Financial Sector Conduct Authority Quarter Three Report

Meeting report

Opening Remarks by Chairperson
The Chairperson said the Committee was meeting at a time when KwaZulu-Natal (KZN) province was going through severe distress because of the flood disaster, and Members were preoccupied with this.

The meeting was to consider the third quarter report of the Financial Sector Conduct Authority (FSCA). This flowed from revamping the financial sector regulation twin-peak model. There was further regulation coming through the National Assembly. FSCA emerged from the twin-peak model and was intended to tighten financial regulations to reduce the potential recurrence of the 2008 financial crisis.

The Committee sympathised with those who lost family members in the flood, and noted solidarity with the injured, destitute, and with those who lost property. The poor and disadvantaged were the ones who suffered the most. This highlighted what the Committee and other Committees had been raising, namely the need to maintain infrastructure, manage funds better, avoid corruption, and the need to have effective councillors, managers, non-profit organisations (NPOs) and Members of Parliament (MPs). Those issues could be dealt with over the next two weeks in the broader structures of parliament and NPOs.
Members were conflicted since there was another programme to attend in the Committee section, but Members could be exempted from it. Members were also supposed to report to provinces and get mandates on the day. The Chairperson would not be affected because the meeting he had was at 12:30. Other Members would need to leave the meeting earlier. Priority was to provincial legislature and Members were free to exit the meeting.

Briefing by Financial Sector Conduct Authority: Quarter Three performance
Mr Unathi Kamlana, Commissioner, FSCA, presented a report on the outcomes of targets for the FSCA. The following targets had been met:
 For the Licencing and Business Centre, 80.13% was achieved for licencing 80% of all received applications within 90 days.
On Regulatory Policy, FCSA responded to 98% of queries received within 28 days of receipt.
100% of returns received from registered funds analysed (offsite reviews) on Retirement Funds supervision.
On the Conduct of Business supervision, one awareness programme was held to educate communities utilising banking services.
FSCA performed offsite analysis on 104% of the conduct of business returns submitted by insurers earmarked for review in the 2021/22 financial year.
On enforcement, FSCA provided assistance to 100% of requests received from international regulators within the requested date

The following targets were not achieved:
On the target of racial quotas for employees, there were 55% female, 45% male, 0.7% employees with disabilities. 88% Black (79% African, 6% Coloured, 3% Indian), and 12% White. The set corrective action was to focus on recruiting people with disabilities, Coloureds, and Indians. The overrepresentation of the White population group can only be achieved through natural attrition. EXCO had approved a bursary policy to recruit people with disabilities, which will assist in meeting the disability target in the long-term.
On Conduct of Business Supervision, the target was to conduct five workshops to provide upskill training for small financial services providers (FAIS workshops were three, and Microinsurer workshops were two). FSCA conducted three workshops to provide upskill training for small financial services providers (FAIS workshops were three and Microinsurer workshops were nought). The workshops were supposed to be conducted in a face-to-face manner, as this works best for the target audience. The workshops would resume in Quarter Four if possible, considering the Covid-19 restrictions.

FSCA faced the following challenges:
The proactive dissemination of information in a changing environment which includes the COVID-19 pandemic. To mitigate this, the FSCA continuously engages with all stakeholders, including the public, to ensure all changes are communicated timeously and accurately.
Delays in finalisation of the Financial Sector Code at the Financial Sector Transformation Council. The FSCA participates in various sub-committees and has contributed significantly to the work done in those committees. There have been lengthy delays in finalisation of a new Financial Sector Code (FSC). To address this, the issue has been communicated to the National Treasury and has been noted by the FSCA at the Financial Sector Transformation Council (FSTC) subcommittees.
To address legislative frameworks not adapting quickly enough to financial sector trends, emerging risks, and international developments, FSCA was carrying out proactive research into and monitoring financial sector trends, emerging risks, and international developments; ensuring regulatory instruments are timeously developed to address emerging risks and participating in the work of international financial sector principle/standard setting bodies.
Uncertainties regarding the intention and timing of the Financial Sector Regulation Act (FSRA) insofar it relates to the various mandates of the different financial sector regulators and legislative architecture.
Delays in the promulgation of the Conduct of Financial Institution (COFI) Bill framework.
Under the future legislative framework all sectoral laws will be collapsed into the COFI Bill. There is therefore a significant body of existing subordinate legislation that must be facilitated through standards under the COFI Bill. If COFI is passed and the body of subordinate legislation is not ready, it could lead to a significant delay in the implementation of the COFI framework and/or gaps in legislation.

