Transform or bust, the choice is yours

The handful of financial advisory firms that still believe they will be able to trade indefinitely without tackling transformation in their businesses are in for a rude awakening, as lawmakers and regulators bring all the instruments at their disposal to bear. On the one hand they face the imminent Employment Equity Amendment Bill (EEAB), which has made its way through Parliament and now sits with the National Council of Provinces for concurrence… On the other, the Financial Sector Conduct Authority (FSCA) has just released a Draft Financial Sector Transformation Strategy for public comment.

Tough targets, tougher to meet…

The EEAB gives the Minister of Employment and Labour sweeping powers to set employment equity targets, with new sector-specific equity rules already promised for 2022. An article published on Businesstech.co.za towards the end of 2021 included ominous comment from the Department’s director of employment equity, who said: “All current employment equity plans will fall away on 22 September 2022, and the new plans will have to be aligned with five-year targets; self-regulation has not worked”. 

We have spoken to one or two compliance experts who hint that overly aggressive EE targets could prove almost impossible for firms to achieve given legacy skills shortages in the domestic market. They further warn that the Department of Labour appears unmoved by arguments that skill shortages make compliance with certain targets impossible, with a typical counter being: “you have had more than two decades to see these shortages coming and plan for them”. One wonders what might happen to a firm operating in the financial services sector when it is physically unable to onboard enough qualified and experienced actuaries, chartered accountants, engineers, software developers, etc to meet these targets, especially when also barred from sourcing such skills offshore? 

Firms operating in the financial services sector will now also have to monitor the FSCA’s Financial Sector Transformation Strategy for additional EE-based compliance requirements. In a media release accompanying its 23-page document, the FSCA singled out the “promotion and development of an innovative, inclusive and sustainable financial system” alongside “the transformation of the financial sector” as among its strategic objectives. This apparently harmless media release gives insight into how South Africa’s already-complex legal and regulatory landscape is likely to evolve over the coming years. 

Layer upon layer of law covering the same ground

The FSCA said that it recognised the Broad-Based Black Economic Empowerment (B-BBEE) Act as the overarching policy framework for B-BBEE in South Africa. This Act gave rise to the Financial Sector Code (FS Code), which was gazetted back in 2012 and subsequently revised and gazetted in 2017. The FS Code, they write, “reflects the accord reached by key financial sector stakeholders regarding their joint commitment to fostering B-BBEE in the financial sector”. PS: we have heard some comment that financial services firms took their proverbial ‘eye off the ball’ by not taking the accord proceedings seriously enough, but we will shelve that discussion for another day. 

You might, dear reader, forgive yourselves for believing that there were enough cooks in the transformation kitchen at this point. Alas, here enters twin peaks, as set out in the Financial Sector Regulation (FSR) Act. It seems that the policymakers, perhaps unclear about the primary objective of this emerging framework, decided that transformation had a nice ring to it… They thus include “the promotion of transformation of the financial sector” alongside financial inclusion on a growing list of objectives. As such, the long-awaited Conduct of Financial Institutions (COFI) Bill, which is expected to be tabled at Parliament later this year, also includes key proposals to strengthen the powers of the FSCA in relation to financial sector transformation. 

These developments may, of course, be the inevitable result of setting an objective as vague as ‘regulating the conduct of financial institutions’. In hindsight this is akin the regulator’s saying: we declare our primary objective as being to oversee everything that each and every financial services firm does. It is an overly complex decree, given there are government departments and laws that already handle many institutional behaviours. So, suddenly and without any warning you have labour law, competitions regulation and financial sector regulation each having transformation among their objectives… Chaos ensues via regulatory overlap. 

The trouble with absolute power

Clearly, we cannot fix the overregulation mess… Our lot is simply to inform you, dear reader, of what you can expect based on the just-released 23-page document. Per the FSCA, they are outlining their approach to promoting financial sector transformation within the existing policy framework of the B-BBEE Act, FSR Act and FS Code plus the future COFI Act. The authority was also able to share some insights into how the COFI framework would be leveraged to achieve its now confirmed transformation role, including by: 

• Making the promotion of transformation an explicit function of the FSCA;
• Mandating the FSCA to issue conduct standards that further the promotion of transformation objective;
• Empowering the FSCA to require entities to “promote transformation in a manner reasonably consistent with a transformation plan, which must be aligned to the achievement of tangible targets informed by the FS Code”; and
• Empowering the FSCA to issue directives and use its other supervisory and enforcement powers to ensure that a financial institution adheres to commitments made through its transformation plan, and that its governance frameworks in relation to transformation are adequate and adhered to. 

“These proposals will strengthen the overall framework for transformation in the financial sector, by allowing the FSCA to exercise reasonable supervisory and enforcement measures against financial institutions that do not uphold commitments to transformation,” they conclude. Stakeholders in the financial services industry were invited to comment on the document by no later than 29 April 2022. 

Is your head spinning yet? It should be…

Local businesses, already drowning under a sea of red tape, are being further pressured to report on their transformation initiatives on multiple fronts. To make matters worse they face enforcement actions from both the traditional Parliament-based law making machinery and a handful of parallel “states within the state” comprising all-powerful administrative agencies. The future looks increasingly like one in which laws will be drawn up by these administrative agencies and rubber-stamped by Parliament, with Parliament and the individuals it represents being side-lined from the democratic process. Ultimately, the protection afforded to the individual by the rule of law will be eroded. 

Writer’s thoughts:
Today’s newsletter was a bit of a rant against the regulatory burden that affects each and every business and individual trying to stay afloat in South Africa’s already-tough business environment. The latest push is for ‘carved in stone’ EE targets, regardless… Are you concerned about too many enforcement agencies presiding over transformation, or are you happy for multiple regulators to ‘bring it on’? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.