Financial Services Regulation - Monthly Update: November 2021

​​​​​​​Keep up to date on the most important Financial Services Regulation developments in South Africa during November 2021.

Financial Sector Conduct Authority

Withdrawal of draft Conduct Standard [-] of 2020 (RF) - Conditions for Investment in Hedge Funds ("draft Conduct Standard")

The Financial Sector Conduct Authority ("FSCA") announced on 19 November 2021 that it will not proceed with the implementation of the draft Conduct Standard due to changes in the regulatory landscape of the retirement fund industry since it published the first draft notice on the Conditions for Investment in Hedge Funds (“the Notice”) in November 2015. Following the publication of the Notice, the Financial Sector Regulation Act 9 of 2017 (“FSR Act”) was promulgated and the Financial Services Board was replaced with the FSCA.

A second draft of the Notice was converted into the Draft Conduct Standard and published for further public comment in October 2020. Four industry stakeholders submitted comments and held meetings with the FSCA, where they raised concerns about the necessity of the draft Conduct Standard, in light of the existence of Regulation 28 to the Pension Funds Act 24 of 1956, and especially considering the proposed amendments to Regulation 28.

The relevant proposed amendments to Regulation 28 include defining ‘hedge fund’ with reference to the Collective Investment Schemes Act 45 of 2002 (“CISCA”). The result of this would be that retirement funds would only be allowed to invest in CISCA-regulated hedge funds and permitted to use the services of managers registered in terms of section 42 of CISCA for managing members’ investments in hedge funds. Regulation 28 in its current form already contains protections against particularly risky investments in hedge funds.

Given these developments, the FSCA concluded that there was no longer a need for regulating investment in hedge funds through a Conduct Standard, so it has withdrawn the draft Conduct Standard.

To read more about the latest proposed amendments to Regulation 28, click here.

Prudential Authority

Withdrawal of the temporary treatment of restructured credit exposures due to the Covid-19 pandemic

The Prudential Authority ("PA") has announced the impending withdrawal of Directive 3 of 2020 ("D3/2020") which granted temporary relief from the minimum capital requirements relating to credit risk for banks, controlling companies and branches of foreign institutions. 

There has been a notable decrease in the demand for relief in terms of Covid-19-related restructuring. The PA has advised all banks of its intention to withdraw D3/2020 so that banks are given sufficient time to make the necessary changes internally.  D3/2020 will be withdrawn with effect from 1 April 2022, and transitional arrangements have been put in place until 31 March 2022.

Matters related to the licence conversion process

The PA has published Communication 8 of 2021 (the "Communication") to clarify its approach towards representations made by insurers on matters related to the licence conversion process concluded on 30 June 2020. 

The Communication applies to all licensed insurers that were converted from registered insurers under the Long-term Insurance Act, 1998 ("LTIA"), and the Short-term Insurance Act, 1998 ("STIA") to insurers licensed to conduct insurance business under the Insurance Act, 2017 ("Insurance Act").

According to the Transitional Arrangements in Schedule 3 of the Insurance Act (item 6(2)), the PA was supposed to convert the insurance licences within two years of the Insurance Act coming into effect.  After consultation and engagement with insurers, it was agreed that all licences would be converted by 30 June 2020.

Since reaching finality on the conversion process outlined above, the PA has observed that certain insurers have not fully analysed and matched some of the business they were conducting previously with the classes and sub-classes set out in Schedule 2 of the Insurance Act.  In addition, some non-life insurers appear still to have insurance products with a life component included (such as accident and disability benefits).

For this reason, the PA has given insurers 30 days to make final representations on outstanding licensing matters, failing which insurers who are conducting insurance business in any class or sub-class of insurance for which they are not licensed will be in contravention of section 45(4) of the Insurance Act. 

Final representations are due 30 days from the Communication's publication date of 26 November 2021.

Proposed arrangements to support operational continuity in resolution

The PA has published its discussion document entitled "Proposed arrangements to support operational continuity in resolution ("OCIR")" (the "Discussion Document") for public comment until 14 February 2022.