FSCA Draft Strategy for Promoting Financial Sector Transformation
Phase One would focus on the role the FSCA will play within the current legislative framework.

Phase Two would focus on the role the FSCA will play within the COFI Act legislative framework once the Act is implemented, amongst others:
-Considering transformation plans during the licensing process and supervising the progress of financial institutions against its plans.
-Setting minimum Broad-based Black Economic Empowerment (B-BBEE) levels such as Level Four, which must be targeted by each firm and documented in the transformation plan, and requiring progression through the levels of transformation over defined periods of time.

The draft strategy was out for public comment until 29 April 2022 and would then be reviewed and refined before publishing.

Discussion
Mr D Ryder (DA, Gauteng) said at the beginning of the presentation, the Commissioner introduced Ms Farzana Badat, Deputy Commissioner, FSCA. She and Ms Katherine Gibson, Deputy Commissioner, FSCA, were appointed in the quarter under review as presented in the meeting. He asked how they were incorporated; and what their roles would be for the five-year term at FSCA.

He also asked which alarm-bells there were on issues the FSCA had picked up on in the financial sector; what steps had been taken; and what the results were.  

On the listed racial quota, he asked if the FSCA was using the pencil test to determine which category people fell into. The Commissioner did not have to respond to this since it was an unpleasant issue as the country was stuck in the apartheid era classifications.

There was a recent tweet on 20 February by Magda Wierzycka, a Chief Executive Officer (CEO) of a prominent financial services company with a high profile in the country and on Twitter. While Twitter was not the real world, the tweet made an important allegation. The tweet said she was once told by a CEO of a major bank in South Africa the bank wished it could be subpoenaed to disclose the transactions it saw going through many high profile accounts, but the bank waits in vain. This was a scary allegation, and the existence of the FSCA and the Financial Intelligence Centre (FIC) should have given the bank executives the opportunity to freely make disclosures, declarations, and comments. While FIC was not a part of FSCA, there was a memorandum of understanding.

Mr Ryder asked if there were there any open discussions with banking structures which would enable the bank to make such declarations. If such declarations had not been made, it was contravening the FIC Act. It would be important within the mandate of FSCA to investigate such comments, which state information which would have a material impact on the financial service industry operations in the country was being withheld.

Mr M Moletsane (EFF, Free State) thanked FSCA for the presentation. On point 17 under the Achievement targets, there was mention of holding an Awareness programme to educate communities on utilising banking services. He asked if the Awareness programme was held for communities across the colour lines.

Mr S Du Toit (FF+, North West) said looking at the transformation mandates, he wondered what measures were in place to widen the transformation sector instead of transforming it with literate legislation. It was obvious a large percentage of the population were discriminated against on the basis of race and he asked if there was a sunset based clause in the sector, which would do away with race-based transformation and allow the financial sector to grow and thrive without interference.
 
The Chairperson asked about efficiency and integrity of financial institutions. He wanted to know if FSCA was ensuring more competition in a highly monopolised and concentrated financial sector; and asked how inclusivity was being encouraged.

He asked if FSCA could give more information about what was presented on financial literacy, and empowering households and small businesses over the next three-year period. FSCA pointed the need for regulatory and legislative changes. He asked which specific changes were being proposed.  FSCA asked for another two years for transitional arrangements. This was previously discussed with the Committee and the Financial Regulator. Two more years was quite long. He asked if FSCA could explain this timeframe, although it had already been granted it.

FSCA said, with the Council of Medical Schemes (CMS), its role and the Prudential Authority’s (PA’s) role was blurred. The roles certainly overlap, but were complementary. He asked what the issues were with the CMS and the PA role overlapping with FSCA.
    
On the Conduct of Financial Institution (COFI) Bill there were conduct, legislative, and regulation issues. Members were waiting for the Bill. His party and most parties did not believe there could be non-racialism without affirmative action. This was not to apply affirmative action crudely, but the Committee complimented FSCA for its overall representative nature. Normally the financial sector was dominated by White and Indian South Africans, with Coloureds and Black Africans underrepresented. The Chairperson congratulated FSCA on this. This was not to say he crudely supported appointing people simply on the basis of colour or gender. The individuals had to have reasonably competent skills for the roles played.  The Chairperson did not see how an increasingly racially polarised society and differences in social strata could ever be reduced without affirmative action. More African people needed to take more dominant roles in the financial sector. This was not to say individuals had to be rejected because they were White or Indian, as this too would be a form of racism, but there were many Africans graduating from universities. There were many in National Treasury, Mr Olano Makhubela, Divisional Executive: Retirement Funds, FSCA was one of them. The Commissioner himself came from the Reserve Bank.  He said he was not sure about gender and asked FSCA to talk more on this.

