financial sector that has lead to poor outcomes for financial customers. The Twin Peaks reforms aims to provide the institutional structure necessary to implement a more comprehensive and consistent strategy to improve market conduct and deliver better outcomes for financial consumers.
The initial estimated costs of establishing the Twin Peaks model has been set at R1,033 million, with R624 million thereof attributable to the FSCA’s supervision of non-bank financial institutions (which would include retirement funds). The levies imposed by the Financial Sector Levies Bill will replace all current fees and levies payable by financial institutions to the Financial Services Board however financial service providers are warned that an increase in levies payable is to be expected in the longer term in light of the strengthened framework for market conduct regulation at the FSCA.
The FSCA will be run by an Executive Committee made up of a Commissioner and his or her Deputy Commissioners. Within 6 months of their appointment the Executive Committee will be required to adopt a regulatory strategy for the FSCA to give general guidance in achieving its objective and the performance of its regulatory and supervisory functions. The FSR Bill further prescribes that this regulatory strategy must state the regulatory and supervisory priorities for the FSCA for the ensuing three years and the intended key outcomes of the strategy.
The FSCA, once established, will also have the task of prescribing various conduct standards relating to financial intuitions, their representatives and key persons, as well as contractors relating to:
1. Ensuring the efficiency and integrity of financial markets;
2. Ensuring that financial institutions and representatives treat financial customers fairly;
3. The reduction of financial crime; and
4. The maintenance of financial stability.
Any material breach of the aforementioned standard will result in the suspension and or revocation of financial licenses. In addition, the FSCA may issue directives requiring financial institutions to take the action specified in the directive where the FSCA is of the opinion that the financial institutions treatment of its financial customers is such that the institution will not be able to comply with its obligations in relation to the fair treatment of its customers or where inter alia there has been a contravention of a financial sector law or enforceable undertaking (undertaking to provide specified redress to financial customers) accepted by the FSCA.
The FSR Bill is currently phrased in broad terms leaving, to a large degree, the actual conduct standards still to be drawn and established by the Executive Committee once it is appointed. With the actual effect of the FSB Bill on retirement funds and other financial institutions yet to be fully understood, while most would applaud an increase in market conduct supervision and regulation, where the cost of such supervision is pushed on and passed down to the financial customers themselves, the applause may be quickly silenced.