Keep up to date on the most important Financial Services Regulation developments in South Africa in June 2021.
Financial Sector Conduct Authority
Effective date of Joint Standard 2 on the margin requirements for non-centrally cleared over-the-counter derivative transactions
On 2 June 2020, the Financial Sector Conduct Authority and the Prudential Authority (the Authorities) published Joint Standard 2 of 2020, which deals with margin requirements for non-centrally cleared OTC derivative transactions.
The general requirements of the Joint Standard are that an OTC derivative provider must: (a) calculate and exchange initial and variation margins based on the relevant amount of counterparty credit risk arising from its non-centrally cleared OTC derivative transactions; (b) have processes, board-approved policies and procedures in place that are sufficiently robust in respect of the relevant OTC derivative transactions; (c) have dispute resolution procedures in place with its relevant counterparties before the commencement of any relevant transaction; and (d) that all margin transfers be subject to a minimum transfer amount, provided that the aggregate of the initial margin and variation margin does not exceed ZAR 5 million.
According to the Authorities, the benefits of implementing the Joint Standard will include, amongst other things: consistent, transparent and improved pricing across the OTC derivative market; improved soundness and safety of financial institutions, which will reduce systemic risk; and international compliance for financial institutions that trade internationally. To access this Joint Standard, click here.
Joint Communication 2 of 2021 notifies all interested persons of the effective date of Joint Standard 2 of 2020, which is 16 August 2021. To access this Joint Standard, click here.
Joint Communication 3 of 2021: Publication of draft Joint Standard – Information technology risk management
On 9 June 2021, the Financial Sector Conduct Authority (FSCA) and the Prudential Authority (PA) published the draft Joint Standard 3 of 2021 on Information Technology Risk Management, which is open for public consultation for the next six weeks from the draft standard's date of publication.
The main objective of the Joint Standard is to prescribe the requirements that a financial institution must comply with on information technology risk management. It is intended to apply to a bank, bank controlling companies, a mutual bank, a licensed insurer, a manager of a collective investment scheme, a market infrastructure, a discretionary financial services provider (FSP), and an administrative FSP. There are four annexures attached to the Joint Communication. Two of these are discussed below.
Annexure A is a notice inviting submissions on the draft joint standard, stating where, how and by when submissions are to be made. Annexure B is a statement explaining the need for, the expected impact of, and the intended operation of the draft Joint Standard. For example, when critical systems fail and customers cannot access financial products and services, the business operations of a financial institution may immediately come to a standstill. The impact on customers would be immediate, with significant consequences for the financial institution, including reputational damage, regulatory breaches, and revenue and business losses. Annexure C is the draft Joint Standard on IT Risk Management.
The commencement date of the Standard is expected to be 1 January 2022. This Standard is governed under section 107, read with sections 105, 106 and 108 of the Financial Sector Regulations Act of 2017. Comments on the draft Standard must be submitted using the comments template by 26 July 2021. To access this Joint Standard, click here.
South African Reserve Bank
IFWG CAR Working Group position paper on crypto assets
On 11 June 2021, the Inter-governmental Fintech Working Group (IFWG) published its long-awaited Crypto Asset Policy Paper. The policy paper shows how the IFWG is officially moving towards regulating crypto-asset services in South Africa and bringing an end to the long-standing "user-beware" crypto asset regulatory position established in 2014.
The South African crypto asset industry will now begin to transition from its current unregulated landscape to one that is subject to the regulatory purview of the Financial Sector Conduct Authority (FSCA), the South African Reserve Bank (SARB) and the Financial Intelligence Centre (FIC). To access our previous article on this publication, click here.
Johannesburg Stock Exchange
JSE Clear (Pty) Ltd Rules
On 23 June 2021, JSE Clear (Propriety) Limited published a notice of application for a Central Counterparty and Independent Clearing House licence, in terms of section 47(4)(a) of the Financial Markets Act 19 of 2012, on the FSCA website. It also published the notice in two newspapers, Business Day and The Star. The proposed clearing house rules are available on the FSCA's website for public comment, with a deadline of thirty days from the date of publication. To access these rules, click here.
Government Gazette No: 44701 of 2021
On 11 June 2021, the SARB designated Efficacy Payments (Pty) Limited (Efficacy) as a clearing system participant in terms of section 6(3)(a) of the National Payments Act. Efficacy is the first pure fintech-based payment company in South Africa that has received SARB's approval to be a clearing participant. This notice is interesting, as it is also the first time that one of the key reasons for SARB's approval was Efficacy's tech-based business model, giving effect to financial inclusion. This designation notice is a perfect case study to support the argument that services which promote financial inclusion are a very important factor in a non-bank being approved to clear payments. In the past, it was solely a question of transaction volume and risk. To access this notice, click here.
Government Gazette No: 44651 of 2021
The Cybercrimes Act 19 of 2020 (the Act) was promulgated on 1 June 2021. The Act creates a number of offences against various activities, such as: the dissemination of data messages that incite violence or threaten persons with violence; those which contain an intimate image; cyber fraud, forgery, extortion, damage to property and theft of incorporeal property; the unlawful and intentional access of a computer system or computer data storage medium; and the unlawful interception of or interference with data, among other things. The Act does not define "cybercrime" and this in turn creates a broad ambit for the application of the Act, which defines "data" as electronic representations of information in any form.
