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Financial Sector Regulation

South Africa’s banking and financial services industry had earned international kudos for weathering the storm which, in 2008 and subsequently, swept through and over their Northern Hemisphere counterparts. This was, in part, due to the Republic’s regulatory regime and in which the Financial Services Board had played a significant role.

However, 2017 saw a reshuffle in the legislation controlling and regulating the financial markets in South Africa. The introduction of the Financial Sector Regulation Act 2017 brought with it the repeal of the legislation concerning the FSB, replacing it with the Financial Sector Conduct Authority.

At the same time the Prudential Authority has been established, and the two organs have complementary objectives and functions. In very broad terms, the former takes care of the financial markets, and the latter oversees the institutions participating in the financial markets. The main aim is to promote and enhance the integrity of the financial sector, protect users and customers, and promote and maintain financial stability.

A. Duties of staff and members of the various bodies

  1. The Prudential Committee is responsible overall for the management and administration of the Prudential Authority. It is staffed by the Governor of the Reserve Bank, the CEO of the Prudential Authority, and the Deputy Governors of the Reserve Bank. It appoints subcommittees, which can include persons who are neither members of the Prudential Committee, nor staff members of the Prudential Authority. The members of all these committees must act honestly, in good faith, for proper purpose, and with reasonable care and diligence. Any such member1 who fails to live up to these obligations commits a criminal offence.

  2. It is a crime for any member of these committees to use the position, or any information gained by being a member, to benefit himself (in any way) or any other person, to impede the Prudential Authority’s ability to perform its functions, or to cause detriment (in any way) to other persons.2

  3. The provisions set out above equally apply to the Commissioner, Deputy Commissioner, and each member of any subcommittee of the Financial Sector Conduct Authority.3

  4. Similarly, any person who is or has been a staff member of the Prudential Authority who uses the position, or any information gained by being a member, to benefit himself (in any way) or any other person, to impede the Prudential Authority’s ability to perform its functions, or to cause detriment (in any way) to other persons, commits a criminal offence.4

  5. The same applies to past and current members of staff of the Financial Sector Conduct Authority.5

B. Licensing

  1. To render a financial service, or provide a financial product or market infrastructure as a business or part of a business requires one to be licensed in terms of a specific financial sector law,6 or the National Credit Act, or the National Payment System Act. To do so without being licensed is an offence.7

  2. If no specific financial sector law provides for such a licence, then the licence to apply is one granted in terms of the Financial Sector Regulation Act. Failure to conduct such a business and not be so licensed is a criminal offence.8

  3. To render a financial service (as contemplated by section 3 of the Financial Sector Regulation Act) requires a licence in terms of the Act. To conduct business in such a service without such a licence is a crime.9

  4. To provide a financial product (as contemplated by section 2 of the Financial Sector Regulation Act) requires a licence in terms of the Act. To conduct business in such products without such a licence is a crime.10

  5. It is a criminal offence falsely to pretend to be licensed for a specific purpose.11

  6. It is also an offence to allow someone else falsely pretend that you are licensed for a specific purpose.12

  7. It is a crime to contravene any of the conditions upon which a licence has been granted.13

C. Information, investigations and inspections

  1. A licensed financial institution, its outsourced services vendor, and any of its representatives are referred to as a ‘supervised entity’. If the responsible authority for a financial sector law serves a notice on such a supervised entity calling for information or documentation to assist it in performing its functions, failure to comply with the notice constitutes a criminal offence.14

  2. Likewise, an official of a financial sector regulator who is busy with an on-site inspection (to verify compliance, for example) can give the supervised entity a written directive to produce a specified business document. It is an offence not to comply with such a directive.15

  3. If such a directive has been given, and the document in question is removed from the premises, concealed, interfered with, or destroyed the supervised entity, or the person on whom the directive was served is guilty of an offence.16

  4. It is a crime to hinder or interfere with an on-site inspection in terms of this Act.17

  5. Investigators appointed in terms of the Act have wide powers when it is suspected that an offence is being committed, or that there is non-compliance, etc. The following are all criminal offences in relation to such investigations:

    • to interfere with or hinder its conduct;18
    • to fail to comply with the requirements of a notice or directive issued by the investigator;19
    • not to answer all questions by the investigator fully and truthfully;20
    • refuse or fail to comply with any reasonable request by an investigator;21
    • to give information which is false or misleading, including by omission.22

D. Enforcement

  1. To ensure compliance with the Act, a regulator can issue directives to any financial institution, key person, representative or even contractor to a financial institution. It is a crime not to comply with any such directive.23

