Evolving regulatory landscape – 2020 and beyond

Since the global financial crisis in 2008, the financial sector has undergone substantial regulatory reform globally. In this article, we take stock of these developments and delve into how you may experience these changes as an investor.

South Africa has followed a similar trajectory to align to these global shifts. Government’s financial services reform process is designed to strengthen public confidence in the industry and has implemented several significant changes over the past few years in a bid to achieve this.

One of the first initiatives in the market was the launch of the Treating Customers Fairly framework introduced in 2010 by the Authority (formerly the Financial Services Board and is currently Financial Sector Conduct Authority (FSCA)), followed by the Retail Distribution Review late in 2014.

Another key piece of legislation emerging from Twin Peaks, and a milestone in the reform journey, came about when the Financial Sector Regulation (FSR) Act was signed into Law in 2017. The FSR Act is significant as it broadens the FSCA’s jurisdiction to have oversight of financial products and services that was not part of the FSB’s mandate, including: banking, services related to credit, and buying and selling foreign exchange.

Since then, ongoing regulatory changes have shifted the way the industry conducts business, and these changes bode well for all industry stakeholders.

Transition period of the regulatory framework
Since the Twin Peaks regime was adopted in 2018; two new regulatory bodies for the financial services industry emerged; namely the Prudential Authority (PA) and the FSCA.

The FSCA was tasked with the responsibility of market conduct regulation and supervision to ensure that Financial Services Providers (FSPs) are treating customers fairly, while supporting the efficiency and integrity of the markets.

Another key outcome of the Twin Peaks process was the Conduct of Financial Institutions Bill (referred to as COFI), which was published in 2019.

COFI regulates how the financial services industry behaves and at the heart is the promotion of good market conduct by ensuring FSPs follow Treating Customers Fairly (TCF), an outcomes-based framework covering six specific principles to help ensure that you are treated fairly. It is a consistent standard that applies across the industry and covers everything from designing products, to the financial advice that you receive, through to point of sale and after sales service.

Over time, conduct standards issued as subordinate legislation will replace many of the current laws governing the industry.

COFI requires that the Authority’s regulatory and supervisory approach is: pre-emptive, proactive, risk-based, proportional, intensive, intrusive, transparent and outcomes-focused.

FICA aligned to international standards
A significant update to the provisions of the Financial Intelligence Centre Amendment Act (FICA) came into effect in April 2019.

These changes were brought about to align South Africa with international standards and to address deficiencies in the previous version of FICA (2001). The changes resulted in:

• A shift from a rules-based approach to a risk-based approach, which is aligned to international standards and allows institutions to have flexibility when determining how to verify a client’s identity through the “Know-Your-Customer” system.

• Greater transparency through the financial system, as the amendments better safeguard the integrity of the financial system and may protect accountable institutions from abuse by criminals.

Regulations affecting retirement funds
As part of retirement reform, government continues to implement initiatives to help retirement fund members make better decisions that will ultimately assist them to prepare for their retirement.
One of these initiatives are the Default Regulations, which form part of the Pension Funds Act, setting out the legislative requirements with which all retirement funds must comply.

The Default Regulations required the boards of trustees to offer the following to retirement fund members since March 2019:

• Annuity strategy, which must be made available to members and can be either a living or life annuity with specific objectives, asset class composition and predetermined drawdown rules which members may elect at retirement.

• Retirement Benefits Counselling is a process of sharing information with members, three to six months prior to retirement, about their options at retirement to help them make informed decisions to secure a comfortable retirement income.

Investment policy statement to include sustainable investments strategy
Regulators globally are increasingly requiring institutions to act like responsible corporate citizens and take ownership of their Environmental, Social and Governance (ESG) responsibilities.

This expectation has permeated into the South African landscape, too. Regulations of the Pension Funds Act require all retirement funds to have an investment policy statement to consider ESG factors before investing in an asset. In the South African context and specifically in respect of assets located in SA, these factors include (but are not limited to) the manner in which broad-based black economic (BBBE) empowerment is advanced.

The FSCA released a guidance notice entitled: “Sustainability of investments and assets in the context of a retirement fund’s investment policy statement”, which is aimed at the Trustees of retirement funds. The guidance notice explicitly mentions that investment policy statements should include ESG integration, as well as efforts to mitigate the risks of climate change.

It’s important to note that the FSCA has affirmed its commitment to refining the regulatory framework relating to issues of sustainability in consultation with the industry players, following which, specific requirements may be incorporated into prudential and/or conduct standards in future.

A sector that serves all
The goal of the industry reform, as indicated by National Treasury, is to build a financial services sector that serves all South Africans.

At PPS Investments, we strive to implement these legislative and regulatory changes in the spirit and not just the letter of the law. Our view is that these reforms bode well for all industry stakeholders and we continue to hold your best interests at the centre of everything we do.