This article was written by Stephen Mason (special counsel) and Jodi Gray (senior associate).
South Africa’s financial sector is currently undergoing
significant regulatory reform, which will likely result in the
establishment of a “twin peaks” model of regulation in the
near future through the enactment of the Financial Sector
Regulation Bill at some point during 2016.
This article summaries the outcomes of the past few years
of reform efforts since the Government first announced its
reform program in 2011, looking at: the institutions that
will be established, the importance of financial stability and
the enforcement and review mechanisms that will be put
in place when the reforms are passed. It also provides an
overview of further reforms of the financial sector that are
in the pipeline.
Recent financial sector reform
Twin peaks institutional model
The Director-General of the National Treasury – Lungisa
Fuzile – recently told the Association for Savings and
Investment South Africa Conference:
We remain committed to seeing a financial sector,
which is transformed and supports financial inclusion.
We would like to see a financial sector, which continues
to innovate, but also treats customers fairly and
properly through offering them the right products and
services. We would like to see a financial sector, which
continues to be well regulated and therefore embraces
the good intentions behind the Twin Peaks model of
supervision. We are keen on a sector which continues to support key government initiatives on infrastructure
without compromising hard earned investor or client’s
The twin peaks regulatory model gives responsibility for
financial sector regulation to two separate independent
- The existing Financial Services Board will be
reconstituted as the Financial Sector Conduct Authority
(FSCA). The FSCA will have the role of enhancing
and supporting the efficiency and integrity of financial
markets and protecting financial customers, including
by promoting fair treatment of them.
- A new body, the Prudential Authority, will have
responsibility for prudential regulation of financial
institutions. The focus of its work will be enhancing
the safety and soundness of financial institutions and
market infrastructures (such as stock exchanges) and
protecting financial customers against the risk that
those institutions will fail to meet their obligations. The
Prudential Authority will be an independent body but,
because of the close linkages between its work and
the role of the South African Reserve Bank (SARB), the
Authority will be located within SARB’s administrative
framework and SARB will provide the Authority’s
The Bill requires the two agencies to cooperate in carrying
out their roles.
A centrepiece of the reforms is the ability of the Prudential
Authority and the FSCA to make wide-ranging prudential
and conduct standards to apply to financial institutions.
- Prudential standards will be aimed at ensuring the
safety and soundness of financial institutions. They will
be able to impose requirements on financial institutions
including in relation to capital adequacy, minimum
liquidity, “fit and proper persons” and risk management.
- Conduct standards will be directed towards
ensuring efficiency and integrity of financial markets
and protecting and treating financial customers
fairly. They will be able to impose requirements on
financial institutions including in relation to “fit and
proper persons”, disclosure, risk management and
governance, as well as the design and suitability of –
and marketing and distribution of - financial products
It remains to be seen how the new FSCA will craft these
“product suitability” standards and how it will balance the
need for innovation and risk taking against the objective
that financial institutions treat customers fairly through
offering them the right products and services.
The reforms also focus on the improved arrangements for
monitoring and managing “financial stability”, which means
that financial institutions are able to provide – and continue
to provide – financial products and services without
interruption and there is confidence that that will occur.
SARB has overall responsibility for financial stability, and
the reforms include a number of new powers for SARB as
well as new consultative bodies to advise SARB in carrying
out this mandate.
Enforcement and review mechanisms
The reforms provide the two regulatory bodies with a
comprehensive set of investigation and enforcement
powers, including directives, enforceable undertakings and
They also set up a new Tribunal, which will have extensive
powers to review or reconsider regulated decisions.
However, the Tribunal will only be able to substitute its own
decision in very limited situations. In addition, the reforms
provide for an ombud scheme, including the establishment
of an overarching Ombud Council.
Once these reforms are implemented, we expect a further
round of reforms to bring sectoral laws into line with the
current reform agenda and to effect the Government’s
objective of “treating customers fairly” in the financial sector.
In addition, work is underway to create a comprehensive
scheme for dealing with financial institutions in distress
(resolution). This work comes on the back of the failure
of at least one bank recently, and will be guided by
developments in overseas jurisdictions, particularly the UK.
It is expected that this work will be concluded by the end
of 2016 and will include reform measures such as “bail
in” arrangements, regulators’ ability to step in prior to
insolvency and a deposit guarantee scheme to protect
customers of financial institutions that fall into distress.