FSCA’s transformation strategy means strict compliance with BEE standards

The Financial Sector Conduct Authority (FSCA), which regulates all financial services providers, is preparing to demand transformation plans from participants, and could ultimately withhold licences from those who do not comply with specific black economic empowerment (BEE) thresholds.

The FSCA announced a memorandum of understanding with the Department of Trade, Industry and Competition’s B-BBEE Commission last week which, while rather short on detail, does warn that the commission “has been concerned about the unacceptable level of submission of B-BBEE compliance reports by the Financial Sector”.

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The FSCA’s ambit is broad and covers not only insurers, collective investment schemes, and retirement funds, but brokers, financial planners and wealth managers too – all these entities require licences to operate.

Under current legislation, there are no real penalties for non-compliance with government’s transformation objectives.

CoFI is coming

Once the Conduct of Financial Institutions (CoFI) Act is implemented, however, the FSCA sees itself empowered to “set standards in relation to transformation and allowing it to exercise reasonable supervisory and enforcement measures against financial institutions that do not uphold commitments to transformation”.

The act is the second leg of government’s Twin Peaks reform and is currently before parliament.

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Ahead of its implementation, the FSCA has begun preparing internally across its licensing, supervisory, and investigations and enforcement divisions. In this phase, it is concluding memoranda of understanding with other relevant entities and has commenced with data collection on ownership of licensed entities in preparation for enforcement.

It says financial institutions “will be required to have transformation plans in place and submit these plans to the FSCA at licensing stage … Already licensed institutions will be required to submit a plan as part of the COFI Bill framework licensing conversion process within the relevant transitional period”.

The FSCA adds that “non-submission of a transformation plan during the licensing process may result in a licence application being considered incomplete”.

This is a carefully veiled threat and it is reasonable to assume that an incomplete application will likely mean that a licence will be withheld.

In its Transformation Strategy, published last year, the FSCA says one of its key strengths “in supporting the transformation of the financial sector is its ability to take enforcement action against financial institutions”.

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“This contrasts with other stakeholders such as the FSTC [Financial Sector Transformation Council], which is not able to sanction institutions, and even the B-BBEE Commission, whose administrative actions are limited to instances of fraud or misrepresentation. The FSCA will ultimately be able to act against financial institutions that do not adhere to commitments made in terms of their transformation plans.”

FSCA directives

The FSCA says it could issue directives for non-compliance with an enforceable undertaking or administrative penalties for non-compliance if financial institutions fail to meet the targets identified in their transformation plans.

It says its mandate remains the enforcement of “financial sector laws only, and not the B-BBEE Act or the FS [Financial Sector] Code, which are the responsibility of the B-BBEE Commission and FSTC respectively”.

The FSCA says it will “apply a proportionate approach to transformation requirements”.

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“Entities that are not subject to the FS Code will not be required to submit transformation plans to the FSCA.”

Exempted micro enterprises, with annual turnover of up to R10 million, are deemed to have a B-BBEE status of a Level 4 contributor.

Black ownership of these businesses further boosts scores to level two or one.

Qualifying Small Financial Institutions are those with annual turnover of between R10 million and R50 million. The code says these “must comply with all of the elements of B-BBEE for the purposes of measurement unless exempted from compliance with any element or sub-element”.

Tread carefully, warns Sakeliga on FSCA request

Business lobby group Sakeliga has advised financial service providers “to carefully weigh up providing the FSCA with transformation plans, BEE certificates, or other compliance material unrelated to financial services”.

“The FSCA intends to use these against you,” it says.

“Non-compliance with such directives should be at the maximum level achievable after careful consideration of relevant regulatory and professional risks.”

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It says it is opposing CoFI as its “BEE provisions are harmful”.

“They restrict the available pool of financial services, limiting the public’s access to these services and raising their cost.

“They also constitute an unacceptable infringement on the freedom to trade or conduct a profession, and to run and own a business.”

This article was republished from Moneyweb. Read the original here