FSCA finances in the spotlight

The Financial Sector Conduct Authority (FSCA) has upped the ante in the annual reporting stakes with the publication of its first-ever integrated annual report. According to the authority, the FSCA 2022-23 Integrated Annual Report allows it “to provide stakeholders with a balanced and holistic view of its performance and broader impact over the past financial year [with due consideration of] risks, opportunities and relevant socioeconomic, environmental and technological factors”.

Inflation and interest rates feature, again

The 2022-23 report is introduced by Finance Minister Enoch Godongwana, who draws attention to the myriad macroeconomic challenges facing stakeholders in the domestic financial services sector. “Several factors, such as persistently high inflation, are adversely affecting the economic performance of many economies worldwide,” he wrote. “As a result, households are grappling with a significantly increased cost of living”. Higher borrowing costs and the ongoing energy crisis were singled out as leading causes of South Africa’s sub-optimal GDP growth outlook, with the Minister promising “decisive economic reforms to assist in maintaining the integrity of the country’s financial system”. 

The Minster was full of praise for the FSCA, commending the authority for showing “resilience and determination in effectively carrying out its responsibilities”. Key performance targets met in the latest financial year included the authority publishing its inaugural Regulatory Actions Report; undertaking a mystery shopping initiative; issuing market surveillance; and establishing a Consumer Advisory Panel. But financial services providers (FSPs) will be more interested in the myriad conduct standards drafted or published during the period, related to the payment of pension fund contributions and third-party cell captive business. Per the Minister, these “allowed the FSCA to work more effectively in new areas brought under its regulatory net”. 

Other highlights from 2022-23 include the authority’s work on a fairer approach to unclaimed assets, as reported on by FAnews in ‘An unclaimed assets free for all’; its publication of a strategy for promoting financial sector transformation; and progress made in developing a consolidated, cross-sector legal framework for identified key conduct themes. “The FSCA has taken proactive steps to ensure a seamless transition [for the] implementation of the pending Conduct of Financial Institutions (COFI) framework,” the Minister said. PS, although COFI got 10-mentions in the 179-page integrated annual report, there was still no guidance on when it might be finalised. 

No mention of financial or risk advisers?

As an aside, this writer did a quick search of the report for words like adviser, broker, intermediary and the phrase ‘retail distribution review’ without success. Rather than dwelling on this strange state of affairs, we flipped forward to page 47-48 of the report for an update from FSCA Commissioner, Unathi Kamlana, who reminded his audience that this marked the fifth anniversary since the authority successfully transitioned out of the Financial Services Board. 

“Despite an increasingly adverse operating environment, the financial sector demonstrated remarkable resilience and remained steadfast in providing essential financial services and products to financial customers,” Kamlana wrote. “As the regulator of the sector, we have made significant progress in successfully implementing our regulatory strategy”. Focus areas that got special mention included the implementation of robust regulatory frameworks; proactive supervision; and effective enforcement! 

On the latter point, the 2022-23 FSCA Integrated Annual Report confirmed that the authority had taken 1668 regulatory actions in the period including 984 FSP licenses suspended; 522 suspensions lifted; and 420 license withdrawn. It might be worth watching the ‘suspensions lifted’ trend over the coming years and, perhaps, put the ‘reason for suspension’ under the microscope given the reputational damage that the suspension of an FSP licence creates. Commenting on the 2022-23 licensing application process, the Commissioner noted that 584 licenses had been approved, authorising persons and entities to perform regulated financial services. 

A tough approach to its enforcement mandate ensured a significant cash injection for the authority, as-and-when these ‘debts’ are collected. “Fines exceeding R100 million were imposed on persons and entities who violated regulatory rules, demonstrating our resolve in dealing with non-compliance,” the Commissioner said. Alas, these actions were not enough to balance the books. Per the financial dashboard  shared early on in the 2022-23 report, the FSCA reported a net deficit for its 2022 and 2023 financial years, of R4.9 million and R7.8 million respectively. So, despite generating R1.038 billion in revenue for the year-ended 31 March 2023, and R949 million in the prior year, the authority was unable to break even. 

FSPs dodge the ‘fee and levy’ bullet

The FSCA is funded by the FSPs it regulates. As things stand, FSCA levies account for more than 82% of the R955.766 million revenue earned from so-called non-exchange revenue transactions, with non-levy income from other fees and service charges, legal fee recoveries and investment interest and dividends making up less than 8% of total revenue. Given that the make-up of FSCA revenues, one cannot help but wonder about future ‘fee and levy’ increases, let alone the potential ramp-up of enforcement action. 

The question FSPs will no doubt be contemplating is how much more they might be expected to ‘chip in’ to keep the authority solvent. Fortunately, they already have the answer thanks to the recent publication of the FSCA budget, levies and fees proposals for 2024-25. A quick flip through this document suggests that most ‘fee and levy’ increases will be in line with inflation, at around 6%. FSPs who take exception to any of the proposals contained in the document have until 2 November 2023 to voice same. 

You cannot page through an integrated annual report without encountering non-financial aspects such as a brand’s performance on important environmental, social and governance measures. And the latest FSCA report did not disappoint. Kamlana commented on ongoing progress towards the strategic goal of fostering an innovative, inclusive and sustainable financial sector via the publication of a strategy for promoting financial sector transformation and statement on sustainable finance. The latter “highlights our commitment to incorporating ESG considerations into our regulatory and supervisory frameworks,” he wrote. 

Keeping consumers up-to-speed on scams

Consumer education also received mention in the report, with the FSCA developing and rolling out over 102 financial consumer education programmes, reaching over 27936 consumers in the period under review. “By empowering consumers with knowledge and understanding, we enable them to make informed decisions and protect their interests in an increasingly complex financial landscape,” Kamlana wrote. He also drew attention to ongoing efforts to warn the public about criminal activity, with the FSCA issuing 47 scam alerts over the period. 

“While I congratulate the authority for this excellent performance, it is important to recognise that more work still lies ahead in protecting financial consumers, enhancing market integrity and assisting in maintaining financial stability,” concluded Kamlana. “The ever-evolving landscape of the financial sector demands continuous vigilance and adaptability; it necessitates the FSCA’s ongoing commitment to staying vigilant of emerging risks, market developments and regulatory advancements”. 

Writer’s thoughts:
The FSCA 2022-23 Integrated Annual Report runs to 179-pages… My question to South Africa’s FSPs is simply this: will you pore over the annual report, or are your interests better served reviewing the 42-page Annexure A to the Budget, Fees and Levies proposal? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.