Keep up to date with key Financial Services Regulation developments in South Africa in May 2023.
Regulations related to the Amendments to the Non-Profit Organisations Act, 1997 as contained in the General Laws Amendment Act, 2022
On 8 May 2023, the Department of Social Development published Regulations related to the amendments to the Non-Profit Organisations Act, 1997 (NPO Act) in terms of the General Laws Amendment Act, 2022. These regulations came into effect on the same date.
These regulations are intended to:
- combat money laundering, funding of terrorist organisations and activities;
- specify the powers of the Directorate;
- provide administrative penalties;
- establish a register of persons disqualified from being office-bearers;
- provide clarity on fiscal sponsorship; and
- protect non-profit organisations (NPOs) from being abused by terrorist organisations or persons.
The Directorate is mandated to create and maintain a register of persons who are disqualified from serving as office-bearers in terms of a court order made in terms of the NPO Act or any other law. The details of the persons listed in the register will include their full names, identity numbers (or passport numbers and dates of birth), date on which the disqualification expires, why they were disqualified, their disqualification, and case numbers and dates of the court orders (where applicable).
The regulations impose obligations on certain registered NPOs and require South Africa to apply a risk-based approach to ensure that measures are implemented to mitigate and prevent money laundering and terrorist financing, in line with the risks the Financial Action Task Force (FATF) identified in its assessment. The Minister is also mandated to set out measures to protect NPOs from potential terrorist financing abuse and address known threats of terrorist financing abuse of NPOs, in line with the risk-based approach.
Finally, access to information may be requested from a registered NPO according to the Promotion of Access to Information Act, 2000. Any person may inspect the register of NPOs at the office of the Director of NPOs between 08:30 and 12:00 and 13:30 to 15:30 from Monday to Friday.
FSCA FAIS Notices 25 of 2023 - Exemption of persons rendering financial services in respect of crypto assets from certain requirements
On 11 May 2023, the Financial Sector Conduct Authority (FSCA) published FAIS Notice 25 of 2023: the Exemption of Persons Rendering a Financial Service in Relation to Crypto Assets from Certain Requirements, 2023 (Notice).
Exemptions applicable to crypto asset financial service providers, their key individuals and representatives
Exemption from section 13 of the General Code of Conduct and Board Notice 123 of 2009 (Notice on Requirements for Professional Indemnity and Fidelity Insurance Cover for Providers, 2009).
A crypto asset financial service provider (crypto asset FSP) is exempted from section 13 of the General Code of Conduct and Board Notice 123 of 2009 only as it relates to the rendering of financial services in respect of crypto assets.
Temporary exemption from regulatory examinations
A crypto asset FSP and its key individuals are exempted from Part 4 of Chapter 3 of the Determination of Fit and Proper Requirements for Financial Services Providers, 2017 (“Determination”) for 18 months from the effective date of the Notice, which is 11 May 2023.
Exemption applicable to crypto asset supervised representatives
Exemption from regulatory examination requirements
A crypto asset supervised representative, who, before publication of the Notice, was never appointed as a representative of a financial service provider (FSP), is exempted from Part 4 of Chapter 3 of the Determination. This is conditional on the crypto asset supervised representative completing the relevant regulatory examination within two years of first being appointed as a representative to render financial services in relation to crypto assets.
A crypto asset supervised representative who, before publication of the Notice, was only appointed to:
- Render financial services for a Tier 2 financial product; or
- Perform the execution of sales,
must comply with the applicable regulatory requirements within two years of first being appointed as a representative to render financial services, other than the execution of sales, in relation to crypto assets.
Lapsing and withdrawal of exemption
Failure by a crypto asset FSP, its key individuals, representatives and crypto asset supervised representative to comply with any condition referred to in the Notice will automatically result in the exemption no longer being applicable to that crypto asset FSP, their key individuals, representatives and crypto asset supervised representative.
FSCA Conduct Standard 1 of 2023 (RF) - Conditions for investment in derivative instruments for pension funds
On 11 May 2023, the FSCA published a conduct standard setting out the conditions for retirement funds to invest in derivatives (conduct standard).
In the statement supporting the conduct standard, the FSCA said that derivatives have a role to play in retirement fund portfolios. However, because of the inherent risks of these instruments, including market transparency, counterparty risk, and liquidity risk, they require closer monitoring, analysis, and intrusive supervision than most traditional investment products.
