South Africa's current financial regulatory framework: Can we bank on it?
By Ruan Macleod
This has now become increasingly apparent but 10 years ago this was not the case. In 2008, the world saw the Global Financial Crisis (“GFC”). This was caused by, amongst others, sub-prime lending of AAA rated bonds in the United States of America. Banks around the world were tempted into buying these ‘collateralised debt obligations’ from rating agents that were unethical and unhindered by statutory obligations, a practice known as “predatory lending”, and once most debtors began to default the value of these debt obligations resulted in huge losses to banks around the world. Prior to the GFC, a lack of prudential awareness was often preceded by crisis, however, worryingly in the present day, poor market conduct and a lack of consumer protection led to situations like the GFC and its impact resulted in huge shocks throughout society.
South Africa’s present framework: our saving grace
There was widespread global cause for concern following the GFC. Many countries around the world struggled to maintain their economies. However, Australia was relatively unscathed by the world’s financial crisis. Its policies on global spending and its revolutionary “Twin Peaks” model of financial regulation had kept it safe. South Africa on the other hand, although feeling the impact of the GFC, fared slightly better than the majority of its global counterparts. In essence we were saved by the National Credit Act 34 of 2005(“NCA”), which regulates consumer credit, unfair credit and credit-marketing practices as well as reckless credit-granting. The effect of the NCA is that sub-prime lending is not allowed in South Africa. Furthermore, the Currency and Exchange Act 9 of 1933, which regulates legal tender, currency exchange and banking, is said to have also had a huge impact on keeping our economy safe. Exchange Control Regulations issued in terms of this Act, impose exchange controls that restrict the export of capital from South Africa.
A fragmented approach to financial regulation
South Africa has complicated banking systems that attempts to provide for institutional safety, consumer protection and economic stability. However, new legislation that aims to give effect to the current South African adoption of the Twin Peaks model seeks to unify and consolidate our banking laws. Initially, it seemed as if 2019 would be set to be the year that the defragmentation of the vast array of laws governing this aspect would occur. Regrettably, at the time of writing this article, a more realistic expectation would see the consolidation of our legislation set to begin occurring in 2020.
Our system is regarded as fragmented due to the vast amount of legislation which governs this field in practice. These laws operate in tandem, are mutually inclusive of one another and find harmony in their interpretation.
The Financial Sector Regulation Act (“FSRA”) was signed into law on 21 August 2017. This marked the beginning of the defragmentation of our financial legislation and has been welcomed as a huge step towards harmonisation of our financial laws with international norms. South Africa has been complimented for these positive steps and as the first African country to adopt the Twin Peaks model, which aims to promote and maintain financial stability as its core objective. In this regard, we join the ranks of countries like Australia, New Zealand, England and the Netherlands that have already adopted this model.
Twin Peaks implies two core pillars on which responsibility for regulation rests. The model recognises that the two pillars may have contradictory goals, and creates separate, but equal mechanisms to achieve those goals.
One peak, referred to as the “system stability” regulator, is responsible for creating and enforcing administrative regulations, aimed at reducing the risk of a financial crisis. The second peak is aimed at preventing misconduct and protecting consumers of financial products and services.
The FSRA achieves the model by creating two key regulators. The first is a Prudential Authority which is housed within and administered by the South African Reserve Bank (“SARB”), and serves as a safety net, by ensuring system-wide security and soundness of our financial institutions. The second is the Financial Sector Conduct Authority (“the Authority”), a separate and independent body, whose main task is to oversee system wide efficiency and integrity of our financial systems and providing strict forms of consumer protection.
The FSRA empowers these regulators to establish and issue industry specific standards under the specific legislation’ that governs each of the relevant industries that make up the broad financial sector, such as banks, insurance companies, retail credit providers and others. This will apply until a new Bill, the Conduct of Financial Institution Bill (“COFI”) is enacted and becomes law. COFI represents a shift in the current regulatory landscape as it does away with the current ‘rules and regulations’ approach to a ‘principles and outcomes’ based approach. To this end, section 30(1) of COFI provides that a financial institution must at all times conduct its business in a manner that prioritises fair outcomes for financial customers, so that there is confidence that their fair treatment is central to the corporate culture of the financial institution.
Section 30(2) provides that, in conducting its business, and in order to achieve the objectives set out in section 30(1), a financial institution must at all times:
conduct its business with integrity;
conduct its business at all times honestly, fairly, with due skill, care and diligence, and in the best interests of financial customers, and the integrity of the financial sector;
organise and control its affairs responsibly and effectively;
maintain adequate financial and other resources;
avoid or, where avoidance is not reasonable, manage, mitigate and disclose conflicts of interest;
deal with the Authority in an open and cooperative manner;
comply with the requirements or conduct standards issued in terms of this Act relating to market conduct and the conduct of business;
have due regard to the interests and fair treatment of its financial customers, including conducting its activity or activities transparently and with due regard to the information needs of its financial customers; and
ensure that its governing body is accountable for compliance with COFI.
In light of the provisions of COFI, one may ask how public opinion may affect a Court’s decision when sections of COFI, such as section 30 above are in dispute. With financial institutions having to maintain honesty, integrity and fairness in exercise of their functions it is inevitable that factors such as the legal convictions of the community may come into the fray.
With COFI already taking the spotlight in our major banks board meetings, one can rest easy that a higher norm of financial regulation will begin to take effect. At this stage the good news for consumers is that once it is enacted they will enjoy an even greater level of protection and transparency in the manner in which their funds are handled by financial institutions.