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The changing face of the legal industry in SA

05 December 2019 Jo-Anne Bailey, CEO at Ancillary Financial Services
Jo-Anne Bailey, CEO at Ancillary Financial Services

Jo-Anne Bailey, CEO at Ancillary Financial Services

The Financial Services Industry, from the outside looking in, appears exciting and fast paced filled with many healthy, wealthy and uber trendy looking young adults.

This was certainly my impression as a newly qualified and admitted attorney back in the mid-nineties. That was enough to entice me into joining the industry and spending the next 20 years listening and learning in various roles at various asset management companies. One thing I can say with confidence is that twenty years later the legal picture looks very different indeed!

One of the biggest changes I have seen is the huge increase in the levels of regulation and legislation pertaining to the financial services industry. The landscape has developed, matured and been refined principally on the back of several corporate accounting scandals (Enron and Lehman Brothers come to mind) and the increased focus on the protection of investors globally.

The good news for legal professionals in the financial services industry is that there is an ever-increasing demand for qualified and experienced legal /compliance practitioners. However South Africa has a complicated banking system so for those not schooled in the legal field this means an increased compliance burden with lists of legislation, accompanying regulations and never-ending amendments to amendments. The financial sector regulation appears fragmented due to the vast amount of legislation and regulations and in some instances, they cannot be reconciled and require creative interpretation or rulings from the Regulators.

The Financial Sector Regulation Act ("FSRA") was promulgated on 21 August 2017. The FSRA creates a more unified platform from a legislative point of view, aligns our financial laws with global norms and aims to promote financial stability in the financial sector by adopting the Twin Peaks model.

The Twin Peaks model refers to two bodies who together are responsible for regulating the industry. In South Africa the first peak is the Prudential Authority (located within the South African Reserve Bank (SARB) and responsible for creating and enforcing prudential regulations which are designed to prevent a financial crisis). The second peak is the Financial Sector Conduct Authority (FSCA), previously known as the Financial Services Board (FSB), which is responsible for preventing misconduct and protecting consumers of financial products and services. These two bodies may have contradictory roles, but the twin peaks model creates separate yet equal mechanisms to achieve their respective goals.

Personally, I am most excited by the fact that the new FSR Act, through the adoption of the Twin Peaks model, seeks to unify our banking laws, which I am hoping will finally simplify the landscape for practitioners.

In 2018, market players came together once more to reflect on the existing framework regulating the conduct of financial institutions in South Africa. The findings suggested that this framework needed extensive reform. A new piece of legislation, The Conduct of Financial Institutions (COFI) Bill followed, which aims to provide a consolidated regulatory framework for the conduct of financial institutions.

The FSR Act gives consumers and financial institutions an indication of what to expect of financial sector regulators, while the COFI Bill outlines what customers and industry players can expect of financial institutions.

COFI shifts away from the current 'rules and regulations' approach to a 'principles and outcomes-based' approach. A principles-based approach seeks to set principles that specify the intention of regulation, rather than set rules for financial institutions. A focus on principles should see a shift in the industry-and regulator-toward ensuring that their actions are focussed on achieving certain principles in the financial sector, not only on technical compliance with the law.

In summary, the Bill aims to establish a consolidated, comprehensive and consistent regulatory framework for the conduct of financial institutions that will:

• Protect financial customers;
• Promote the fair treatment of financial customers by financial institutions;
• Support fair and efficient financial markets;
• Promote innovation and the development of and investment in innovative technologies, processes and practices;
• Promote competition;
• Promote financial inclusion; and
• Promote transformation of the financial services sector.

The Bill is clearly focussed on the fair treatment of customers; yet it reflects the need for market conduct regulation to go further. Two aspects stand out for me: the promotion of 1) innovation and 2) transformation within the regulatory framework. With reference to technology, this is the first step in developing a South African fintech regulatory environment, possibly in the belief that the maze of what is the financial services regulation may restrict or prevent the development, investment or deployment of technology in the industry.

Several distribution business models within the industry have already been digitised and the fit and proper requirements promulgated under the Financial Advisory and Intermediary Services Act (FAIS) in 2017, made provision for “automated advice”. It has been argued1 that innovative technology does not introduce a significant enough risk into the financial services industry to require the development of a regulatory framework focusing on the impact of technology, yet the same cannot be said of the disruptive capability of technology.

The COFI Bill is its’ initial draft stages and the final Act may well look different, but in determining the legislative objective and foundation upon which a fintech regulatory environment will be built, it is important for the proposed legislation to acknowledge that not all technology is created equal. Both the 2018 Fintech Programme media statement issued in February 2019 by SARB and the published Regulatory Strategy of the Financial Sector Conduct Authority, state that the type of fintech that should be regulated are “technologies applied to financial services with the potential to disrupt current business models, applications, processes or products…”. Fortunately, the FSCA recognises that the fintech regulatory oversight objective needs to be proportional to the risks involved, rather than potentially hampering the innovative use of technology in providing faster, easier, cheaper and more convenient ways for service providers and clients alike to access the financial systems.

Transformation is also included as one of its main objectives.in the COFI Bill. The Explanatory Paper on COFI states that financial institutions will be required to report on the implementation of their transformation policies to the FSCA. This is an indication that the regulation of the conduct of financial institutions in South Africa includes monitoring and prioritising transformation in the industry. This should assist the regulator in being able to encourage emerging institutions and black-owned businesses to enter the market. The extent to which this may afford new entrants more leeway which will enable them to develop, grow and focus on their core business, is uncertain at this stage, yet it is comforting to know transformation is top of mind.

Although the implementation of the overarching COFI Act seems some light years away, the FSCA is preparing for this shift by putting Treating Customers Fairly (TCF) squarely at the forefront in the way they are interpreting and enforcing of the existing regulatory frameworks.

The shift from fragmented regulation determined by industry type, to consistent and universal regulation of all financial service providers is a major shirt in our financial services industry. So too is the move from rules -based to principles-based regulation. From a legal point of view this will introduce some interesting debates as we are now moving away from relying on detailed prescriptive rules to more high-level, broadly stated rules. This by its very nature introduces a level of subjectivity which will require context and interpretation: fertile ground for legal practitioners! Let's hope the flexibility afforded does not come at the expense of certainty.

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