Keep up to date on the most important Financial Services Regulation developments in South Africa during August 2021.
Financial Sector Conduct Authority
Joint Communication 4 of 2021: Joint standard on margin requirements for non-centrally cleared over the counter derivative transactions: implementation roadmap and request for information
The purpose of this communication is to communicate the implementation roadmap that is developed by the Financial Sector Conduct Authority (FSCA) and the Prudential Authority (PA) (jointly the Authorities) for Joint Standard 2 of 2020: Margin requirements for non-centrally cleared over the counter derivative transactions (Joint Standard). Access this Joint Standard here.
The Authorities have also included the publication of Joint Information Request 1 of 2021; and have made certain forms available for providers that intend to apply for the use of: (a) the quantitative portfolio margin model (QPMM) (for the computation of initial margin requirements), this is Form A; and/or (b) the risk-sensitive quantitative model-based haircut (RQMH) approach (for the computation of collateral haircuts), this is Form B.
The Authorities have developed a high-level implementation roadmap (subject to revision) set out in Appendix A. Appendix A addresses various structural, technical and operational requirements of the Joint Standard and is intended to guide project planning initiatives within the Authorities, as well as counterparties and providers as captured by the Joint Standard.
In terms of the Joint Information Request 1 of 2021, the information required for completion and submission to the Authorities is set out in the questionnaire annexed to the Joint Information Request, Annexure A (General implementation questionnaire). Annexure A must be completed by all providers that are subject to the Joint Standard and thereafter submitted to the Authorities by latest 1 December 2021.
The Authorities have envisaged that the providers and counterparties will be required to submit such information to the PA daily. The implementation of this proposal is intended to comprise of two phases. Phase one is intended to relate to an interim requirement, in terms of which providers and counterparties will be required to submit information on a predetermined Microsoft Excel template. Phase two is projected to focus on a long-term strategic solution, providers and counterparties will submit information into a dedicated technological solution. The phased implementation of the strategic reporting requirements and solution is still under progress and incidentally, the PA will consider publishing an implementation roadmap potentially in 2022.
Accordingly, all counterparties and providers are encouraged to apply the full extent of their internal technical and governance procedures to ensure compliance with the Joint Standard. Access this Joint Communication here.
Publication of draft Conduct Standard for Co-operative Financial Institutions and accompanying documentation for public comment
The FSCA has published the draft conduct standard for the conduct of co-operative financial institutions (Draft Conduct Standard for CFIs) for public comment. All comments pertaining to the Draft Conduct Standard for CFIs are due to the FSC on or before 24 September 2021.
The statement of need accompanying the Draft Conduct Standard for CFIs notes that the need for the Conduct Standard stems from the Co-operative Banks Act promulgated in 2008 to diversify the financial services industry and promote financial inclusion through a legislative framework that allowed member-based deposit taking financial co-operatives to register as CFIs.
Furthermore, the FSCA has identified an urgent need to develop a conduct standard for CFIs due to the uniqueness of the CFI business model, and the Draft Conduct Standard for CFIs will serve as the first step to rolling out a market conduct regulatory framework for the relatively small CFI sector in South Africa. In doing so, the Draft Conduct Standard for CFIs sets out the high-level business principles and governance requirements with which CFIs must operate. Access the Draft Conduct Standard for CFIs here.
FSCA Press Release: Update on Contingent Business Interruption claims
The FSCA continues to investigate policyholder complaints regarding the assessment and payment of Contingent Business Interruption (CBI) claims. Some of the reasons for pending claims include insurers still awaiting outstanding documentation from their policyholders and certain claims resulting in litigation regarding the quantum of a claim. The following documents are required by the insurer for a successful claim:
- A copy of the Annual Financial Statement/s for the last three financial years depending on the requirements stated by the insurer;
- A letter from the Accountant/Auditor confirming the amounts reported to be a true reflection of the books of account;
- Completion of templates/spreadsheets as per the request of the insurer;
- Proof of the disease in the radius as at 27 March 2020, and if not, the date the disease first entered the radius. Other insurers have utilised information from the National Institute of Communicable Diseases (NICD) that documents the spread of Covid-19 across South Africa. Where CBI is specifically covered at the premises only, policyholders must submit proof and confirmation of the disease at the insured premises/address;
- Proof of the original booking, cancellation of accommodation and refund of deposits to guests for claims under the Cancellation of Bookings extension; and
- Proof of Unemployment Insurance Fund (UIF) Covid-19 Temporary Employment Relief Scheme (TERS) payments that the business received.
The FSCA advises that policyholders collate the required documents and contact the claims department of the insurer and other persons where assistance is required. Access this press release here.
FSCA Communication: Submission of compliance reports, handover reports and irregularity reports for Financial Services Providers (FSPs) for 2021
The FSCA has published Communication 16 of 2021 to provide clarity regarding the submission of compliance reports (annual reports submitted by compliance officers), handover reports (report submitted by compliance offer whose appointment has been terminated) and irregularity reports (report informing the FSCA of any irregularity - actual or suspected - which the compliance officer has become aware and in their opinion is material). for the year 2021.
