Financial Regulation: Shifts to keep an eye on

The financial sector recently underwent major structural reforms with the introduction of the twin peaks regulatory framework. This regulatory framework was brought about with the commencement of the Financial Sector Regulatory Act 9 of 2017 (“FSRA”), which commenced on 29 March 2018. On a macro-level, the twin peaks model of regulation seeks to ensure that our economy is in a better position to handle potential global financial crises; whilst, on a micro-level, it seeks to ensure that, as a financial customer, your hard-earned money is protected. Post the African Bank and VBS Mutual Bank debacles, it is clear that this is a live risk and undeniably a necessary move for the South African financial sector.

The FSRA seeks to consolidate the fragmented regulation in the financial sector under a single “tent” with two peaks. The changes affect insurance companies, banks, medical aid schemes, investment management companies and the likes. The two peaks that were ushered in by the FSRA comprise of the Prudential Authority, on the one hand, and the Financial Sector Conduct Authority (“FSCA”) on the other hand. Whilst the Prudential Authority is mandated to ensure financial stability within the financial sector and ensure the soundness of financial institutions and market infrastructure; the FSCA is mandated to ultimately strengthen financial customer protection through the regulation of market conduct. This legal insight focuses on the key market conduct and financial customer protection mechanisms that have been introduced by the FSRA and touches very briefly on what is to come.

FSCA

The FSCA is an exciting development in light of its customer-centric mandate. Its objectives include: (i) ensuring the enhancement and integrity of financial markets; (ii) the protection of financial customers through the promotion of fair treatment, financial education and literacy programs; and (iii) assisting with the maintenance of financial stability. Aligned to these objectives are the functions of the FSCA which extend to: (i) regulating and supervising the conduct of financial institutions; (ii) co-operating with, and assisting, the Reserve Bank, the Financial Stability Oversight Committee, the Prudential Authority, the National Credit Regulator, and the Financial Intelligence Centre, as required in terms of the FSRA; (iii) co-operating with the Council for Medical Schemes in the handling of matters of mutual interest; (iv) promoting, sustainable competition in the provision of financial products and financial services; (v) promoting financial inclusion; (vi) regularly reviewing the perimeter and scope of financial sector regulation and mitigating any risks where applicable; (vii) administering the collection of levies and the distribution of amounts received in respect of levies; (viii) conducting and publishing research relevant to its objectives; (x) monitoring the extent to which the financial system is delivering fair outcomes (with respect to financial products and services) for financial customers; and (xi) formulating and implementing strategies and programs for the financial education of the general public.

The FSCA is most recently reported to have fined 36ONE Asset Management R350 000 for marketing investments in two funds that had not been approved by the authority to be marketed to the South African public. The FSCA appears to be resolute on enforcing its mandate and its establishment is a welcome development.

The ombud system

Another significant development with the commencement FSRA is the establishment of the Ombud Council which is there to ensure that financial customers have access to dispute resolution processes that are affordable, effective, independent and fair. The FSRA makes it mandatory for the Ombud Council to establish and operate one or more centres to facilitate financial customers’ access to the relevant ombud schemes. This may incorporate a call centre. Furthermore, financial institutions are required to disclose to financial customers which applicable ombud schemes are available, as well as how to contact and submit claims to these ombud schemes. Importantly, any ombud schemes that financial customers are referred to must be recognised in terms of the FSRA. Collaboration between ombuds is prescribed by the FSRA and this extends to joint procedures in order to hear and determine complaints where applicable. This collaborative mandate will hopefully curtail forum shopping and ensure that financial customers have access to expedient redress.

Financial Services Tribunal

The last significant structural change introduced by the FRSA is an independent Financial Services Tribunal (“Tribunal”). This Tribunal replaces the FSB Appeal Board and has been tasked with, amongst other things, reconsidering decisions by (i) a financial sector regulator, (ii) the ombud council, (iii) authorised financial services providers, (iv) a statutory ombud; and other decisions that will be prescribed in the relevant regulations. It is also significant to note, from an enforcement perspective, that the decisions of the Tribunal can be made orders of court.

In the pipeline…

Following the major structural reform that has taken place within the financial sector, legal reforms are next in line with the view to strengthening market conduct laws and ensuring fairness to financial customers. These will be implemented through the Conduct of Financial Institutions Bill (“COFI Bill”). The intention of the COFI Bill is to streamline the regulatory laws for market conduct in the financial sector. It is envisaged that the COFI Bill will further address issues of licensing, marketing and disclosure as well as remedial actions (to name but a few). The anticipated result is that once the legal framework has been aligned with the structural reforms, there will be improved market conduct in the financial sector which will be beneficial to the financial customers and the economy at large.

We eagerly await the publication of the COFI Bill for public comment.

Tshepiso Scott – Managing Director, Tumbo Scott