In March, the FSCA announced a Memorandum of Understanding (MoU) with the Broad-Based Black Economic Empowerment (B-BBEE) Commission. The announcement serves as a cautionary note regarding the Commission’s concern over, in its view, the inadequate submission of B-BBEE compliance reports by the financial sector.
Read: FSCA, B-BBEE Commission to work together to advance transformation
The purpose of the MoU between the FSCA and the B-BBEE Commission is to formalise and strengthen a relationship on issues of common interest, co-operation, collaboration, assistance, and the exchange of information. This is to fulfil their resultant responsibilities and obligations insofar as it relates to promoting the transformation of the financial sector.
In March 2023, the FSCA published its final Strategy for Promoting Financial Sector Transformation. It outlines how the FSCA aims to promote transformation within the current legislative framework, such as the Broad-Based Black Economic Empowerment Act and the Financial Sector Code (FSC), pending the finalisation of the Conduct of Financial Institutions (COFI) Bill for all financial institutions. In addition to this publication, the FSCA published a summary of the feedback received on the draft FSCA Transformation Strategy.
Read: FSCA drops proposed minimum B-BBEE Level 4 requirement
A two-phase approach
Phase 1 will focus on the role the FSCA will play within the current legislative framework, and Phase 2 will focus on the role the Authority will play within the COFI legislative framework.
The FSCA’s jurisdiction extends widely, encompassing insurers, collective investment schemes, retirement funds, brokers, financial planners, and wealth managers.
The FSCA intends to lower the entry barriers by adjusting regulatory demands according to the risks and scale of financial institutions. It may introduce phased implementation of requirements and explore tiered licensing. Moreover, when existing regulations pose obstacles for small entities, the FSCA encourages stakeholders to motivate how certain requirements hinder entry.
Phase 2 will require financial institutions to have in place a transformation plan aimed at achieving targets set under the FSC.
Upon implementation of the COFI Bill, which is said to be tabled in Parliament this year, the FSCA will be empowered to make standards relating to transformation. These standards will aim to provide specific details on requirements for transformation plans.
Currently, the FSCA does not have transformation objects as part of its regulatory regime; therefore, there are consequently no significant penalties for failing to meet the government’s transformation goals under existing legislation.
As the regulatory body for all financial institutions, the FSCA will take a stronger stance on transformation by requiring them to submit plans for achieving it. A failure to comply with specific BEE thresholds outlined in these plans could lead to the FSCA withholding licences.
Transformation plans during the licensing process
To stay within its designated mandate, the FSCA will base its transformation requirements on provisions outlined in the COFI Act (once implemented). Its mandate remains the enforcement of financial sector laws only, and not the B-BBEE Act or the FSC, which are the responsibility of the B-BBEE Commission and Financial Sector Transformation Council, respectively.
The impact of the inclusion of transformation in the licensing process can be summarised as follows:
- Financial institutions will be required to have transformation plans in place, likely becoming a mandatory requirement. These plans, tailored to each institution’s business model, will be assessed during licensing to ensure commitment to transformation objectives and FSC targets. Ongoing supervision will evaluate institutions’ performance against their transformation plans, with additional guidance provided as licensing frameworks are developed under the COFI Bill.
- Existing licensed institutions are expected to undergo a conversion process from their current sectoral licences to licences and authorisations governed by the COFI Act. As part of this conversion, these entities will likely be mandated to submit their transformation plans to the FSCA within a specified timeframe. The details of the new licensing framework, including the licence conversion process, will be communicated as the COFI Act is rolled out.
- The FSCA will ensure that transformation plans encompass all relevant aspects of the FSC for approval. There will be no preference given to specific elements.
Regulatory and supervisory actions
The FSCA has opted for a “proportionate approach” to transformation, abandoning a blanket requirement for a minimum Level 4 B-BBEE status. This approach entails exemptions and varying requirements based on factors such as turnover threshold, ownership structures, business models, and existing B-BBEE levels.
By eliminating the Level 4 requirement, the FSCA aims to adopt a risk-based approach, concentrating resources where transformation is most needed. This includes entities with high B-BBEE ratings but poor performance in specific areas, those showing no progress in transformation, and those unable to justify their inability to achieve higher transformation levels. The possibility of establishing a minimum B-BBEE level in the future remains open, pending consultation.
Through this approach, the FSCA seeks to foster sustainable transformation while balancing regulatory imperatives, ultimately paving the way for a more diverse and resilient financial sector.
This article was written by Johan Henning, Zelda Swanepoel, Safiyya Patel, and Gabi Richards-Smith, who are partners at Webber Wentzel, and Mariam Ismail, who is an associate at the law firm.
Disclaimer: The views expressed in this article are those of the writers and are not necessarily shared by Moonstone Information Refinery or its sister companies. The information in this article does not constitute legal advice that is appropriate to every individual’s needs and circumstances.
Where would Fintechs fit in, since they are not “true” FSPs? Should one merely inform the FSCA that the relevant Generic ICT Scorecard is submitted to B-BBEE ICT Sector Council?
Regrettably, I have not been able to obtain a definitive answer from our compliance department, apart from stating that the Financial Sector Transformation Code, which is enforced by the Financial Sector Transformation Council, does not apply to managers of investments on behalf of the public who are not subject to regulation by the FSCA. I have asked the Council for a response.