According to the communication, no compliance report needs to be submitted during 2021 and there is also no prescribed format for handover reports this year. However, all irregularity reports must still be submitted to the FSCA, together with all outstanding compliance reports dating up to the year 2018. Access the communication here.
FSCA Press Release: The FSCA’s expectations regarding premium increases on funeral policies
The FSCA has issued a press release (based on Communication 17 of 2021) expressing the Authority's concern with the high premium increases that have been implemented by insurers on funeral policies.
Accordingly, the FSCA has reminded insurers of their obligations as set out in the Policyholder Protection Rules (PPRs) issued under section 62 of the Long-term Insurance Act, 52 of 1998 (LTIA). Rule 1.2 of the PPRs requires insures to act with due skill, care and diligence when increasing premiums. In addition, section 46(1)(a) of the LTIA prescribes that the premiums set by insurers be actuarially sound.
As such, the FSCA maintains that if the policies were not correctly priced at the policy's inception, and exorbitant increases are thus implemented due to the impact of Covid-19 or underwriting losses, the result would be unfair outcomes for policyholders which fall foul of the applicable regulations. Access the press release here.
FSCA Press Release: FSCA suspends Exchange licence of ZAR X (PTY) LTD
On 20 August 2021, the FSCA suspended the exchange licence of ZAR X PTY LTD (ZAR X) in terms of section 60(1) of the Financial Markets Act (FMA). The suspension resulted from ZARX’s non-compliance with section 8(1)(a) of the FMA, read with Regulation 8 and 43(2) of the FMA Regulations, which relate to the liquidity and capital adequacy requirements of an exchange.
The suspension is coupled with conditions which requires ZAR X to:
- Immediately inform all affected persons, including (i) issuers with listed securities on its exchange; (ii) authorised users of its exchange; (iii) investors; (iv) appointed CSD’s; and all its stakeholders that its licence has been suspended.
- Provide the FSCA with weekly progress reports in respect of the matters referred to in the notice.
Accordingly, if ZARX fail to rectify its non-compliance with the capital adequacy requirements, the FSCA intends to cancel ZARX’s exchange licence three months after the date of suspension. Access the press release here.
South African Reserve Bank / Prudential Authority
Financial Soundness Standards for Insurers – Technical Supervisory Observation
The Financial Soundness Standards for Insurers (FSI) - Technical Supervisory Observation (Supervisory Observation) aims to assist stakeholders in understanding the rationale for a specific topic in the FSIs. Supervisory Observations aim to explain, expand on or supplement technical information on a topic. In this Supervisory Observation, the topic aims to explain the current view of the Prudential Authority (PA) regarding what an encumbered asset is, and additionally what the PA considers when deciding if and how an insurer may recognise the encumbered asset.
The legislation relevant to encumbered assets can be found at paragraphs 4.5 and 4.6 of Prudential Standard FSI 2.1: 'Valuation of Assets and Liabilities Other than Technical Provisions' (FSI 2.1), read with section 36(6)(i)(v) of the Insurance Act 18 of 2017 (the Act). Further, the topic expands on the PA’s position with generic examples on the treatment of encumbered assets. It is advised that insurers contact the PA for a case-by-case assessment of their transactions or set of transactions.
The first aspect that the Supervisory Observation addresses is the challenge that encumbered assets represent. The PA advances that the challenge is the availability of the assets to cover the insurer’s losses whenever they may occur rather than the risk that the transaction or set of transactions is or may be exposing the insurer to.
Accordingly, there are various definitions for encumbered assets that exist and that typically suggest that an asset could be encumbered if a company (or person) has an asset or recognises an asset on its balance sheet. However, for different reasons the company has limited control over the asset. This lack of control could be attributable to a situation where, for example, consent is required from another party before the asset may be used, sold or allocated.
The treatment of encumbered assets is explained by describing the salient features of some types of transactions or sets of transactions. Some of these transactions include: (i) margin accounts, (ii) repurchase transactions, (iii) foreign branch of a local insurer, (iv) securities lending transactions, (v) en commandite partnership transactions, (vi) leases and (vii) reinsurance deposits. This section of the Supervisory Observation intends to assist in the understanding of encumbered assets and does not to create a ruleset for the general treatment of encumbered assets.
For example, margin accounts are often required for derivative transactions and a margin account consists of initial and variation margins. When the margin account is recognised as an asset on the balance sheet of the insurer, an encumbered asset could be present with the following features:
- The margin account asset is regarded as encumbered because the monies cannot be used for purposes other than mitigating the risk of the derivative transaction;
- Full recognition of the margin account as an encumbered asset is possible, but is limited to the value of the associated liability; and;
- The programme allowance is potentially limited to a percentage of the assets that are referenced for the purpose of the use of derivatives.
Furthermore, as set out in paragraph 4.5 of FSI 2.1, it is a contravention of the Act to have encumbered assets without the express approval of the PA. These requirements are only applicable to insurers, this excludes the controlling company of an insurance group, however, an insurer with an asset holding intermediary (AHI) should also comply with these requirements since the AHI’s assets and liabilities are recognised on the balance sheet of the insurer. Access this Supervisory Observation, here.