Responses by FSCA
Mr Kamlana replied to the question about the roles and responsibilities of the Deputy Commissioners. Ms Badat was responsible for Conduct of Business Supervision, the Office of the General Council, and the Licensing and Business Centre. Ms Astrid Ludin, Deputy Commissioner: FSCA was responsible for Retirement Funds, Market Integrity, and the Specialist Support functional area in the organisation. Ms Gibson was responsible for Regulatory Policy and Enforcement.

One of the trends FSCA picked up was digital adoption. Covid-19 moved the trend of digital adoption at a high rate. From a customer perspective, there were specific issues, such as the benefit of technology for customers and the sector, as it assumes access to data. There was a need for financial institutions to ensure the institutions were not leaving some customer segments behind in the transformational digital adoption journey. Given the impact of Covid-19, there was closure of many physical branches of banks. Yet there remained a significant segment of customers who still preferred physical contact with banks. One of the focus areas for FSCA conversations with the sector had been how to manage this so it did not negatively affect the customer experience and customer outcomes.

Given Covid-19, another major trend related to challenges with arrear contributions for many retirement funds. FSCA needed to engage the retirement sector. With employers juggling issues of sustainability, deductions would be made from employees but not paid over to the funds.  Another area was crypto assets and people exposing themselves to such investments which were currently not regulated. FSCA was working with others in the official sector to come up with a regulatory framework. This is to provide clear protection and a clear view from an educational perspective, of what the underlying investments meant, so customers could decide if it was an area the customer could invest hard-earned money into. Every time there was a crisis, unlicensed insurance companies and illegal deposit-taking scams tried to take money from unsuspecting customers. In this area FSCA had to rethink its approach and be adequately resourced to respond, because consumer harm was noted in those spaces. He referred the Committee to a study the FSCA had just published, the “Financial Sector Outlook Study”, which considered all the industries FSCA regulates, and highlighted some of the observed risks and trends.

On the question on the tweet around Anti-Money Laundering and Countering Financial Terrorism (AML/CFT), the arrangement was the PA was responsible for AML/CFT outcomes in the banking sector. Regardless if people had been subpoenaed or not, people had full access to both the PA and FSCA on any issue of concern. He did not think there were senior executives in any of the licensed entities who would withhold information if the executive knew such information was important for regulatory outcomes. This would be very surprising.

Regarding if financial workshops were held across colour lines, the criteria used to determine the target audience was if the person fell into the vulnerable groups; and it was for Small, Medium, and Micro-entities (SMMEs) across the colour lines. The objective of those interventions was empowerment and resilience.

On transformation, FSCA did not design transformation interventions. As outlined in the presentation, FSCA was working on the basis of existing policy and legislative framework, which was driven by the Department of Trade, Industry and Competition (DTIC), which was commissioned as the primary regulator. FSCA had a broad interest because transformation was an important objective for the country, and specifically because it talked to trust and confidence in the financial sector which was an important consideration for sustainability and financial stability. These were issues FSCA drove so momentum was not lost to get to a point of financial instability. There was need for collective and proactive involvement to ensure meaningful transformational outcomes. In FSCA’s engagement with executives of financial institutions, this was high on the agenda of the board of various institutions.

On competition and transformation of incumbents versus encouraging new entrants, the two were mutually reinforcing, and it was not one versus the other. There were imperatives around transformation of incumbents, but FSCA was also focused on ensuring regulatory and legislatives frameworks did not impede licensing and sustainability of new entrants. 

