Compliance excellence demands 24-7 attention

Compliance officers taking 14-days of annual leave risk finding themselves in a similar boat to investors who miss out on the best upward moves in financial markets. This may sound like muddled thinking; but please allow your writer to explain.

A somewhat stretched comparison

The comparison emerged as your writer delved into the latest in a long list of regulatory updates published by South Africa’s Financial Sector Conduct Authority (FSCA). His initial thought was that one would soon need a doctorate in law or finance to navigate the increasingly complex morass of laws and standards. And his second, was a feeling of empathy for those tasked with financial sector compliance who dare to step away from their desks for a week or two. Upon your return, you will almost certainly face a backlog of reading that would fill a volume or two of the old world Encyclopaedia Britannica. 

Ok, but what does that have to do with stock market investing? Well, a study by JP Morgan Asset Management revealed that investors who ‘missed’ the 10 best return days on the S&P 500 between 1999 and 2018 would have cut their overall return in half. And your writer’s hypothesis is that compliance officers who miss the 10 most saturated ‘regulatory update’ days risk having a significant hole in their compliance portfolio and / or understanding. Ugh. It. Is a stretch, dear reader, but one is always seeking a fun way to introduce dry topics. Which brings me to the subject of today’s newsletter, the 2024 FSCA 3-Year Regulation Plan (the 2024 Plan). 

“The ongoing review and development of the regulatory framework is critical to ensure that it is robust, aligned with international standards, fit for purpose and sufficiently flexible to position the FSCA to meet its legislated objectives and functions,” reads the first line of the 2000-plus word executive summary (sic). According to the FSCA, the 2024 Plan sets out high-level details of the review of the prior year plan; insights into new approaches and revisions informed by said review; and regulatory focus areas for the period April 2024 to March 2027. 

Compliance content similar, timelines tweaked

There was some good news in that the priorities identified in the 2023 Regulation Plan were largely unchanged, only the timelines had to be tweaked. And here’s where the need for a PhD becomes apparent: the authority then set about explaining the process of mapping each of the projects contained in the 2024 Plan to “one or more” of its strategic objectives. This, dear reader, is to ensure alignment with another document titled FSCA Regulatory Strategy (2021-2025). Suddenly, to make sense of the 2024 Plan, your compliance crew needs digest the regulator’s strategic objectives and study a strategy document that is also frequently reviewed and updated. 

So, let us begin at the beginning and attempt a matric-level explainer of the status quo. The FSCA mentions four “key strategic factors” that are baked into the 2024 Plan. First and foremost, the regulator seeks alignment of South Africa’s regulatory frameworks with international standards. This seems fair enough; but the regulator said something troubling, namely that our framework “has lagged behind certain international standards, especially in the financial markets context”. Honestly, up to this point your writer had firmly believed that the raft of twin peaks regulation put South Africa at the top of the regulatory tables. Then again, there was that whole Financial Action Task Force (FATF) grey-listing debacle. 

The second key strategic factor was spelled out as “actively pursuing the harmonisation and consolidation of laws governing cross-cutting themes and transforming the legislative landscape to one that is more outcomes- and principles-based”. Wow, that is a bit of a mouthful that some compliance officer wannabe may yet turn into a doctoral thesis; but once you wrap your mind around needing to identify and incorporate overarching themes into your compliance mindset, you should be ok. The FSCA identified the long-awaited Conduct of Financial Institutions (COFI) Bill and their COFI Bill Transition Project as important focuses in this area. 

Cross-sector is only the beginning

Next up, we have emerging and topical risks at both an international and local level. Alas, each of the fields mentioned under this heading require reams of reading too. To stay ahead of the third key strategic factor requires knowledge of AI and machine learning; crypto assets; fintech; open finance; and sustainable finance to name a few. “Many of these issues and risks require a response in the form of legislative interventions,” the FSCA wrote, perhaps explaining why financial sector lawmakers are expanding their reach into almost every aspect of the economy and society. 

And finally, the fourth factor, is to tackle identified sector-specific risks. “The FSCA still closely monitors industry-specific risks and developments and in many instances legislative interventions are necessary to mitigate the identified risks and / or deal with a specific identified development’” the regulator wrote. This focus could be thought of as a throwback to traditional law-making, where you had the FAIS Act to address conduct of intermediaries rather than a COFI Bill to address the conduct of all financial institutions, or separate laws for businesses in the life and short-term sectors rather than an overarching Insurance Act. 

Armed with this background information, you can start delving into both existing and new projects to get a feel for how the regulatory landscape is changing. There are four new projects that financial services providers (FSPs) and their compliance team or partners should keep an eye on. These include Joint Standard – Third party service provision / outsourcing; Joint Standard – Capital requirements and risk management rules for ODPs; Prudential Standard – Quarterly Regulation 28 Reporting; and Amendments to FSRA Conduct Standard No. 1 of 2019 (PFA). You will, no doubt, have a better grasp than the writer with regards which of these apply to your business. 

The second ‘third party provider’ Joint Standard

Given the number of brokers and financial advisers among the FAnews readership it may be worth delving into the first project mentioned here. The outsourcing project stems from “the need to harmonise and strengthen requirements pertaining to third party service provision or outsourcing,” explained the FSCA. The regulator commented on the rapid rise of outsourcing in the context of digitalisation before warning of the potential for disruption to critical financial services if these relationships were not properly managed. PS, this Joint Standard should not be confused with the insurer-specific Joint Standard – Outsourcing by Insurers which was issued as final in May of this year. 

There was some basic information in the 2024 Plan, which described the initiative as a cross-cutting, sector-regulatory framework project. The FSCA and Prudential Authority will consider various important considerations set out in the FSB paper as they develop the new Join Standard over 2024-2025. But for more on the regulatory approach to third party services provision you may wish to dive into a paper published by the Financial Stability Board (FSB) in December 2023, titled ‘Enhancing Third-Party Risk Management and Oversight toolkit for financial institutions’. 

Is there time for a breather?

To close this newsletter on a high note, it seems the compliance gurus in the financial intermediation and insurance disciplines can take a bit of a breather between now and 2027. The reason: there are no FAIS- or insurer-focused interventions earmarked for completion within the next three years. Under the insurer heading, the regulator says, “various insurance related matters will be considered as part of the process focused on transitioning the existing sectoral laws to the COFI Bill framework”. And similarly, under FAIS, “the focus will be on how to transition the existing FAIS framework to the COFI Bill”. 

Do not, however, become too complacent. There is plenty more to come as the FSCA and PA build out the conduct regulatory framework and ensure the domestic financial markets regulatory framework is better- aligned to international standards. 

Writer’s thoughts:

There is plenty of irony in regulation. Example, you may need to outsource to ensure compliance with the planned Joint Standard on Third party service provision. Do you agree that complex financial sector regulation is increasingly ‘out of reach’ for the layperson? Please comment below, interact with us on X at @fanews_online or email us your thoughts editor@fanews.co.za.