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FSCA to get tough on transformation

01 April 2019 Jonathan Faurie

We recently published a newsletter which pointed out that transformation scorecards will soon become a reality in the investments industry. The transformation debate is alive and well in the financial services sector.

FAnews spoke to Tendani Mahlobo, Senior Specialist: Inclusion Research (Market and Customer) at the Financial Sector Conduct Authority (FSCA) to find out more about what needs to be done when it comes to transformation. 

What is the FSCA's stance when it comes to transformation?

Given that the financial services industry is at the heart of the economy, the FSCA believes that transformation of the industry is important in creating a society in which all South Africans have an equal opportunity to participate in mainstream economic activities. 

This is spelt out in the National Development Plan by providing accessible financial services to previously disadvantaged section of the population and small, medium & micro enterprises (SMMEs) and by directing investment into targeted sectors of the economy. 

It is therefore important that, as the regulator, we support transformation of the industry through developing regulatory and supervisory frameworks that create an enabling environment for more black owned financial institutions to enter the industry and for financial institutions to serve all South Africans. 

From the FSCA's point of view, what is the current state of transformation within the industry? 

The introduction of the Financial Sector Charter and the subsequent Financial Sector Code (FSC) has significantly changed the transformation landscape of the financial services industry. 

The FSC has enabled significant (positive) changes in lending to black SMMEs, black farmers, improving funding for low-cost housing and transformation infrastructure. Access to basic financial services was increased significantly. 

Progress has also been made, though to a lesser extent, in meeting the employment equity targets, skills development target as well as ownership targets. 

But more needs to be done. The industry‘s performance in relation to board participation, executive and senior management has been unsatisfactory. Black ownership in the sector is still not broad based; we would like to see more black owned and run businesses, both in the financial sector and related industries (service providers) like panel beaters. Sustainable usage of the products acquired from insurers and low-up take of products such as non-life insurance, non-funeral products in the lower-end of the market remains an issue. 

Does the FSCA plan to become tough on the transformation issue in the future? 

As pointed out in our regulatory strategy, our role regarding transformation of the industry will be to support the work of the FSTC and the BEE Commission. 

The supporting role that is being proposed is to oversee transformation at a financial institution level in line with what has been entrenched in the Insurance Act of 2017. In terms of the Insurance Act, insurers are required to submit a transformation plan to the Prudential Authority as the responsible authority in terms of the Act when applying for a license. 

To ensure that this is consistently applied across the financial sector, the Conduct of Financial Institutions (COFI) Bill provides for transformation provisions that will apply to all financial institutions. The FSCA, as the responsible authority in terms of the COFI Bill, will be responsible to oversee compliance with these provisions. 

The Financial Sector Regulation (FSR) Act empowers the FSCA to take regulatory action for non-compliance with financial sector laws (including the COFI Bill). The range of regulatory actions that may be taken are set out in the FSR Act and includes penalties.                                                                                                        

How is transformation benefiting the financial services industry?

This question will best be answered by the industry. 

However, given that transformation is about creating equal opportunities for everyone to participate in the economy, the financial services industry has benefited from transformation and will continue to benefit.  

An example of this relates to the benefits that the banking sector have attained through the uptake of their basic accounts. A transformed financial sector will strengthen the potential for recruiting quality staff as the pool of high calibre personnel grows, and grow the pie as there is more demand and take-up of products offerings. Diversification on both the demand and supply side brings balance sheet and system-wide stability. 

What are some of the industry best practice principles that can be seen at present?

Transformation in the financial services industry has been seen by some financial institutions as a compliance exercise where institutions aim to improve their BEE score so that they can do business with government. 

However, what we have been seeing most recently is the shift in the mindset within the industry where some institutions are starting to understand that their sustainability depends on how transformed they are. This has encouraged them to see transformation as more than just a compliance exercise but an important part of their business (and indeed the opportunity for competitive advantage) and have entrenched transformation into the culture of their business. If this principle is adopted across the industry, transformation performance of the industry is likely to improve significantly. 

Editor’s Thoughts:
The transformation of the financial services industry forms an important part of government’s financial inclusion plan. If the industry is reluctant to embrace transformation, is this reluctance for the right reasons? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

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