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Less tolerance for institutions that blatantly ignore targets

04 August 2022 Myra Knoesen

The financial sector is a key contributor to the South African economy. It is, thus, an important component in driving transformation of the economy and ensuring greater inclusivity in economic activities. While there has been progress made toward both economic transformation in general and financial sector transformation specifically, the extent to which the majority of South Africans participate meaningfully in the financial sector remains limited.

FAnews joined the Financial Planning Institute of Southern Africa (FPI) and the Financial Sector Conduct Authority (FSCA), in a discussion on the draft document: FSCA Strategy For Promoting Financial Sector Transformation.

The FSCA’s objectives

Discussing the strategy and purpose of the document, Katherine Gibson, an economist from Durban with extensive experience in public policy and the Deputy Commissioner of the FSCA, said the FSCA recognises that sustainable transformation of South Africa’s financial sector is essential to support financial inclusion and economic growth.

“The strategy outlines the FSCA’s proposed role in promoting transformation alongside other transformation partners like the BBBEE Commission and the Financial Sector Transformation Council,” she said.

The Conduct of Financial Institutions (COFI) Bill, according to Gibson, intended to be tabled in Parliament by National Treasury in 2022, includes key proposals to strengthen the powers of the FSCA in relation to financial sector transformation. “Among others, these proposals will make promoting the transformation of the financial sector an explicit function of the FSCA, empowering the FSCA to set standards in relation to transformation and allowing the FSCA to exercise reasonable supervisory and enforcement measures against financial institutions that do not uphold commitments to transformation.”

In recognition of the FSCA’s stronger future role of promoting financial sector transformation, Gibson said the strategy aims to outline the FSCA’s approach to promoting financial sector transformation within the existing policy framework, including the FSR Act, and the future COFI Act framework.

Meeting targets

When asked if the FSCA’s objectives of supporting financial inclusion and transformation of the South African financial sector are being achieved, or if we still have a long road ahead Gibson said, “The introduction of the Financial Sector Charter and the subsequent Financial Sector Code (FSC) has significantly changed the transformation landscape of the financial sector. The FSC has enabled more lending to black SMEs and black farmers and has improved funding for low-cost housing and transformation infrastructure. Access to basic financial services has increased. Progress has also been made, though to a lesser extent, in meeting the employment equity targets, skills development targets 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 sufficiently broad-based; we would like to see more black-owned and run businesses, both in the financial sector itself and related industries both upstream and downstream. The FSCA strategy will encourage financial institutions to fast track their efforts towards a fully transformed financial sector,” added Gibson.

A handful of financial advisory firms still believe they will be able to trade indefinitely without tackling transformation in their businesses.

Gibson iterated that the FSCA draft strategy for promoting financial sector transformation aims to actively encourage all financial institutions, including financial advisers, to see transformation as a moral and a business imperative that should be embedded in the organisational culture and business strategies. “Section 12 and section 17 of the COFI Bill require all licensed financial institutions to have in place a transformation plan and to promote transformation in a manner consistent with their transformation plan. Where there is a lack of commitment to promoting transformation, the COFI Bill empowers the FSCA to issue directives in relation to transformation plans and to use its supervisory and enforcement powers to ensure that a financial institution’s transformation frameworks are adequate and adhered to.”

“Keep in mind that the envisaged FSCA approach simply mirrors the FSC expectations and does not create additional burden, meaning that a business that currently falls outside of the scope of the FSC will continue to do so. Furthermore, it is designed to ensure proportionate application of the expectations. A provider is given the space to determine how to transform in the context of its own business and business model and will be asked to demonstrate this over time. Should a particular target be overly prejudicial to implement because of the nature of the business or business model, a provider should engage the regulator to consider what is reasonable. On the flip side, there will be less tolerance for those financial institutions that blatantly ignore the targets and do not seek to improve,” she emphasised.

“Where a financial institution is unable to meet the targets set out in its plan, the FSCA will engage the entity, which needs to demonstrate steps taken to meet the targets and give reasonable grounds for not meeting targets. This approach provides the flexibility for the entity to align its transformation plan with its individual business model. However, where there is a blunt obstinacy to meet the targets set out in the transformation plan and no reasonable grounds are presented, the FSCA may use its supervisory and enforcement powers to ensure that a financial institution commits to its transformation plan in a meaningful way,” she concluded.

Monitoring compliance

Lelané Bezuidenhout, CFP® and Chief Executive Officer of the FPI added that the proposals made are not new and have been around since +- 2017, or at least the reviewed B-BBEE scorecards for the financial services sector have. “What has been lacking is the monitoring of compliance with the Financial Sector Transformation Council’s (FSTC) various B-BBEE scorecards from a market conduct point of view. The FSCA proposals are, therefore, focusing more on its role in monitoring and evaluating compliance at licensing stage and various supervision stages.”

“The framework aims to not only strengthen transformation in the sector, but also improve overall financial inclusion as these two FSCA strategies must be read as one. We need to have full appreciation for all the elements of B-BBEE in terms of the scorecards – it is not just about ownership and management control. The other elements will go a long way in addressing some of the macro-economic problems we are sitting with - from slow GDP to the high unemployment rate in South Africa. With this, I am referring to the Enterprise and Supplier Development element which measures the extent to which Financial Services Providers buy goods and services from empowering suppliers with different B-BBEE recognition levels, as well as Socio-Economic Development and Sector Specific Contribution elements; in our sector this refers, for instance, to consumer education,” continued Bezuidenhout. 

“The framework, therefore, addresses much more than just FSP ownership and management control. But these two elements do highlight the need for proper succession planning to be in place, considering that individuals in top management structures, directors and owners must be in good standing, have high levels of competency and diligence as per the requirements in for instance BN194 of 2017. It also calls for making sure that there are no barriers to entry into the financial services sector - more attention must be given to Recognition of Prior learning by the conduct authority, especially when it comes to some elements of the current fit and proper structure (again, BN 194),” she added. 

“Succession planning, as mentioned above, as well as making sure that you have clear policies and procedures in place, for example, procurement that aligns with the various scorecards, learning and career pathways for your key individuals and representatives (to ensure that there are no barriers to entry into different careers within your FSP) and committing to do consumer education, whether you are a big FSP or a small FSP, are the key things the industry needs to pay attention to. It is about embracing the spirit of the strategy and removing barriers to entry into the financial services sector, but also having a more financially savvy nation,” she concluded. 

Writer’s Thoughts
The webinar covered some critical conversations around the issue of promoting transformation in the industry and where we are going to as an industry. The role of transformation in the industry is something that is often overlooked but it can be fixed with the right methods. Do you agree? If you have any questions please comment below, interact with us on Twitter at @fanews_online or email me - [email protected]

Comments

Added by Ayanda, 04 Aug 2022
Moeletsi Mbeki: "BEE and affirmative action are biggest drivers of corruption in SA."
More and more red tape to destroy the SA economy and put yet more people out of work.
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Added by justsaying, 04 Aug 2022
The usual heavy handedness about transformation; there is no better counter to our Overlords than this:

https://www.moneyweb.co.za/news/economy/government-is-failing-to-comply-with-its-own-empowerment-policies/?mc_cid=c2035bf20e&mc_eid=c15d168e1e

Sleep tight.


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