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Financial Sector Regulation Takes Another Step Towards Implementing Twin Peaks Regulatory Model

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Financial Sector Regulation Takes Another Step Towards Implementing Twin Peaks Regulatory Model

6th September 2017

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The Financial Sector Regulation Act, 2017 was signed by the President and published in the Government Gazette on 22 August 2017. The Act will come into effect on a date to be determined by the Minister of Finance and announced by notice in the Government Gazette.

The Act aims to consolidate the regulation and supervision of the financial sector and its various subsectors - namely banking, insurance, financial products and services and market infrastructure - to ensure that each subsector is subject to both prudential and market conduct supervision and regulation. This approach is commonly referred to as the Twin Peaks Model.

The Treasury seeks to implement the transition of the South African financial sector regulation to a "Twin Peaks" supervisory model in two phases. The Act provides that different dates may be determined by the Minister of Finance for the coming into effect of different provisions of the Act and/or in respect of the different categories of Financial Institutions where the different provisions will apply.

Who is affected?
A "Financial Institution" is defined as a financial product provider, a financial service provider, a market infrastructure, a holding company of a financial conglomerate and includes any person licensed or required to be licensed in terms of a financial sector law.

Phase one will entail creating two new regulators - the Prudential Authority and the Financial Sector Conduct Authority (FSCA) - to supervise all participants in the financial sector. They will work in conjunction with the South African Reserve Bank, the Financial Intelligence Centre and the National Credit Regulator.

The Prudential Authority, to be housed within SARB, will be tasked with regulating prudential issues (systemic stability and the safety and soundness of Financial Institutions) in relation to banks, insurers and the financial markets with a special focus on "financial conglomerates".

The FSCA, which will replace the Financial Services Board, will act as a market-conduct regulator in respect of all Financial Institutions, in particular regarding business conduct and consumer protection.

Phase two will involve consolidating the regulation of, and the standards applied to, the various financial subsectors into over-arching legislation applicable to all Financial Institutions. This will will be administered by the Prudential Authority, the FSCA, the Financial Intelligence Centre, the SARB and the National Credit Regulator, each in their functional sphere rather than by designating a regulator per subsector. It is likely that existing industry specific licences for Financial Institutions will be phased out and each Financial Institution will require a licence from the Prudential Authority and the FSCA.

What to expect
During Phase one, the existing industry specific legislation will remain in force and will be allocated to one of the new regulators (as set out in Schedule 2 of the Act) as the principal regulatory authority. For the most part, the Prudential Authority will be responsible for legislation previously administered by the Banks Supervision Department of the SARB and the FSCA will be responsible for legislation previously administered by the FSB, with the exception of the insurance industry. Both the Prudential Authority and the FSCA have been designated as primary regulatory authority in respect of the insurance industry.

The designated regulator will act as the licensing authority and (primary) supervisory authority for the particular legislation during Phase one. Both regulators, however, will have the power to exercise supervisory powers and to apply and enforce the industry specific legislation on a Financial Institution - the Prudential Authority in respect of prudential aspects and the FSCA in respect of market-conduct issues. Each of the new regulators will also be able to issue new standards under the industry specific legislation. In this sense, the mandates of the new regulators are broader than the mandates of their predecessors.

The Act gives the new regulators supervisory and enforcement powers in addition to the powers afforded to the relevant regulator under the industry specific legislation. Furthermore, the powers of the Prudential Authority and the FSCA may be exercised in respect of controlling companies of Financial Institutions and entities that form part of "financial conglomerates", where such entities may not previously have been subject to the financial sector laws.

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Written by Jen Stolp, Partner, and Chantél Bredenhann, Associate, in Baker McKenzie's Banking & Finance Practice Group in Johannesburg

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