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Nine bad behaviours the FSCA will not ignore!

08 May 2023 Gareth Stokes

he first-ever Regulatory Actions Report released by the Financial Sector Conduct Authority (FSCA) shortlists nine financial conduct ‘landmines’ that financial services providers (FSPs) must avoid. The 45-page report, published in April 2023, informs industry stakeholders of FSCA enforcement and oversight activities over the 12-months to 31 March 2023. For the thousands of South Africans plying your trade as key individuals (KIs) or Representatives, the message in the report is clear: the enforcement division of the FSCA is deadly serious about ensuring the integrity of the financial sector, and protecting consumers. 

Is visible enforcement sufficiently dissuasive?

“Visible enforcement is one of the strategic objectives of the organisation … so that we can operate as a credible deterrent to some of the misconduct that we see in the financial sector,” said FSCA Commissioner Unathi Kamlana, in a media round table to coincide with the report launch. He said that recent developments, most notably South Africa’s grey listing by the Financial Action Task Force (FATF), had raised questions over whether the conduct authority’s current sanctions regime was “sufficiently dissuasive”. The Commissioner commented on the importance of cooperation with both domestic and international players; but was also quick to remind his audience that the FSCA was not a prosecutorial authority. “This report, and our engagement [with the media] is a strategic contribution to transparency around the FSCA’s enforcement actions,” he concluded, before handing over to Gerhard van Deventer, Divisional Executive: Enforcement at the FSCA to share more detail. 

Van Deventer started his presentation with an overview of the international cooperative framework that the FSCA relies on to navigate today’s highly interconnected financial ecosystem. “International cooperation and collaborations are enabled through 92 bi-lateral and multi-lateral Memoranda of Understanding (MOUs) with the FSCA’s regulatory counterparts,” he said. Domestic cooperation with sister regulatory agencies like the Financial Intelligence Centre (FIC), the Prudential Authority (PA), the National Consumer Commissioner (NCC); and National Credit Regulator (NCR) is important too, as is working with criminal authorities such as the NPA and SAPS. Van Deventer also reminded journalists that the FSCA is not responsible or mandated to conduct criminal investigations and prosecutions

A summary of enforcement interventions, 2022-23

This newsletter will share the nine financial behaviours that the FSCA is clamping down on in the coming year; but first we thought it appropriate to give you an overview of the enforcement interventions that took place in the year under review. It is an impressive list made up of: 

  • 47 warnings to the public about scams.
  • 70 Referrals to Specialised Commercial Crime Units and Commercial Crime Courts.
  • 210 Debarments.
  • 984 Licenses suspended.
  • 421 Licenses withdrawn.
  • 406 Finalised investigations which are concentrated in the Financial Advisory and Intermediary Services (FAIS) and insurance disciplines.
  • 6 million in administrative penalties.
  • 6 Persons removed from regulated positions.
  • 2 Enforceable undertakings.
  • 1 Statutory manager appointed, in the N-e-FG matter. 

Nine FSCA enforcement focus areas

The continued clampdown on unlicensed over-the-counter derivatives providers (ODPs) was noted as the first of nine regulatory enforcement focus areas. Van Deventer said that the industry had had more than enough time to regularise its practices given that it became compulsory for ODPs to have a license back in 2018-19. He also felt that the confusion around whether certain FSPs were trading as ODP providers vs conducting the business of an intermediary had been cleared up. “We have completed a number of investigations and taken a few actions in this area, and will be keeping an eye on it going forward,” he said, before turning to the second area of concern, being the so-called Rent-a-KI trend, which has been on the authority’s enforcement radar for some time. 

The highly concerning spike in unauthorised crypto asset financial services was singled out as the third focus area for 2023 and beyond. “The crypto assets space is a wonderful place for scammers to hide because it is difficult to investigate [and] scammers can be vague about where they are; what product they are offering; and where the money is,” Van Deventer said. The FSCA takes every opportunity to warn the public against crypto assets platform traders, encouraging consumers to work through regulated entities and not plough their hard-earned savings into high-risk investments. Copy trading or mirror trading stood out as the fourth of nine enforcement focus areas. Basically, this practise involves an experienced trader sharing his or her trades with unsophisticated consumers. 

Beware, outsourcing is still in the ‘cross hairs’

“Some copy trading systems are so sophisticated that the trader’s trades are automatically copied onto ‘slave’ accounts,” said Van Deventer. He added that traders who allowed other consumers to copy their trades were technically giving investment advice or offering discretionary investment services or both. As such, they needed to be licensed FSPs. Circumvention of commission regulations entered the countdown in position five. In this regard, the authority is concerned about insurers that outsource certain administrative functions to third parties that are linked back to an FSP. Upon further investigation, the FSCA finds “extraordinary remuneration packages [that are] linked very closely to the commissions earned by the FSP in question”. This practise introduces major conflicts and is definitely not acceptable. 

Items six and seven were fictitious policies and guarantee policies, though these are in totally different financial advice disciplines. The former refers to an intermediary, usually in the life insurance space, fabricating a policy and submitting it to the insurance company for the obvious gain of a commission; the latter to a financial guarantee usually issued by a non-life insurer to the successful winner of municipal contracts. “A Guarantee Policy is an insurance policy, and you need an insurance licence to issue it,” Van Deventer explained. Unfortunately, the authority has noticed an alarming uptick in instances of regulatory examination fraud, which gets a mention in position eight of nine. “We have about 120 open cases where we suspect there has been RE fraud,” he said. Representatives are taking high-risk, illegal short-cuts such as getting another person to sit the exam on their behalf, or purchasing false certificates. 

Finally, the FSCA enforcement team will be paying close attention to failures by FSPs to implement risk management programmes relating to anti-money laundering (AML) and countering of the financing of terrorism (CFT) compliance. “We have issued quite a few penalties for this type of contravention; but there are cries for prosecution as well,” concluded Van Deventer. He urged FSPs to read the report, and pay close attention to the case studies that go into more detail on how the nine financial conduct issues crop up. There you have it, dear reader; you cannot say that you have not been warned. 

Writer’s thoughts:
I was surprised by many of the nine conduct issues raised by the FSCA in its 2022-23 Regulatory Actions Report. One would think that blatant transgressions by way of fictitious policies; ‘rent-a-KI’; and regulatory exam fraud would be a thing of the past. Your thoughts? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.

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