Profound changes in financial sector

National Treasury’s aim of a twin peak regulatory framework will change the financial sector in South Africa profoundly. The ministry suggested the first draft bill towards twin peak regulation. Call for public comments by 7 February 2014.

1)   Background and main objectives

The National Treasury aims for a twin peaks regulatory framework, a comprehensive framework for regulating the financial sector. The implementation of the twin peaks reform is a multi-year project, with a two-phase process envisaged. In this context the National Treasury published a DRAFT bill for comment, which covers the first phase and  is to establish the following two regulatory authorities:

• A new Prudential Authority within the Reserve Bank which will be responsible for the oversight of the safety and soundness of banks, insurers and financial conglomerates.
• A new Market Conduct Authority to protect customers of financial services firms, and to improve the way financial service providers conduct their business.

The draft Bill gives the South African Reserve Bank (SARB) primary responsibility to oversee financial stability. Thus, the Bill creates a statutory inter-agency Financial Stability Oversight Committee (FSOC), chaired by the Governor of the Reserve Bank, with financial stability powers.

In the first phase, a few changes will made to existing sector legislation (e.g. the Banks Act), other than re-assigning responsibility for implementation of legislation to the two regulators (e.g. the formal responsibility for the Banks Act is shifted from the Banking Supervision Department to the Prudential Authority).

The draft also creates the concepts of “mono-regulated” and “dual regulated” institutions. Mono-regulated entities are those that undertake activities that only give rise to market conduct regulation (e.g. advisory and intermediary services). Dual-regulated entities are those that undertake activities that give rise to both prudential and market conduct regulation (e.g. banking and insurance).

In the second phase, the existing sectoral legislation (like the example of the Banks Act given above) will be gradually amended or replaced with laws that more appropriately align with the twin peaks framework.

2)   Additional objectives

In addition to creating the two regulators, the other objectives of the Bill are:

• Enhancing coordination and cooperation between regulators

FSOC shall ensure a coordinated and immediate response to risks to the stability of the financial system; a Council of Financial Regulators (“CFR”) will coordinate all regulators, standard-setters and other agencies.

• Balancing operational independence and accountability of regulators

The Bill seeks to strengthen the operational independence and accountability of regulators (within a governmental policy framework).

• Establishing a crisis management and resolution framework

The Bill provides for resolution powers and identifies the Reserve Bank as the resolution authority in South Africa. Nevertheless, the Bill suggests for crisis management decisions to be taken by the Minister of Finance.

• Creating a Financial Services Tribunal and strengthening enforcement

The Bill also establishes a shared enforcement mechanism, the Financial Services Tribunal, which is aimed at encouraging compliance with all aspects of the new regulatory regime.

• Strengthening ombuds schemes

The Bill seeks to strengthen the ombuds system by putting measures in place to enhance public awareness of the ombud system and requiring all financial institutions to be members of an ombud scheme. Among others, FSOC will set norms and standards for ombud schemes including those to ensure the independence of such schemes.

3)   Public comment

Stakeholders are invited for comments on the draft Bill. Written comments should be sent to: [email protected] or faxed to 012 315 5206 on or before 7 February 2014.

Public workshops are planned in January 2013. Details will be communicated in early January and interested persons are invited to submit their contact information to the email address or fax number given above.

[Financial Sector Regulation DRAFT Bill_11 Dec 2013]

[Financial Sector Regulation DRAFT Bill_public comment_Gazette_11 Dec 2013]