  2. Another measure that the responsible authority for a financial sector law can impose is to make a ‘debarment order’ in respect of a person. This prevents him from being involved (in any way) in rendering such services, or acting in any capacity, and for such period as specified in the order. It is an offence to engage in conduct that, directly or indirectly, contravenes the order.24

  3. Where someone is under a debarment order, and he engages a third party to do something which would contravene the order if he did it, that other person is also guilty of a crime if he knew (or reasonably should have known) that entering into the arrangement would have that effect.25

  4. If a debarment order has been made, the licensed institution which has employed or engaged that person must, as soon as it becomes aware of the order, take all reasonable steps to ensure that the order is effective.26

E. Ombud schemes

An ombud (sometimes, ‘ombudsman’) is an independent official appointed to provide a check on government activity in the interests of citizens, and to oversee the investigation of complaints of improper government activity against citizens. So the ombud becomes a representative of the people – much like our Public Protector. There can also be an ombud in public corporations – again, to protect the interests of the public, against the corporation.

The Financial Sector Regulation Act establishes an Ombud Council, the objective of which is to assist in ensuring that financial customers have access to, and are able to use, affordable, effective, independent and fair alternative dispute resolution processes for complaints about financial institutions in relation to financial products, financial services, and services provided by market infrastructures. The Ombud Council is administered and operated by a Board.

  1. The members of the Board must act honestly, in good faith, for proper purpose, and with reasonable care and diligence. Any such member who fails to live up to these obligations commits a criminal offence.27

  2. It is a crime for any member of the Board to use the position, or any information gained by being a member, to benefit himself (in any way) or any other person, to impede the Ombud Council’s ability to perform its functions, or to cause improper detriment (in any way) to other persons.28

  3. Similarly, any person who is (or has been) a staff member of the Ombud Council who uses the position, or any information gained by being a member, to benefit himself (in any way) or any other person, to impede the Ombud Council’s ability to perform its functions, or to cause detriment (in any way) to other persons, commits a criminal offence.19

  4. The Ombud Council can issue directives to ombuds and so-called ombud schemes. It is an offence for any person to whom such a directive has been issued not to comply with it.29

  5. The Ombud Council can also issue a debarment order in respect of an ombud. This prevents him from performing a specified role in relation to an ombud scheme. It is an offence to engage in conduct that, directly or indirectly, contravenes the order.30

  6. Where an ombud is under a debarment order, and he engages a third party to do something which would contravene the order if he did it, that other person is also guilty of a crime if he knew (or reasonably should have known) that entering into the arrangement would have that effect.31

  7. The Ombud Council can give an ombud or an ombud scheme a written directive to provide specified information or to produce a specified document. It is an offence not to comply with such a directive.32

  8. There are a number of restrictions upon financial institutions in relation to ombud schemes. They:
    • may not describe any internal procedure for dealing with or resolving complaints made to it by financial customers as an ombud scheme;
    • may not describe a person that deals with or resolves such complaints as an ombud;
    • must disclose to its financial customers applicable ombud schemes, and how to contact and submit complaints to those schemes;
    • may not require or invite a financial customer to make a complaint to an:
      • ombud, unless the person so charged with this function is part of a recognised industry ombud scheme or a statutory ombud scheme; or
      • ombud scheme, unless the ombud scheme concerned is a recognised industry ombud scheme or a statutory ombud scheme.

    It is an offence for a licensed financial institution to contravene any of these provisions.33

  9. It is an offence for a financial institution that is a member of a recognised industry ombud scheme not to comply with the governing rules of the scheme.34

  10. There are various reporting obligations upon ombuds and ombud schemes. It is an offence to contravene any of the requirements in this regard.35

F. The Financial Services Tribunal

  1. The function of the Financial Services Tribunal is essentially to reconsider decisions that have been made by regulators, the Ombud Council, financial services providers, and decisions regarding a market infrastructure. Panels are appointed for the hearings relating to such reconsideration. The person presiding over a panel can direct that a specified person must appear before the panel to give evidence and answer questions, etc. It is a crime to refuse to comply with such a directive.36

  2. It is further a crime to refuse to take an oath (or make an affirmation) relating to the evidence that such a person is about to give.37

G. Falsehoods

  1. It is an offence to provide information to a regulator or the Reserve Bank (in connection with the operation of a financial sector law) which is false or misleading.38

  2. If you are required to keep accounts or records in terms of a financial sector law, you commit a crime if the accounts or records do not correctly explain that to which they relate, and you were reckless as to whether they did so, or intended them to be so, or intended (thereby) to hinder or obstruct a regulator or investigator.39

  3. If you give to your business or undertaking a representation implying an association or connection with the Financial Sector Regulator, without its consent, you commit a crime.40