The Act will be of particular importance to electronic communications service providers and financial institutions because they are obliged to assist in the investigation of cybercrimes. In the event of furnishing a court with certain particulars, financial institutions may be required to hand over data or even hardware on application. In addition, financial institutions are required to report (without undue delay and where feasible) cyber offences within 72 hours of becoming aware of them.
Non-compliance with the provisions of the Act include a fine (not more than ZAR 50,000 per offence) or imprisonment for a period of up to 15 years, or both a fine and imprisonment. To access this notice, click here.
Updates to the Financial Sector Laws Amendment Bill
In light of the public hearings of the Standing Committee on Finance (Committee), a revised draft of the Financial Sector Laws Amendment Bill [B15 – 2020] (FSLAB) has been published to reflect the amendments proposed by various stakeholders. To access the proposed amendments, click here.
National Treasury has also published its updated responses to issues raised during the public hearings of the Committee. Various recommendations were made on revising the definitions section of the FSLAB to harmonise it with other existing financial sector laws, such as the Financial Sector Regulation Act (FSR Act) and the Banks Act. The Reserve Bank has confirmed that the Competition Commission will continue to be involved in mergers or amalgamations and none of the provisions in FSLAB seek to support anti-competitive behaviour.
In line with statements made by COSATU, it has been emphasized that the bail-in strategy will be employed in the event that a bank should fail. This contrasts with the previous solution which relied on using taxpayer funds. To read more on the updated responses, click here.
On 15 June 2021, Treasury held an informal briefing on the FSLAB before the Finance Committee of the National Council of Provinces. To access the informal briefing, click here.
Public hearings on the National Health Insurance Bill
Public deliberations on the National Health Insurance (NHI) Bill continued this month as virtual submissions were made to the Portfolio Committee on Health by various stakeholders. As with previous submissions, stakeholders continued to support and recognise the principle of universal access to health care and welcomed the initiatives taken to improve access to health care services. Despite this, the general consensus was that the NHI Bill still has some way to go before it is ready for promulgation.
Stakeholders echoed one another's concerns about the financial viability of the NHI Fund and government's ability to adequately implement the Bill.
A call was made to initiate more pilot projects to assess the efficacy and progress of the NHI Bill. To access the submissions, click here.
Code of conduct for the processing of personal information by the banking industry
The Information Regulator has issued the Code of Conduct for the processing of personal information by the banking industry (Code) after an application was made by the Banking Association of South Africa (BASA). The Code outlines specific obligations on the members of BASA when processing the personal information of data subjects. According to the Code, the standards do not replace the Protection of Personal Information Act (POPIA), which went live on 1 July 2021. Although the Code does not intend to be an exhaustive list of all the processing activities undertaken by member banks, it provides extensive rules on the conditions for lawful processing, in accordance with the provisions of POPIA, to ensure that all information is processed subject to the consent of the data subject and other limitations imposed by law. Comments on the Code were due fourteen days after the publication of Government Notice no. 492. To access the Code, click here.
Supreme Court of Appeal
Lewis Stores (Pty) Ltd v Summit Financial Partners (Pty) Ltd and Others  ZASCA 91
On 25 June 2021, the Supreme Court of Appeal (SCA) pronounced on the proper interpretation of section 141(1)(b) of the National Credit Act (NCA).
The first respondent, Summit Financial Partners (Pty) Ltd (Summit), had lodged a complaint with the Regulator alleging that the appellant, Lewis Stores (Pty) Ltd (Lewis), had repeatedly breached section 102 of the National Credit Act by raising compulsory and unreasonable delivery charges for the goods sold by Lewis. Having been dismissed by the Regulator, Summit applied for leave to refer the matter directly to the Tribunal, citing (a) the importance of the parties, (b) the interpretation of the National Credit Act and (c) reasonable prospects of success as the basis for the appeal. Although Lewis rejected these claims, leave to appeal was granted by the Tribunal. On appeal to the High Court, the court a quo also found in favour of Summit.
The matter then progressed to the Supreme Court of Appeal, where the court had to consider three distinct issues: (1) whether a decision of the Tribunal to permit direct referral in terms of section 141(1)(b) of the National Credit Act is appealable under section 148(2) of the same legislation, (2) what test the Tribunal should have applied in assessing the application and (3) whether Summit had satisfied the test.
On the first issue, Lewis argued that it had participated in a hearing before the full panel of the Tribunal and was therefore entitled to appeal against the Tribunal's decision to grant leave to appeal. Summit argued that, on a proper construction, the proceedings did not constitute a "hearing" as contemplated in section 148(2)(b) and the granting of leave to appeal did not amount to an appealable decision.
In reaching its decision, the Supreme Court of Appeal considered various provisions of the National Credit Act. The SCA found that section 141(1)(b) does not contemplate a formal application or hearing, and merely involves a reconsideration of the ruling given by a Regulator. Moreover, the section confers a wide, largely unfettered discretion upon the Tribunal to permit a direct referral in respect of a complaint. Accordingly, the court found that the granting of leave to refer a complaint directly to the Tribunal is not a decision which must be arrived at in a hearing, nor is it susceptible to appeal in terms of section 148 of the National Credit Act. To access the judgment, click here.