The Discussion Document expands on the proposals that were set out in the 2019 discussion paper entitled "Ending too big to fail: South Africa's intended approach to bank resolution". It should be considered in the context of the South African Reserve Bank's overall approach and arrangements to facilitate the resolution of designated institutions ("DI") in line with the provisions of the Financial Sector Laws Amendment Bill ("FSLAB").  In this context, operational continuity refers to ensuring the continuity of essential business lines and services necessary to maintain the provision, or facilitate the winding-down, of a DI's critical functions during resolution.

OCIR is one of the important elements in resolution planning. The Discussion Document proposes a number of arrangements that DI​s may adopt to support OCIR.

Financial Services Tribunal

Dr JC Pieterse v Liberty Lifestyle Retirement Annuity Fund and Another (case no: PFA7/2021)

On 1 November 2021, the Tribunal dismissed an application brought by Dr Pieterse (the complainant) for the reconsideration of a determination made by the Pension Funds Adjudicator (PFA) in respect of the investment losses that he had suffered because of the Covid-19 pandemic.

Dr Pieterse is a multi-investment portfolio holder with Liberty Life Limited.  These investment policies included a lifestyle retirement annuity policy, which commenced on 1 October 1989.  The selected retirement date was 1 October 2020. A few months earlier, a capital reduction of 20% was made to the Liberty Property Portfolio ("LPP") without Dr Pieterse being notified, as well as a reduced interim bonus rate from 6.25% to 5.5% for the remainder of 2020.  This was the main cause of Dr Pieterse's complaint to the PFA.

The reason for this reduction was the announcement of the country's national lockdown on 30 March 2020. Liberty made a capital adjustment of 20% to the value of properties held by the Liberty Property Portfolio because the portfolio was exposed to the office and hospitality sectors that were affected by the pandemic.

In making its determination, the PFA considered whether Liberty should have been held liable for the alleged loss suffered by the complainant.

As a starting point, the PFA looked at section 7D of the PFA which relates to the duties of the board to ensure that adequate and appropriate information is communicated to the members and beneficiaries of the fund informing them of their rights, benefits and duties in terms of the rules of the fund.

The PFA found that all customers are entitled to fair treatment and that financial service providers, representatives and intermediary service providers have to work together to align with the TCF outcomes.

Having considered this, together with Liberty's explanation why the decision to adjust was made subsequent to the pandemic, the PFA concluded that the investment was subject to market volatility due to the Covid-19 pandemic and that Liberty could not be held liable for the financial loss suffered by the complainant.

As part of his grounds for reconsideration, Dr Pieterse explained that: (i) the contributions spanned 31 years but were reduced by 6% six months before his retirement date; (ii) that this was a conservative portfolio and a reduction of 20% falls outside that window; and that (iii) Liberty had pre-empted the reduction by effecting it three days into the lockdown. 

Having assessed the matter, the Tribunal stated that what was central to this issue was whether the conduct of the trustees bore scrutiny in terms of section 7D(c) of the Act.  Liberty contended that it had adopted this strategy pursuant to expert advice. By Dr Pieterse's own admissions, his investments were doing well until the pandemic.  Accordingly, the Tribunal found that the complainant had failed to demonstrate that there was any negligence or recklessness by the trustees and concluded that there was no merit in the application. The application for reconsideration was dismissed.

Tape Aids for the Blind v Ashwin Anandh Palhad, PFA, Fundsatwork and Momentum PFA/2021 (28 October 2021)

Mr Palhad, a former employee of Tape Aids for the Blind ("Tape Aids"), was dismissed on 13 December 2019. He was a member of the Fundsatwork Umbrella Provident Fund ("the Fund") by virtue of his employment, and upon termination of his employment, he was entitled to a withdrawal benefit of ZAR 401 002.80. Tape Aids alleged that Mr Palhad had committed fraud and that they intended to lay criminal charges.

On 2 January 2020, Tape Aids asked the Fund to withhold payment of the withdrawal benefit to Mr Palhad until the legal proceedings against him had been finalised. This is allowed in terms of section 37D(1)(b)(ii) of the Pension Funds Act (“the Act”), in the event that a member of a pension fund has caused damage to their former employer by reason of any theft, dishonesty, fraud or misconduct, provided that the member has in writing admitted liability to the employer or judgment has been obtained against the member in any court.