H. Reporting

  1. An auditor of a licensed financial institution must report to the Prudential Authority about any matter which in his view is likely to cause the institution to be financially unsound; or that it is contravening a financial sector law; or which may cause the audit not to be completed; or may result in an adverse or qualified opinion. He commits an offence if he fails to lodge such a report.41

  2. It is a criminal offence to victimise, prejudice or penalise any person in any way who reported as required by the Financial Sector Regulation Act.42

  3. The Reserve Bank and regulators can use and share information they acquire, including personal information about people. However, they can do so only to the extent required to perform their statutory functions. If information is shared or disclosed contrary to this restriction, it is an offence.43

  4. In such a case, both the employee or the official concerned, and the Financial Sector Regulator or the Reserve Bank, as the case may be, commit the offence.44

I. Miscellaneous

  1. If a financial institution commits an offence in terms of a financial sector law, and a member of its governing body failed to take all reasonable steps to prevent the offence, he too is guilty of the offence.45

  2. Conversely, if a key person of a financial institution commits an offence in terms of a financial sector law, and the financial institution failed to take all reasonable steps to prevent the offence, it too is guilty of the offence.46

  1. Section 265 read with section 46(1). ↩

  2. Section 265 read with section 46(2). ↩

  3. Section 265 read with sections 69(1) and 69(2). ↩

  4. Section 265 read with section 52. ↩

  5. Section 265 read with section 74. ↩

  6. In terms of a Schedule to the Act, these are:

    Pension Funds Act, 1956 (Act 24 of 1956)

    Friendly Societies Act, 1956 (Act 25 of 1956)

    Banks Act, 1990 (Act 94 of 1990)

    Financial Services Board Act, 1990 (Act 97 of 1990)

    Financial Supervision of the Road Accident Fund Act, 1993 (Act 8 of 1993)

    Mutual Banks Act, 1993 (Act 124 of 1993)

    Long-term Insurance Act, 1998 (Act 52 of 1998)

    Short-term Insurance Act, 1998 (Act 53 of 1998)

    Financial Institutions (Protection of Funds) Act, 2001 (Act 28 of 2001)

    Financial Advisory and Intermediary Services Act, 2002 (Act 37 of 2002)

    Collective Investment Schemes Control Act, 2002 (Act 45 of 2002)

    Co-operative Banks Act, 2007 (Act 40 of 2007)

    Financial Markets Act, 2012 (Act 19 of 2012)

    Credit Rating Services Act, 2012 (Act 24 of 2012)

    Insurance Act, 2017 (Act 18 of 2017) ↩

  7. Section 266 read with section 111(1)(a). ↩

  8. Section 266 read with section 111(1)(b). ↩

  9. Section 266 read with section 111(2). ↩

  10. Ibid. ↩

  11. Section 266 read with section 111(4). ↩

  12. Section 266 read with section 111(5). ↩

  13. Section 272(5) read with section 280. ↩

  14. Section 267(1) read with section 131(1)(b). ↩

  15. Section 267(2) read with section 132(4)(a)iii. ↩

  16. Section 267(3). ↩

  17. Section 267(4) read with section 133. ↩

  18. Section 267(5) read with section 139(1). ↩

  19. Section 267(5) read with section 139(2). ↩ ↩2

  20. Section 267(5) read with section 139(3). ↩

  21. Section 267(5) read with section 139(4). ↩

  22. Section 267(5) read with section 139(5). ↩

  23. Section 268(1) read with section 149(1). ↩

  24. Section 268(2) read with section 153(4)(a). ↩

  25. Section 268(3) read with section 153(4). ↩

  26. Section 268(4) read with section 153(5). ↩

  27. Section 270(1) read with section 189(1). ↩

  28. Section 270(1) read with section 189(2). ↩

  29. Section 270(2) read with section 202(11). ↩

  30. Section 270(3) read with section 205(8). ↩

  31. Section 270(4) read with section 205(8). ↩

  32. Section 270(5) read with section 207(2). ↩

  33. Section 270(6) read with section 210. ↩

  34. Section 270(7) read with section 215(1). ↩

  35. Section 270(8) read with section 217. ↩

  36. Section 271 read with section 232(5)(a). ↩

  37. Section 271 read with section 232(5)(b). ↩

  38. Section 273. ↩

  39. Section 274. ↩

  40. Section 275. ↩

  41. Section 272(3) read with section 252. ↩

  42. Section 272(4) read with section 254. ↩

  43. Section 272(1)(a) read with section 251. ↩

  44. Section 272(1)(b). ↩

  45. Section 276(1). ↩

  46. Section 276(2). ↩

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