Ms Ludin, replied to the question on financial markets. Members were aware there were five exchanges in South Africa, although one had been suspended. For the infrastructure in the capital markets area, there were two licensed Central Securities Depositories (CSD), and were in the process of licensing an independent clearing house. The regulatory framework contained in the Financial Markets Acts was geared around the single exchange, single central securities depository environment. Many of the practices in the market had maintained this structure. FSCA’s focus on the licensing of new exchanges had raised many issues around managing relationships between exchanges such as trades across exchanges. In addition, finding ways to make it facilitative for all actors in the value chain, for example, making it easy for brokers to get the best prices for its ultimate clients across the exchanges. FSCA found, in environments with a dominant incumbent, as it was in all market structures, it was difficult for new entrants to carve out its areas and become sustainable. These entities needed to have deep pockets and a long-term strategy. FSCA’s approach was to ensure availability of opportunities with no obstacles in the market. Over the years, there was engagement with the exchanges and CSD’s, and all actors in the ecosystem to ensure the rules were fair. Entities were engaged with to find solutions between these entities. There were regulatory instruments. The Competition Commission could also be approached to ensure competition, to do research, get an opinion or initiate investigation. FSCA had not needed to go this route, but were preparing a memorandum of understanding and would engage with the Competition Commission to ensure a strong cooperative relationship. FSCA was also looking to strengthen its internal capacity on understanding competition. Ultimately, there were instruments in the form of conduct rules to enable the Authority to set out clear rules on how entities would engage with each other. As the Commissioner mentioned, proportionality was also considered in the regulatory framework. The same obligations could not be imposed on separation in governance functions of small entities, but it meant it needed to be supervised more proactively. This was how FSCA was looking into efficiency and integrity. On integrity, there was also a market abuse side where FSCA monitored and initiated investigations. This would be an area of focus in the coming year, from a supervision perspective. There was a need to understand the kind of disclosures made, and the information made available. The role of technology also needed to be considered as it introduced risks such as data breach, while it also lowered barriers to entry for new entrants to come into the market. FSCA was researching and monitoring the markets, engaging with the entities, and supervising.

The Commissioner added further to the question of inclusion. FSCA had a focused approach on inclusive innovation through its Financial Technology (FinTech) Unit. Through this, tests were done for whether the regulatory frameworks were supportive for the new innovations, and kind of changes that would need to be made to the extent to the regulatory framework. Many of the innovations were targeted at including customers who may find existing offerings expensive or inaccessible. One of the issues referred to in the Financial Sector Outlook Study was that the last decade was good in terms of access, although there were still challenges with usage. From 63% ten years ago to 80% now had access to a bank account, yet a high proportion of those withdrew their funds as they got deposited. There were however, several reasons for this.

On the question of COFI, it was an important development in the sector. It would be the consolidation of all conduct relevant provisions. FSCA came from an industry-based silo approach to conduct regulation. With the reestablishment of the FSCA, there was need for common framework for conduct regulation in the financial sector. While this was taking longer than envisaged, given the impact and scope of the work, based on the pieces of legislation it was touching, there needed to be an appreciation of the time it would take.

On the question of transitional arrangements, the nature of the inquiry was that there was a need to unpack the prudential relevance of certain financial institutions which traditionally would not have been regarded as prudential entities in the same category as banks and insurance. FSCA had three years’ experience in being regulated by the Financial Sector Regulation Act (FSRA) and found it was not sufficient experience to inform the future framework. FSRA said all prudential regulation was the responsibility of the PA, and all conduct was the responsibility of the FSCA. For a few institutions, such as retirement funds, investment schemes, and friendly societies, both prudential, conduct regulation, and supervision would be the responsibility of the FSCA. FSCA’s current work was to determine if there was a need for a cleaner split, as there was with other institution types. It was found in the space of retirement funds, a large amount of conduct issues dwarfed prudential concerns, and FSCA was not sure if it made sense according to efficiency to split the responsibility and locate it into two entities. This was the reason why FSCA approached the Minister.  It hoped the issues would be resolved, including how to enable it in the legislation, by 2024.

On delineation of some roles between FSCA, CMS, and the PA, the Financial Sector Regulation Act defined medical schemes as a financial product, which meant prudential issues pertaining to medical schemes were the responsibility of PA, with supervision delegated to the CMS. Conduct issues were the responsibility of FSCA, with supervision delegated to CMS. Currently, work was being done was to determine the best approach and if the clean split was necessary. There were policy issues which needed engagement between National Treasury and the Department of Health. However, for the day-to-day, regulatory entities needed to be close to understanding where support would be given, and to ensure there were no gaps in customer focus, which was FSCA’s interest.

On diversity of gender and race, in the four-member committee at the helm of the FSCA, the Commissioner was the only man.

The Chairperson said being the only man is rare and unusual but not necessarily good.

Mr Makhubela replied to the question on retirement funds. One of the issues COFI would assist with would be around arrear contributions. These had become prominent even within municipality funds. Part of the challenge was FSCA did not directly supervise employers. As such, it was nearly impossible to take regulatory action against employers who were not paying through contributions into the retirement fund. The proposal was for COFI to assist by including a provision which would deems an employer a supervised entity, for a limited scope, one scope being arrear contributions. This way, the regulator would be able to add, and where necessary penalise the employer directly, and route the penalty money into the retirement fund.

