The publication of the final amendments to Joint Standard 1 of 2020 by the FSCA means that the significant owners of FSPs must now comply with the honesty and integrity requirement from which they were previously exempted. In addition, they need to follow the prescribed procedures for assessing and reporting on fitness and propriety.
The final amendments are contained in General Notice 1 of 2022, which was published on 16 September.
Last month, the Authority published, for comment, the draft amendments to General Notice 3 of 2020, which exempted the significant owners of FSPs (excluding FSPs that are also banks, insurers and managers of collective investment schemes) from the requirements of Joint Standard 1.
Read: FSCA wants ‘honesty and integrity’ Joint Standard to apply to the significant owners of FSPs
Joint Standard 1 of 2020 (“Fitness, propriety and other matters relating to significant owners”) applies to the significant owners of financial institutions and to financial institutions, unless exempted.
A “significant owner” is defined in section 157 of the Financial Sector Regulation Act. Essentially, a person is a significant owner of a financial institution if he or she, directly or indirectly, alone, or together with a related or inter-related person, can control or materially influence the institution’s business or strategy.
Responding to comments on the draft amendments, the FSCA drew attention to the fact that the exemption from the “competence and financial standing” requirement remains.
The exemptions that no longer apply to the significant owners of FSPs pertain to:
- Honesty and integrity; and
- Procedures for assessing fitness and propriety, and reporting.
FSCA’s responses to comments
The FSCA’s responses to some of the comments it received may help FSPs to interpret and apply Joint Standard 1 of 2020 and General Notice 1 of 2022.
Deadline for compliance
Question: Section 5.1 of Joint Standard 1 requires assessment and attestation of the significant owner’s fitness and propriety within one year of the date of the commencement of the joint standard. By when will this now be required by FSPs?
FSCA’s response: The requirement will need to be complied with within one year from the effective date of the amendment of the exemption (General Notice 1 of 2022).
Attestation of fitness and propriety
Question: In terms of the requirement for annual assessment and attestation of fitness and propriety by the significant owner, where must this information be retained – must it be retained by the significant owner or reported to the FSP?
FSCA’s response: In terms of section 5.1 of Joint Standard 1, the requirement for annual assessment and attestation of fitness and propriety by the significant owner is imposed on the significant owner, not the financial institution.
Independent confirmation
Question: What, in terms of section 5.5 of the joint standard, would constitute appropriate independent confirmation?
FSCA’s response: Independent confirmation may be provided by an internal auditor or an external auditor. However, the Authorities (FSCA and the Prudential Authority) will, in their request, specify the type of independent confirmation that is required. The type of independent confirmation will depend on the nature, scale and complexity of the financial institution, or the nature of the significant owner.
If a significant owner is not fit and proper
Question: Joint Standard 1 is unclear on what is expected if any of the existing significant owners fall into one of the categories in section 6. To have to withdraw ownership could have significant detrimental effects on a small business.
FSCA’s response: If any of the factors listed in section 6.2 applies to a significant owner, it would constitute prima facie evidence that the significant owner is not fit and proper, and the significant owner might be in breach of the joint standard. In such an instance, paragraph 5.4 will apply:
“A financial institution must notify the Authorities, in the manner and form determined by the Authorities, within 30 days of it becoming aware of non-compliance with this joint standard by a significant owner.”
However, the significant owner can still attempt to make an argument that it is fit and proper. This will be a factual consideration, depending on the specific circumstances. If it is concluded that a significant owner is not fit and proper, regulatory action might be taken.
Reporting obligation
Question: By exempting significant owners (as opposed to the FSPs), the FSCA is placing the onus on the FSP to assess its shareholders. This places the management of FSPs in an invidious position in that they are required to report any issue to the regulator regarding their principals, who could retaliate and remove the reporting manager(s).
FSCA’s response: The significant owners of particular FSPs, and the FSPs themselves, were already exempted from Joint Standard 1 of 2020 (through General Notice 3 of 2020). The amendment to General Notice 3 of 2020 removes the exemption in as far as it relates to the honesty and integrity requirements.
Joint Standard 1 of 2020 places the obligation to assess fitness and propriety on the significant owner, not on the financial institution. The significant owner is also obliged to report its significant ownership to the FSCA.
As an additional failsafe, if a financial institution becomes aware of significant ownership or non-compliance, it is required to:
- Notify the FSCA of significant ownership or potential significant ownership; and
- Report non-compliance with the joint standard.
Therefore, the financial institution is not obliged proactively or actively to assess fitness and propriety and report non-compliance; it must merely do so if it becomes aware of such a situation.
Application to foreign FSPs
Question: Will the removal of the exemption apply to foreign FSPs that have no presence in South Africa and operate only on a cross-border basis? Where an FSP has no presence in South Africa, and its home-state requirements include stringent and equally effective requirements related to fitness, propriety, and other standards expected of significant owners and senior managers, the requirements of Joint Standard 1 should not apply directly to the foreign FSP.
FSCA’s response: Foreign FSPs and their significant owners will have to comply with the honesty and integrity portions of Joint Standard 1.
The Authority disagrees with the proposal that the requirements should not apply to foreign FSPs. The local requirement should not place a too onerous burden on foreign FSPs, in addition to their home-state requirements already in place.
Download the notice
To download General Notice 1 of 2022, go to www.fsca.co.za > Regulatory framework > Notices > General > 2022.
For more information, contact the FSCA’s Regulatory Framework Department by emailing Hannelie Hattingh at Hannelie.hattingh@fsca.co.za.
