The FSCA has published its updated three-year Regulation Plan, which covers the period 1 April 2023 to 31 March 2026. These rolling three-year regulation plans assist the Authority in developing the regulatory framework falling within its purview in a strategic and focused manner, the FSCA says.
The Authority reviews and revises the plans every year.
The 2023 plan is set out in a 20-page document that consists of five sections. The two main sections, three and four, summarise the achievements in the 2022/23 year and outline the FSCA’s priorities for 2023/24, respectively.
The top-of-mind question for many people in the financial services industry is: what’s happening with the Conduct of Financial Institutions (Cofi) Bill?
It should not come as a surprise that a “key focus” of the FSCA for the next three years will be developing a new conduct regulatory framework under Cofi, the Regulation Plan says.
The FSCA believes that “good progress” has been made in preparing the bill for submission to Parliament. The Authority is supporting National Treasury in developing this primary legislation.
Many of the FSCA’s current conduct regulatory framework projects are “highly dependent” on the promulgation of the Cofi Bill, the plan states. Notwithstanding this, the FSCA is “preparing for all potential scenarios that may unfold” in respect of the Cofi Bill. It will ensure that the conduct framework it is designing can be given effect to through other means if there are significant issues or delays in impeding the promulgation of the bill.
The plan says the following progress has been made with developing the Cofi framework:
- The initial high-level design of the new framework (Phase 1) has been finalised. This design will evolve and be refined over time as the development of the new framework progresses.
- Targeted consultation on the themed frameworks (Phase 2) will start in the second half of 2023.
- The work focused on transitioning the existing sectoral laws into Cofi (Phase 3) will continue throughout 2023 with the intention of having initial formal proposals ready in the first half of 2024.
The transition work will also consider how to incorporate current policy projects, such as the Retail Distribution Review, and draft regulatory instruments into the new framework, particularly the following draft regulatory instruments that were placed on hold:
- Draft Conduct Standard for Co-operative Financial Institutions;
- Draft amendments to the Policyholder Protection Rules under the Long-term Insurance Act (LTIA) and the Short-term Insurance Act (STIA);
- Draft amendments to the regulations under the LTIA and the STIA;
- Draft Conduct Standard relating to governance, fit and proper, and other requirements for CIS managers;
- Draft Conduct Standard relating to advertising and marketing requirements for CIS managers; and
- Draft Conduct Standard relating to culture and governance for pension funds.
FAIS environment
No FAIS-specific interventions are earmarked for completion within the next three years. The focus will be on how to transition the existing FAIS framework to the Cofi Bill, the FSCA says.
The draft amendments to the FAIS Ombud Rules have been removed from the 2023 Regulation Plan. These draft amendments were published for comment in July 2022. They proposed increasing the FAIS Ombud’s compensation limit from R800 000 to R3.5 million. It has been decided that the Ombud Council is better placed to progress the amendments.
Insurance sector
When it comes to the insurance sector, one regulatory instrument has been carried forward into the latest regulatory plan: the Joint Standard on Outsourcing by Insurers, which was published for comment in September 2021.
The FSCA says the Joint Standard remains a priority. It is envisaged that the Joint Standard will be submitted to National Treasury so it can be sent to Parliament during the second half of 2023.
No other insurance-specific interventions are earmarked for completion within the next three years. However, various insurance-related matters will be considered as part of the process of transitioning the existing sectoral laws into the Cofi framework.
Retirement fund benefit administrators
The 2022 Regulation Plan indicated that the draft Conduct Standard relating to retirement fund benefit administrators would likely be collapsed into the Cofi Bill transition work. But this project has been reprioritised because the persistent problems in the section 13B administrator environment are being exacerbated by the lack of an appropriate framework, the FSCA said.
The FSCA said it will progress this project in some form. This could entail proceeding with a sightly “watered down” version of the Conduct Standard that addresses critical deficiencies in the framework but avoids potential misalignment with the future Cofi framework.
Retirement funds
One retirement fund-related project has been added to the 2023 Regulation Plan: Prudential Standard – Regulation 28 quarterly reporting requirements for pension funds.
The promulgation of the amendments to Regulation 28 in 2022 has resulted in the need to amend the Regulation 28 quarterly reporting requirements to align with the new Regulation 28. A draft Standard was published for public comment in November 2022, and the finalisation of the Standard is being prioritised.
Retirement fund-related projects listed in the 2022 plan that remain relevant include:
- Conduct Standard – Conditions for investment in derivative instruments by pension funds. The final version of this Conduct Standard was published on 11 May 2023.
- Prudential Standard – Requirements related to regulatory reporting and audited financial statements for pension funds. It is envisaged that this project will be finalised during 2024.
- Conduct Standard – Conditions for living annuities in an annuity strategy. A final round of informal consultation on the Conduct Standard took place during the first quarter of 2023, and the final draft Conduct Standard will be submitted to National Treasury for tabling in Parliament soon.
Hedge funds and CIS
In March this year, the FSCA published draft amendments to Board Notice 90 of 2014. The most significant is the proposal to allow unit trust funds with a Regulation 28 mandate to invest in hedge funds. The two other proposed changes are:
- Allowing CIS managers to include actively managed exchange traded funds in their portfolios; and
- Increasing the cap on an underlying portfolio’s offshore exposure from 20% to 45%.
The FSCA intends to submit the draft amendments to National Treasury, so they can come before Parliament by the end of 2023.
The abovementioned amendments are an interim measure pending the holistic review of Board Notice 90. The FSCA says the scope of this review has been extended to include a review of Board Notice 52 of 2015 (Determination on the requirements for hedge funds). It is likely that a draft Joint Standard replacing Board Notice 90 will be published for comment during 2024.
The interim amendments to Board Notice 90 are one of two new CIS-related projects added to the 2013 regulation plan.
The other project concerns amendments to Board Notice 257 of 2013 (Conditions in terms of which a foreign CIS may solicit investments in the Republic). The FSCA said a need has arisen to address shortcomings in Board Notice 257. Consultation on the draft amendments will take place in due course.
Standard on beneficial ownership coming
The General Laws (Anti-Money Laundering and Combating Terrorism Financing) Amendment Act, which was promulgated at the end of 2022, introduced a chapter in the Financial Sector Regulation Act pertaining to beneficial owners. The FSCA is intending to develop a Standard on beneficial ownership that will be published for public consultation in due course. The FSCA is also in discussions with the Prudential Authority to determine whether the Standard should be a joint initiative between the FSCA and the Prudential Authority and take the form of a Joint Standard.
Other cross-cutting regulatory projects
In addition to the abovementioned Standard on beneficial ownership, other cross-sectoral regulatory projects listed in the 2022 Regulation Plan that remain relevant include:
- Joint Standard – Culture and Governance. An initial framework has been developed, and the Authorities are intending to embark on consultation during the last quarter of 2023.
- Joint Standard – Information Technology governance and risk management. This Joint Standard has been submitted to Parliament and is expected to be finalised soon.
- Joint Standard – Cyber security and cyber resilience requirements. The Joint Standard has been subject to two rounds of public consultation and will be submitted to Parliament in due course.
- Draft Conduct Standard – Requirements for financial institutions providing financial education initiatives. The Conduct Standard was published for public consultation in March 2023, and the next steps will be determined and communicated once the public comments have been considered.
- Conduct Standard regarding industry practices and treatment of lost accounts and unclaimed assets. The 2022 Regulation Plan indicated that formal draft legislative proposals would be published during the first quarter of 2024, but now it seems more likely that legislative proposals will be published during 2025.
- Conduct Standard relating to open finance. Formal legislative proposals will likely be published in 2024.