The draft conduct standard was published for public comment in June 2020. Commentators said some of the requirements would result in additional costs, because the underlying assets of the derivative instruments would have to be reported more strictly by asset managers, requiring additional resources. The FSCA acknowledged that the standard would, in some instances, result in increased costs, as it might require changing systems and processes. It said the additional costs were justified because of the expected positive outcomes that would be achieved.
The conduct standard sets out overarching principles for funds using derivatives.
It also sets conditions relating to, among other things, the following:
- Permissible uses of derivative instruments;
- Net derivative positions must at all times be covered by appropriate reference assets;
- Valuation of derivative instruments;
- Determining the allowable counterparties for purposes of derivative instruments;
- Providing guidance on the calculation of exposure to derivative instruments;
- Setting out the allowable netting provisions for derivative instruments;
- Determining the conditions for collateral; and
- Prescribing the conditions for reporting.
A transitional period of 12 months has been given to implement in the conduct standard.
The conduct standard is available on the FSCA's website.
Demarcation Regulations: 2023 Escalation of Policy Benefits – LTIA and STIA
On 16 May 2023, the Minister of Finance published the Annual Policy Benefit Escalations applicable to the Demarcation Regulations as regulated under section 72 of the Long-term Insurance Act 52 of 1998 (LTIA) and section 70 of the Short-term Insurance Act 53 of 1998 (STIA). The Demarcation Regulations indicate which types of contracts are regulated under the LTIA and the STIA as health policies, and accident and health policies respectively, so they are excluded from the ambit of the Medical Schemes Act 131 of 1998.
The Demarcation Regulations provide that the amounts in sub regulation (1) will escalate annually from 1 April of each year after the effective date. This escalation will be in line with the Consumer Price Index (CPI) annual inflation rate as published by Statistics South Africa.
The escalations are contained in Annexure A of the LTIA and Annexure B of the STIA.
Proposed Directive – Capital Treatment of Investments in Insurance Entities by Banks
The Prudential Authority (PA) on 4 May 2023 published the proposed directive on the capital treatment of investments in insurance entities by banks (proposed directive). The PA published the directive in terms of section 6(6) of the Banks Act, 1990. The directive is aimed at all banks, controlling companies, branches of foreign institutions, eligible institutions and auditors of banks or controlling companies.
The proposed directive serves to inform banks, branches of foreign institutions and controlling companies (collectively referred to as ‘banks’), as well as auditors of banks, about the capital treatment of investments in insurance businesses. It also specifies how the limited recognition framework provided for in section 38 of the regulations to the Banks Act must be applied by banks with significant investments in insurance entities. This applies where the bank owns more than 10% of the issued common share capital or where the entity is an affiliate as envisaged in section 38(5)(b)(i) of the regulations.
To preserve the integrity of the qualifying regulatory capital and reserve funds of banking groups, it is essential to prevent potential contagion between the banking and insurance sectors. Banks and banking groups are therefore required to remove all amounts from their balance sheets that relate to investments in licensed insurance businesses and subsidiaries, including cell captive arrangements that give rise to insurance liabilities. When banks invest in insurance businesses, stresses or other activity within those entities can affect the financial performance of the investing bank, and vice versa. The deconsolidation of insurance businesses’ balance sheets aims to address this problem.
The regulations align with the Basel Committee on Banking Supervision (BCBS) Basel III framework. They prescribe the treatment of investments in entities that are outside the scope of regulatory consolidation. Section 38(5)(b) of the regulations states that, instead of a full deduction, specified items shall each receive limited recognition when a bank or controlling company calculates its common equity tier 1 (CET1) capital and reserve funds. Recognition is capped at 10% of the bank or controlling company’s common equity or CET1 capital and reserve funds. Relevant items include:
- significant investments in the common shares or CET1 capital of unconsolidated
financial institutions such as banks, insurance and other financial entities;
- any relevant amount related to mortgage servicing rights; and
- any relevant amount related to deferred tax assets that arise from temporary differences.
Finally, the directive deals with the threshold deduction method to be used for investments in insurance entities or activities by banks, subject to the PA's prior written approval and specified conditions. An application to apply the threshold deduction method must contain:
- details of the insurance entity or activity to which the limited recognition will be applied;
- the envisaged capital impact; and
- a benchmark of the application against the provisions of Circular 4 of 2013 to demonstrate the eligibility of the investment to be threshold deducted.
The proposed directive is available on the PA’s website. The comment period closed on 17 May 2023.