Discussions
Reinventing financial sector regulation in South Africa
Ashly Hope, tralac Research Advisor, comments on the current overhaul of South Africa’s financial sector regulation
South Africa’s financial sector regulatory landscape is in a period of transition.
Two pieces of legislation, both currently under scrutiny by the Standing Committee on Finance (SCOF), will contribute to a significant reshaping of the financial sector in the country. These changes to the law will significantly impact financial institutions and consumers in South Africa. Given the size and influence of South Africa’s financial sector, they also have the potential to affect financial sector regulation and trade and investment in financial services in the region.
On 21 July 2016, Treasury released a further revised draft of the Financial Sector Regulation Bill 2015 (FSR Bill). When enacted, this law will implement a new ‘twin peaks’ regulatory structure and is a significant step in the overhaul of South Africa’s financial sector regulation that was kicked off by the 2011 Report ‘A Safer Financial Sector to serve South Africa better’. The SCOF will resume deliberations on the legislation this month.
The new regulatory structure will see prudential regulation (primarily concerned with institutional soundness) functionally separated from conduct regulation (covering behaviour towards consumers and in the financial markets). This will result in two key regulators – the Prudential Regulation Authority, under the South African Reserve Bank, and a new Financial Sector Conduct Authority (a broadened and changed successor organisation to the Financial Services Board). The legislation also provides Reserve Bank with a financial stability mandate and sets up institutional structures for cooperation and coordination among financial regulators (including the National Credit Regulator), as well as consolidating avenues for consumer redress.
The shift will move financial sector regulation in South Africa from a relatively fragmented sectoral approach, to a functional approach. This new regulatory structure is in line with a number of other jurisdictions; and will address recommendations of the International Monetary Fund for enhancing South Africa’s financial sector regulation and aligning it with global standards. It will vest the new financial regulators with increased independence and substantial new powers, including to set standards, accompanied by additional accountability measures.
Alongside, or set to follow, this major institutional change are many changes or proposed changes to further enhance sectoral regulation, including, for example, proposals to legislate the Treating Customers Fairly framework, changes to credit rules, significant changes to insurance regulation and to payments legislation as well as changes to financial market regulation, including implementing G20 rules on central counterparties for OTC derivatives and recovery and resolution of financial institutions.
At the same time, amended Financial Intelligence Centre legislation is currently before Parliament that will change the requirements for financial institutions (as well as others such as lawyers and real estate agents who deal with the transfer of funds) in respect of their anti-money laundering and countering the financing of terrorism (AML-CFT) obligations. The Financial Intelligence Centre Amendment Bill 2015 will implement a substantial change in customer due diligence requirements from a largely rules-based approach, to a risk-based approach. This means more flexibility for financial institutions to make their own assessments of the appropriate level of due diligence necessary to mitigate against the risk of terrorism financing and money laundering. This kind of flexibility is intended to enable financial institutions to direct their resources to the areas of greatest risk, and thus achieve their AML-CFT obligations more efficiently and/or innovatively. However, by removing the bright lines for compliance, it can also create more uncertainty for financial institutions.
The Financial Intelligence Centre released an issues paper regarding potential guidance on its amended legislation on 17 August 2016. Some of the concerns about the changes are reflected in the issues paper – in particular the appropriate procedures and processes necessary for institutions in taking the risk-based approach.
South Africa has one of the largest and most sophisticated financial sectors in Africa. South Africa’s insurance sector accounts for around 80 per cent of the insurance market in Africa, the Johannesburg Stock Exchange is the largest on the continent and the banking sector is similarly dominant in size.
South Africa’s financial institutions also have an increasing presence in other African countries. Particularly in Southern Africa, trade in financial services tends to be from South Africa into the broader region (rather than in the opposite direction), although Togo’s Ecobank has a presence in the country. For example, two of South Africa’s banks are considered ‘Pan-African’ banks, and Standard Bank in particular has a significant footprint on the continent.
The position of South Africa as a net exporter of financial services in Africa, and with a dominant financial sector on the continent means that there is the possibility of ‘regulatory spillovers’ to those countries where South African financial institutions have a presence, and particularly where they have a systemically significant presence. It also means that negotiations on financial services trade and regulatory disciplines, for example in SADC, or even at CFTA level are able to be strongly influenced by South Africa. As such, we might expect to see some of the new regulatory principles being transmitted into regional agreements, or being adopted by other countries in the region as South African institutions seek regulatory consistency.
Given the new laws will see South Africa further align with global standards, and the general view that regulatory convergence encourages trade and investment in services, these changes could be beneficial to the development of the financial services sector both in South Africa, and in the countries where its regulatory regime has influence. However, although this regulatory convergence may be desirable from a South African perspective, and even from the perspective of multinational financial institutions, it may not always be appropriate in the lesser developed financial sectors in the region. For example, the risk-based approach to AML/CTF is heavily dependent on the capacity of both institutions of state and financial institutions for effective and transparent implementation.
From an outward investment perspective, these changes may encourage South African financial institutions to focus attention on other markets in the region as they face a more challenging regulatory environment in South Africa. On the other hand, the new regulations could see South African financial institutions focus on regulatory compliance, rather than business expansion. This would also apply to the capacity and willingness of institutions to expand and innovate domestically. The specific requirements of the various new and changed sectoral regimes will also have the potential to create new barriers and opportunities to trade and investment as well as having implications for financial inclusion.
Sources:
Issue Paper on guidance required to implement the Financial Intelligence Centre Amendment Act, 2016 https://www.fic.gov.za/Documents/160817 Issue Paper 2.pdf
Publication update for Twin Peaks financial sector regulatory reform programme http://www.treasury.gov.za/comm_media/press/2016/20160721 - Media Statement on Twin peaks.pdf
A safer financial sector to serve South Africa Better http://www.treasury.gov.za/twinpeaks/20131211 - Item 2 A safer financial sector to serve South Africa better.pdf
Charles Enoch, Paul Mathieu and Maura Mecagni et al International Monetary Fund Pan-African Banks: Opportunities and challenges for cross-border oversight. Washington, D.C.: International Monetary Fund, 2015. http://www.imf.org/external/pubs/ft/dp/2015/afr1503.pdf
IMF Financial System Stability Assessment: South Africa 2014 https://www.imf.org/external/pubs/ft/scr/2014/cr14340.pdf