FSCA ups the inclusivity stakes

Financial and risks advisers who are uncertain of the financial sector regulator’s approach to financial inclusion and transformation will find all the answers they desire in the 23-page Final Strategy for Promoting Financial Sector Transformation (Transformation Strategy), published in March 2023 by the Financial Sector Conduct Authority (FSCA). Early on in the document, the authority reminds its audience that the creation of an inclusive and transformed financial sector was made a strategic priority in the FSCA 2018 Regulatory Strategy, which more-or-less coincided with the FSCA taking over from the then Financial Services Board (FSB), effective 1 April of that year. 

Legislation to set your demographics to

The Transformation Strategy document introduces the financial sector’s current policy and legislative framework for transformation which is underpinned by the Broad-Based Black Economic Empowerment (B-BBEE) Act and Financial Sector Code (FSC). These constructs are supported by two monitoring mechanisms, being the B-BBEE Commission and the Financial Sector Transformation Council (FSTC). Financial sector specific laws that enable transformation in the broader financial industry include the Financial Sector Regulation (FSR) Act; the Insurance Act; and coming soon, the Conduct of Financial Institutions (COFI) Act. PS, the rather lengthy and persisting delay in COFI being enacted prompted a tongue-in-cheek ‘transformation before COFI’ jibe, though we appreciate that ‘transformation through COFI’ is more accurate. 

This newsletter skips over the introductory sectors of the Transformation Strategy document to offer brief comment on sections three and four, being ‘the role of the financial sector regulators in promoting transformation’ and ‘the regulator’s approach to promoting financial sector transformation’. Section three begins by explaining the regulatory authority’s legal responsibilities in driving sectoral transformation. “Section 10(1)(a) of the B-BBEE Act requires every organ of state and public entity, such as the FSCA, to apply a relevant code of good practice issued in terms of that Act when determining qualification criteria for the issuing of licences, concessions, or other authorisations in respect of economic activity in terms of any [other] law,” they write. And that, dear reader, is how transformation metrics entered the realm of licensing requirements. In short, the FSCA must apply the FS Code when issuing a licence. 

Twin peaks regulators will drive FS Code

The document notes that sector regulators, notably the FSCA and Prudential Authority (PA), are well placed to support the FSTC in driving FS Code commitments. “Regulators are able to set requirements (related to the regulatory objectives) on regulated entities at licensing stage and on an ongoing basis,” they write. The Insurance Act became the first financial sector law to entrench transformation requirements, and the PA already assesses insurers’ transformation plans at the licensing stage. Readers should note, however, that the transformation measures in the Insurance Act are transitional until a legal framework is finalised to allow the FSCA “to play this role for a broader range of financial institutions”. It is common knowledge that the COFI Act will strengthen the powers of the FSCA in relation to financial sector transformation “by making promoting the transformation of the financial sector an explicit function of the FSCA” among others. 

Section four of the Final Strategy document details the FSCA’s two-phase approach to promoting financial sector transformation: Phase 1 will focus on the role that the FSCA will play within the current legislative framework, via the FSR Act, B-BBEE Act and FS Code; and Phase 2 will focus on the role that the FSCA will play within the COFI Act legislative framework. FAnews shares the following eight-point summary of the regulator’s Phase 1 activities, largely borrowing from the document: 

1. Engage with financial institutions. The FSCA will include a “transformation focus” in its engagement with currently regulated and newly licensed financial institutions. It is worth noting that the regulator “will focus on developing a clear picture of the ownership structures of financial institutions in the sector, and how they relate to transformation aims and objectives”. 

2. Improve availability and quality of transformation data. Reliable data is seen as essential to inform “effective policymaking and supervision” and the FSCA has committed to supporting the FSTC in data collection, among other steps. The clean-up and consolidation of existing industry data was described as a multi-year project that would continue in Phase 2. 

3. Build strong co-operative relationships with the FSTC, B-BBEE Commission and other relevant stakeholders. 

4. Develop a collaborative approach to transformation with the PA. Banks and insurers are overseen by both the FSCA and PA, necessitating an aligned regulatory approach on transformation. “The PA and FSCA have engaged on their approaches to transformation and will continue to work closely together in engaging with the industry on transformation and in ensuring that approaches are aligned,” the document notes. 

5. Supporting initiatives of the National Economic Development and Labour Council (NEDLAC) and FSTC related to financial sector transformation. 

6. Supporting small businesses in the financial sector. The FSCA is aware that the current regulation and supervisory approaches can create barriers to entry for small and medium enterprises (SMEs) and seems, in principle at least, committed to addressing such matters ‘proportionately’. 

7. Developing licensing, regulatory and supervisory frameworks that promote transformation of the financial sector. “Licensing, regulatory and supervisory requirements of the FSCA should not in themselves pose a barrier to entry for small financial institutions, particularly those owned by previously disadvantaged individuals,” notes the regulator. “In support of transformation, the FSCA will develop regulatory and supervisory frameworks and instruments that allow for the proportional application of requirements, minimising undue barriers to entry and compliance burdens”. 

8. Internal readiness for Phase 2. And finally, a key component of the FSCA’s efforts to support transformation under the current framework will be to focus on readying the organisation for a stronger and more active role when a new legislative framework is implemented. 

Whipping the COFI Bill into shape

“Phase 2 readiness hinges on whipping the COFI Bill into shape. Promoting transformation is already an explicit function of the FSCA per section 58 of the FSR Act [with] standard-setting powers in relation to transformation set out in section 108. But in its current iteration, the 2020 draft of the COFI Bill gives the FSCA significant reach too. The COFI Bill requires licensed entities to “promote transformation in a manner reasonably consistent with [the entity’s] transformation plan, which plan should be aligned to achieving tangible outcomes based on targets in the FSC”. The FSCA can “issue directives in relation to transformation plans and use its supervisory and enforcement powers to ensure that a financial institution’s governance frameworks, including in relation to transformation, are adequate and adhered to”. 

To conclude, the intended final regulatory framework for overseeing the transformation of the financial sector will include the FSR Act and the COFI Act with the FSCA supervising transformation requirements at an institutional level. 

Writer’s thoughts:
Topics such as financial inclusion and transformation are not new. In fact, these concepts have underpinned South Africa’s financial sector regulatory evolution over a decade or longer. Is your business ready for the transformation focus that the COFI Act introduces? And are you? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].

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