In June 2020, the Fund was informed that Mr Palhad had laid a complaint against it with the Pension Funds Adjudicator. Although the Fund sent Mr Palhad a letter asking him to respond to the claims made against him by Tape Aids, he failed to do so.

The Fund held the view that Mr Palhad's alleged conduct did fall within the meaning of “theft, fraud, dishonesty or misconduct” in terms of section 37D(1)(b)(ii) of the Act. However, the Pension Funds Adjudicator concluded that the decision taken by the Board of the Fund to withhold the withdrawal benefit should be set aside on the following grounds:

  • The decision was not weighed against any material facts presented to the Fund and was taken without sufficient information to enable it to exercise proper discretion;
  • The Fund did not balance the potential harm to Mr Palhad against the potential harm to Tape Aids;
  • The Fund did not exercise its discretion in accordance with its fiduciary responsibilities;
  • The Fund did not consider an agreement between Tape Aids and Mr Palhad in which the parties acknowledged his misconduct and the disciplinary proceedings, but had nonetheless agreed that Tape Aids would process the final payment due to Mr Palhad; and
  • The Fund had not invited Mr Palhad to make representations regarding his former employer’s request to the Fund to withhold his withdrawal benefits.

Tape Aids applied to the Financial Services Tribunal ("Tribunal") for a reconsideration of the Pension Fund Adjudicator’s decision. The question before the Tribunal was whether the Fund had complied with its fiduciary duties in withholding the withdrawal benefit. The fiduciary duties of the Fund included:

  • acting with care;
  • balancing the competing interests of the member and the employer; and
  • having due regard to the strength of the employer’s claim.

The Tribunal found that the balancing of the competing interests of both parties implies that the matter should be carefully scrutinised by the Fund. It would be expected of an employer to act promptly in conducting its investigation and instituting proceedings against an employee accused of fraud, which would satisfy the Fund that prosecution of the matter is not delayed.

Even so, the Tribunal pointed out that a Fund should not be satisfied with only what the employer places before it, and merely rubber stamp an employer’s request to withhold a member’s benefit. A Fund must at least probe into the circumstances and consider the member’s financial status following the termination of his employment.

The Tribunal ultimately found that the Fund was not remiss in its fiduciary duties. The Fund had asked Tape Aids for a considerable amount of information, such as the rand value of the damage suffered, when Tape Aids commenced its investigation, the SAPS case number and a copy of the summons. Tape Aids had supplied the Fund with all the information in its possession, and furthermore, the damages exceeded ZAR 500 000, which indicated substantial fraudulent activity. Moreover, contrary to what was claimed by the Pension Fund Adjudicator, Mr Palhad had been given an opportunity to respond to the employer's allegations and had failed to do so.

The Tribunal then considered the balancing of both parties’ interests and the strength of the employer’s case. It considered that Tape Aids would be prejudiced to a far greater extent than Mr Palhad if the Pension Fund Adjudicator’s decision stood. If the withdrawal benefit was released, and judgment was subsequently obtained against Mr Palhad, Tape Aids would have to try to recover the damages from Mr Palhad. The objective of section 37D is also to protect the employer from loss suffered at the hands of the employee. It would serve no purpose if employees were allowed to defraud employers, then resign and claim a pension benefit.

The Tribunal concluded that, even though pension funds are mandated to exercise discretion and consider the merits of both the employer’s claim and the employee's response, the employer is not expected to prove fraud, dishonesty or theft to a pension fund, nor is it the role of a Fund to pass judgment on whether fraud, dishonesty or theft has been committed by a member. The Fund need only be satisfied that the employer has made out a prima facie case against the member, and that there are reasonable chances of success in the court proceedings.

The Tribunal ultimately upheld the application and referred the matter to the PFA for reconsideration.

National Credit Act

To see the latest case-law developments related to the National Credit Act, click here.


These materials are provided for general information purposes only and do not constitute legal or other professional advice. While every effort is made to update the information regularly and to offer the most current, correct and accurate information, we accept no liability or responsibility whatsoever if any information is, for whatever reason, incorrect, inaccurate or dated. We accept no responsibility for any loss or damage, whether direct, indirect or consequential, which may arise from access to or reliance on the information contained herein.

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Webber Wentzel > News > Financial Services Regulation - Monthly Update: November 2021
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