The Chairperson said the Commissioner gave many statistics, but there was not a clear indication of the outcomes of the work. While independent surveys would be done by FSCA, it was not easy to measure. In the next engagement, the Committee would be interested in a more qualitative report, to summarise the outcomes.  There was need for FSCA to engage more effectively with Treasury to ensure movement in the legislation and regulatory changes which were needed. As mentioned, things did not always move very fast. For example, when the FSCA was shared with Parliament, it was endlessly long. Covid-19 had not been anticipated. While the Bill was being processed, amendments could be made to make FSCA’s work more effective in various programmes. FSCA needed to do more work on this. The Committee would also raise it with Treasury. The National Assembly also met Treasury once every quarter to review progress, and FSCA would probably want to raise it with Treasury.

Mr Ryder agreed with the Chairperson, saying it was a clinical report and qualitative information would be useful. He asked for more details on his previous question about trends. The report being dealt with was within the quarters where it was the end of the lockdowns and people were going back to work. Claims were coming through to insurance companies, life insurance, claims on pension funds, and others. He asked what the impact of the Covid-19 pandemic was; and if the financial sector was able to deal with the pressures. Like other businesses, there were changes in demands during this period. Banks had started out with a very constructive approach on deferred payments, and tried to help people who were not earning an income so people did not owe on their bonds and other funds.  Sometimes this continued, while at other times it could not, since with the passing months, interest amounts rose. The insurance industry and pension funds were under pressure, as many people lost their jobs. He asked if all parties were able to act with the expected speed.

The Commissioner said, in characterising the role of the financial sector in the COVID-19 pandemic, the financial sector was very helpful in how it responded to the crisis, as compared to its role in previous episodes of crisis. This was based on the example given by Mr Ryder, such as payment holidays, premium holidays, and restructuring of debts for customers, among other measures. This was a particularly helpful approach. For the insurance sector specifically, as noted in the Financial Sector Outlook Study, there was a period of much uncertainty around business interruption and insurance, with claims not being paid at the rate which the demand was expecting, and required. As soon as legal issues were resolved and there was some certainty on what was covered and for what period, customers started to be paid and had expectations met by the insurance sector. The mortality rates in the COVID-19 pandemic created a huge impact on insurers, since claims had to be paid.

On soundness and liquidity, the PA would be best placed to reply. Claims were met according to the demand of customers. Smaller to medium-sized insurers experienced some negative impact on its sustainability. This informed the response of the PA, which showed lenience regarding regulatory ratios which had not been met by insurers, given the nature of the of the Covid-19 pandemic.

Mr Makhubela replied to the question on retirement funds. FSCA ran a survey in late 2020 to assess how retirement funds were coping. FSCA had previously reminded funds to consider existing rules which would enable the employer and the employee to reduce contributions to a certain extent, or in some instances to completely waive contributions to ease the pressures on the members. The reality was if an employer was not receiving income because of a hard lockdown, the employer would be struggling to pay employees and to make the employer contribution into the fund. FSCA needed to find a flexible way to assist both the employer and the employee. The survey interestingly showed around 38% of funds was approached by either the employee or the employer, asking for a reduction in contributions. If this were to be taken as the proxy of the difficulty the fund and the employer were experiencing, it gives a good indication of the impact of COVID-19 on retirement funds. Since the system was largely made up of defined contribution funds, which meant nothing was guaranteed to the member, the funds mostly came out quite well. The survey clearly showed the small and medium-sized employers struggled the most with contributions. Larger employers fared much better, and were quite resilient through the period. There were no particular shocks for large employers, such as umbrella funds or large mining companies and related funds. One thing which was stressed on the employer was not to reduce or stop risk benefit premiums, because it related to life cover. The worst during COVID-19 would have been for an employee to lose that employee’s life, only to realise the employer was not paying risk benefit premiums. It would be an unfortunate situation. According to the statistics, the employers played their part in ensuring contributions for risk benefits were being made.

On liquidations, a spike was observed during 2020/21, mostly for small and medium-sized employers. It was hoped this would taper off with the end of the hard lockdowns.

Closing remarks by Chairperson
The Chairperson addressed some Members concerns about not being able to participate in the meeting because of load-shedding. The Chairperson said 4G switches on when the power goes off. Sometimes the mast of the internet service provider is affected because of the power cut. MPs received an allowance for the internet, and Members needed to remain in the meeting as long as the mast was working. The Committee staff also received an allocation.

The Chairperson thanked the FSCA for the input, and said it looked very impressive on the surface. Hopefully in another meeting, more of the outcomes would be explored and FSCA would present a report. The work was very impressive and knowing the calibre of the Commissioner’s leadership, things were in good hands. If there was anything which called for the Committee’s assistance, the Commissioner could reach out to the Chairperson on his cellphone.

The Chairperson thanked the Members for participation.

The meeting was adjourned.