The introduction of a new financial services regulatory model

22 Jan 2018

On 21 August 2017, the Financial Sector Regulation Act (“FSRA”) was signed into law by President Jacob Zuma. While the FSRA has been enacted, the commencement dates are yet to be announced by the Minister of Finance. The enactment of the FSRA signifies an overhaul of the entire financial regulation system, in which South African financial regulation will be divided into prudential regulation and conduct regulation, with two separate regulatory bodies. This new financial sector regulatory model is commonly referred to as the Twin Peaks model.

The first regulatory body introduced by the FSRA is the Prudential Authority (“PA”), which shall form part of the South African Reserve Bank (“SARB”), with the purpose of enhancing the safety and soundness of financial institutes and maintaining financial stability. The introduction of the Prudential Authority will see the banking supervision department of the SARB being dissolved and replaced with the Prudential Authority. The second regulatory body is the Financial Sector Conduct Authority (“FSCA”), which will eventually replace the Financial Services Board, and will regulate the conduct of financial services businesses.

The FSRA requires financial sector regulators (such as the PA, FSCA, Financial Intelligence Centre and the National Credit Regulator), together with SARB, to co-operate and collaborate when performing their functions in terms of financial sector laws such as the National Credit Act and the Financial Intelligence Centre Act. In order to facilitate the above, the FSRA establishes the Financial System Council of Regulators (“FSCR”). The FSCR is a forum in which senior officials of the financial sector regulators can address industry-wide concerns and ensure that there is consistency in action between the financial sector regulators.

The promulgation of the FSRA is the first step in South Africa’s adoption of the Twin Peaks regulatory model which seeks to promote a more proactive and integrated approach to finance regulation, with less reliance on prescriptive laws and more focus on overarching broad based outcomes which corporate entities must demonstrate they are achieving.

For the time being, the existing suite of financial service legislation will remain in force. Financial institutions will continue to be regulated by their current governing legislation with no change to the existing financial services licences, save for a change in the licensing authority. To this end, banks and insurers will be allocated to the PA while the remaining financial institutions will be allocated to the FSCA. Institutions wishing to apply for new licences may do so subject to existing governing legislation.

While it may appear that the enactment of the FSRA will not impose any imminent changes to the regulation of the financial services industry (other than those of an administrative nature) the FSRA is the precursor for the phasing out of industry specific legislation. The FSRA has laid the foundations for the adoption of new financial sector legislation such as the Conduct of Financial Institutions Bill, the Special Resolution Bill, the Insurance Bill and the Financial Sector Levies Bill. Consequently, the enactment of the FSRA signifies the dawn of a new age in the financial services sector.

See also: The ‘Fatal Flaw’ in South Africa’s financial regulation

(This article is provided for informational purposes only and not for the purpose of providing legal advice. For more information on the topic, please contact the author/s or the relevant provider.)