Background

Following the 2007-2008 financial crisis, the Group of Twenty (G20) of which South Africa is a member, undertook to initiate regulatory reforms to ensure a safer global financial sector.  In 2011, Cabinet took the decision to implement the "Twin Peaks" model of financial regulation in South Africa.  In 2013, the National Treasury released the first draft of the Financial Sector Regulation Bill (FSR Bill) for public comment.  The FSR Bill was the first in a series of Bills and notices which were drafted to give effect to Cabinet’s decision to implement the "Twin Peaks" model of financial regulation.

The FSR Bill sought to introduce the Prudential Authority and the Financial Conduct Authority as the regulators of the South African financial sector.  The Prudential Authority will supervise the safety and soundness of financial institutions and the Financial Sector Conduct Authority will supervise how financial services firms conduct their business and treat their customers.  Schedule 4 of the FSR Bill also proposed a number of amendments to the existing financial sector legislation, most of which would align the existing financial sector legislation to contemplate the regulation by the Prudential Authority and the Financial Conduct Authority.

The FSR Act

With the signing into law of the FSR Act, the President gives effect to the Twin Peaks model of financial regulation in South Africa.  Upon the commencement date, the FSR Act will establish the Prudential Authority, which will be a separate department in the SARB, and the Financial Sector Conduct Authority, which will replace the Financial Services Board, and assigns them appropriate powers to regulate financial institutions and financial services companies.  The FSR Act provides each regulator with the appropriate supervisory powers in order to fulfill their objectives.

The FSR Act also makes provision for co-ordination, co-operation, collaboration and consultation among the SARB, the Prudential Authority, the Financial Sector Conduct Authority, the National Credit Regulator, the Financial Intelligence Centre and other organs of state in relation to financial stability and the functions of these entities.

Notably, the FSR Act also makes provision for the regulation of significant owners of financial institutions and the supervision of financial conglomerates.  The FSR Act empowers the Prudential Authority to designate members of a group of companies as “financial conglomerates”.  These financial conglomerates must include a financial institution and holding company of the financial institution.  Once designated as a financial conglomerate, the Prudential Authority may require the holding company to obtain the appropriate financial sector license in South Africa, to the extent it does already hold such a license.

The FSR Act also makes provision for the relevant financial sector regulator to impose administrative penalties for any contravention of a financial sector law.  This “catch-all” penalty provision does not limit the administrative penalties a financial sector regulator may impose and such administrative penalty will be determined in the relevant financial sector regulator’s discretion, upon consideration of the factors listed in section 168 of the FSR Act.

Schedule 4 of the FSR Act provides the amendments which will be made to various existing financial sector legislation.  These amendments largely reflect the change to the regulators for that specific financial sector as well as the relationship between that financial sector law and the FSR Act.

Some important amendments to existing financial sector legislation include:

FAIS

Pursuant to Schedule 4 of the FSR Act, the definition of “intermediary service” will be amended to remove the wording “for and on behalf of a client or product supplier”.  It appears that the FSR Act seeks to broaden the scope the definition of “intermediary service” so as to ensure that product suppliers and third parties acting in their principal capacity do not escape the licensing requirements under FAIS.

The definition of “financial product” will also be extended to include “pooled funds”.  “Pooled funds” will be defined as collective investment undertakings which do not require approval as collective investment schemes.  Accordingly, any persons providing advice or intermediary services in respect of pooled funds in South Africa will be required to be licensed as “financial service providers” in accordance with FAIS.

FMA

A number of provisions will be inserted which provide for the licensing and regulation of central counterparties.  These provisions will allow for the draft FMA Regulations, which will provide, amongst other, for the various compliance and operating requirements of central counterparties in South Africa, to be finalized and promulgated.

The market abuse provisions will also be amended to include “an issuer of derivative instruments related to such security” in the definition of “insider”.  This amendment will ensure that any issuers of derivative instruments are more fully regulated and do not escape the market abuse provisions of the FMA.

Long Term Insurance,1998 and Short Term Insurance Act,1998

Section 25 of the Short Term Insurance Act, 1998 (STIA) and section 26 of the Long Term Insurance Act, 1998 (LTIA) provide a limitation on control of certain shareholding or other interests in a long-term or short-term insurers.  Both section 25 of the STIA and section 26 of the LTIA provide that no person shall, directly or indirectly, acquire or hold more than 25% of the shareholding in a short-term insurer or a long-term insurer without the prior approval of the Registrar of Short-Term Insurance or the Registrar or Long Term Insurance (as applicable).  The FSR Act will amend section 25 of the STIA and section 26 of the LTIA so as to decrease this shareholding threshold to 15%.

Next Steps

The Minister of Finance is required to determine, by notice in the Government Gazette, the commencement date(s) for the provisions of the FSR Act.