In December 2014 the National Treasury published the discussion paper entitled, “Treating Customers Fairly in the Financial Sector: A Draft Market Conduct Policy Framework in South Africa” (“the Market Conduct paper”), together with the second draft Financial Sector Regulation Bill (“FSR Bill”).
The two publications reflect important developments in the proposed reform of the financial regulatory system in South Africa that began in 2007 when the National Treasury launched a review of the South African financial regulatory system.
The intention of the review was to assess South Africa’s financial sector for any gaps and weaknesses (which were both highlighted and exacerbated by the 2008 global financial crisis – the scope of the review was consequently expanded after the crisis) and to propose reforms to improve and strengthen the financial regulatory system. The review culminated in the government policy paper, A Safer Financial Sector to serve South Africa better (2011), commonly known as the “Red Book”, which announced a wide-ranging set of proposals to reform the financial regulatory system in South Africa.
The Red Book was followed by the policy document, Implementing a Twin Peaks model of Financial Regulation in South Africa (2013) (“the Roadmap”), which provided more detailed proposals on implementing the reform of the financial regulatory system set out in the Red Book. One of the primary proposals, and central to South Africa’s regulatory reform, was a shift to a Twin Peaks model of financial regulation. Cabinet approved this proposed shift to a Twin Peaks model in July 2011.
Essentially, the Twin Peaks model contemplates that the financial services sector will have two primary regulators, being a prudential regulator (the Prudential Authority (“PA”)) and a new market conduct regulator (the Financial Sector Conduct Authority (“FSCA”)) that will replace the Financial Services Board (“FSB”). The PA’s objective will be to maintain and enhance the safety and soundness of financial institutions that provide financial products, whereas the FSCA will be responsible for the supervision of the conduct of business of all financial institutions, and the integrity of the financial markets.
The Twin Peaks reform process is to be implemented in a two phased approach. In the first phase the two new regulatory authorities, being the PA and the FSCA, will be established. The FSR Bill creates and gives effect to the two new regulatory authorities.
During this phase the FSB will be dissolved and replaced by the FSCA and both the FSCA and the PA will be structured to properly facilitate them carrying out their respective mandates. In this respect, while the FSR Bill leaves the existing sector specific financial law intact, importantly, it does provide additional supervisory and enforcement powers to the regulators, in addition to those available in existing industry-specific law, to provide them with the necessary tools and scope of responsibility to function effectively in the existing regulatory framework without being hamstrung by gaps in existing laws.
Phase two of the implementation process will be focused on revising, consolidating and harmonising the legal framework for prudential and market conduct in the financial sector. As it pertains to market conduct specifically, this phase two contemplates structural change through the repeal of current sector specific laws and the introduction of a new streamlined and overarching financial sector legislation - the Conduct of Financial Institutions Act (“COFI”).
Once the relevant primary legislation has been repealed and replaced as necessary, the focus will turn to similarly harmonising relevant subordinate legislation. The Market Conduct paper essentially introduces this phase two of the implementation process and provides information on the proposed approach to market conduct regulation in South Africa, explaining the policy framework within which the FSCA will operate. Importantly, it initiates and encourages public debate and comment on how best to achieve a stronger and more effective market conduct framework in the South African financial sector outlining the role and functioning of the new dedicated Market Conduct Authority
Public comment will be taken on the FSR Bill until 2 March 2015, thereafter a 3rd draft will be tabled in Parliament. There will be further opportunity to comment during the Parliamentary process. With respect Market Conduct paper comments will be taken on the proposed framework until 8th April 2015. This will be followed by an updated policy document and draft legislation supporting he proposed framework.