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How will the FSCA use its enforcement power to promote transformation

The Conduct of Financial Institutions Bill “COFI” is part of the Twin Peaks model adopted by the Goverment for the regulatory reform of the financial sector. The aim of COFI is to consolidate the conduct standards of financial institutions in various pieces of legislation into one stature. National Treasury has previously stated that it aims to table COFI by April.

A draft strategy was released this week by the FSCA, for public comment, on how it intends to use its authority to set transformation targets and enforce them once the COFI Bill becomes law.

Even though the legislative framework that specifically empowers the FSCA to promote transformation is still under development the FSCA indicated that they have taken a two- phase approach.

Phase 1

Will focus on the role that the FSCA will fulfill in the current legislative framework i.e. the FSR Act, B-BBEE Act, and FS Code.

Phase 2

Will focus on the role that the FSCA will play within the COFI Act legislative framework.

Enforcement powers

One of the key strengths set out in the FSCA draft strategy is the FSCA’s support of the transformation in the financial sector and its ability to take enforcement action against financial institutions. Contrary to other stakeholders such as the FSTC, who are notable to sanction institutions and the B-BBEE Commission, whose administrative actions are limited to instances offraud and misrepresentation.

In relation to transformation, and in line with the National Treasury’s proposed COFI Bill and consequential amendments to the FSR Act, The FSCA could take the following action to promote transformation:

  • Set targets – require financial institutions to have transformation plans that are aimed at achieving the targets set out under the FSC;
  • Levels – set minimum B-BBEE levels that must be targeted by each firm and documented in the transformation plan, especially larger firms within the financial sector;
  • Licensing – consider transformation plans during the licensing process;
  • Supervise – the progress of financial institutions against their plans;
  • Action – take action when there is a lack of commitment to or achievement of targets set in transformation plans; and
  • Regulatory barriers – minimise regulatory barriers to entry of small, black-owned entities in the financial sector, and support small black businesses with suitably enabling regulatory compliance requirements.

Given the level of transformation of the financial sector currently, the FSCA says that it envisaged that all financial institutions with annual revenue of over R10 million should reflect a B-BBEE level 4 score or have in place a transformation plan that demonstrates they will reach this level within five years.

In the eventthatthe financial institutions fail to meet their transformation targets set out in their plans, the Authority could take the following action in Phase 2 of its strategy:

  • Meet with the board of the institution and engage on the importance of transformation as a national imperative;
  • Request a remedial plan to address the shortcomings; which can take the form of an enforceable undertaking;
  • Issue a directive for non-compliance with an enforceable undertaking; and
  • Issue an administrative penalty for non-compliance with COFI Act transformation requirements, an enforceable undertaking or directive.

FSCA’s objectives in Phase 1

  • Engaging with financial institutions on existing transformation plans and levels of compliance. The FSCA says that it will include a transformation focus in its engagements with current regulated and newly licensed financial institutions to access current levels of transformation in the sector and the maturity of the plans in place to improve their achievement of targets under the FS Code overtime.
  • The FSCA will support the FSTC in data collection, particularly to ownership. They will also undertake a data collection and clean-up exercise to strengthen and improve the information it holds regarding the ownership oflicensed financial institutions.
  • The FSCA will strengthen its engagements with the FSTC and the B-BBEE Commission to improve coordination of efforts aimed at promoting transformation of the financial sector.
  • The FSCA says through its inclusive Business Model Support Unit it will support SMEs in the financial setor by conducting training and support workshops, focusing on issues of compliance, readiness for licensing, and support for regulatory examinations. In Phase 2 more general operational business support will be provided.
  • The FSCA will develop regulatory and supervisory frameworks and instruments that allow for proportional application of requirements, minimising undue barriers to entry and compliance burdens. The FSCA highlights that ‘regulatory and supervisory requirements should not pose a barrier to small financial institutions, particularly those owned by previously disadvantage individuals’.