What is a standard and why does it matter to me?
The Conduct of Financial Institutions Bill ("COFI") will, once finalised and enacted, disrupt the regulation of the financial sector. The first draft of COFI proposes to repeal 13 financial sector laws, replacing them with a single comprehensive market conduct law. COFI sets out the broad principles that will govern the conduct of financial institutions, but specific requirements and rules will be published in Conduct Standards, Prudential Standards or Joint Standards. Standards are a relatively new innovation in the South African legal landscape, having first been introduced by the Financial Sector Regulation Act, 2017 (the "FSRA"): in this article we will unpack what you can expect and highlight why it is critically important that you ensure that you are geared up to consider and comment on draft standards as they are published.
Who is subject to a standard?
The FSRA empowers the Financial Sector Conduct Authority (the "FSCA") and the Prudential Authority ("PA") (each the "Authority", as applicable) to adopt standards. The FSCA may direct Conduct Standards to financial institutions and their representatives, key persons and contractors (a person with whom a financial institution enters into an outsourcing arrangement, other than an independent contractor). The PA may direct Prudential Standards to financial institutions that provide financial products (product suppliers) and securities services, market infrastructures and key persons of financial institutions.
What do standards prescribe?
Prudential Standards are aimed at ensuring the safety and soundness of financial institutions, reducing the risk of financial crime and maintaining financial stability. Conduct Standards are aimed at ensuring the efficiency and integrity of the financial markets, ensuring fair treatment of customers, ensuring that financial education programs are appropriate, reducing the risk of financial crime and assisting to maintain financial stability. Together, the PA and the FSCA may make Joint Standards on any matter on which either of them is empowered to make a standard.
The Insurance Act, 2017 (the "Insurance Act"), which governs short- and long-term insurers, also empowers the PA to prescribe Prudential Standards on any matter that is required or permitted to be prescribed in terms of the Insurance Act. The PA has since exercised this power and prescribed numerous Prudential Standards, governing a diverse range of matters, including in respect of financial soundness of insurers and insurance groups,, outsourcing and risk management.
COFI empowers the FSCA to issue Conduct Standards in respect of the myriad of topics set out in COFI. These topics include loyalty programmes, remuneration of employees, structure of financial institutions, composition of boards and marketing practices. Indeed, at the end of each of the sections of COFI (dealing with licencing, financial products, financial services, marketing and promotion, distribution, advice and discretionary investment management, post-sales barriers and obligations, safeguarding of assets and reporting), there is a list of items in relation to such topics in respect of which the FSCA is empowered to issue Conduct Standards.
We can accordingly expect that standards will be an important tool used by the PA and the FSCA to fulfil their supervisory mandates.
What must the Authority consider when proposing standards?
When publishing standards the relevant Authority must consider several factors, including the objective of applying the applicable financial sector law proportionally with reference to the nature, scale and complexity of the relevant financial institutions, their products and services. In addition, the Authority must consider the requirement to ensure fair outcomes for customers, and its mandate to facilitate access to the market for emerging financial institutions. The Insurance Act requires the PA to consider certain additional factors when prescribing Prudential Standards, including the interests of policyholders, developmental and financial inclusion and the nature, scale and complexity of different kinds or types of insurers.
Standards must not be published in isolation. The Authority is required to consider other legislation and the potential impact of the proposed standards on the targeted financial institutions, conglomerates and other groups to whom they apply. In terms of the memorandum of understanding concluded between the FSCA and the PA, the two authorities are also enjoined to strive for alignment and consistency and for this reason should publish Joint Standards where appropriate.
Once a standard has been passed it must be regularly assessed for effectiveness and should be amended or replaced if any deficiencies or gaps are identified.
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