Financial Services Regulation - Monthly Update: October 2021

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

Financial Sector Conduct Authority

FSCA statement on universal life policies

On 4 October 2021, the FSCA published a statement on the complaints received by the office of the Ombudsman for Long-term Insurance (OLTI) in respect of universal life policies.1 These include grievances on the high premium increases that have been implemented by insurers, the lack of suitable alternative policy cover options being provided and instances where premiums have been deducted from the savings portion of the policies without the permission of policyholders.

In response, the FSCA has confirmed that it has begun consultations with industry stakeholders to develop solutions aimed at achieving fair customer outcomes.  This consultation follows previous engagements with the four main life insurers that offer universal policies, which culminated in having certain additional requirements being introduced to the Regulations and Policyholder Protection Rules issued in terms of the Long-term Insurance Act, 52 of 1888.  The additional requirements included rules in respect of product design (Rule 2), determining premiums (Rule 11) and the review of premiums (Rule 15).

The FSCA has now engaged various stakeholders to better understand the current concerns of industry.

Update on the Private Security Sector Provident Fund (PSSPF) investigation

The FSCA has issued a press release following various requests for it to release the report on its investigation on the PSSPF.  The FSCA has reiterated that, in line with the provisions of section 251 of the Financial Sector Regulation Act, 2017 (FSR Act), it does not release any of its investigation reports to the public.  Investigation reports are only made available to those individuals against whom regulatory action has commenced, thus allowing an opportunity for these individuals to comment on the allegations levelled against them, in accordance with the audi alteram partem principle.

Whilst the FSCA has stated that it cannot disclose any further details about its findings, it has made assurances that the matter is receiving due attention.

FSCA communication: Notification of Processing in terms of the Protection of Personal Information Act 4 of 2013 (POPIA)

On 19 October 2021, the FSCA published a communication to confirm its commitment to processing personal information in a manner that is consistent with both the Financial Sector Regulation Act, 9 of 2017 (FSR Act) and POPIA. The FSCA is empowered by section 251(1)(b) of the FSR Act to collect and use information to the extent that is it necessary to properly perform its objectives, obligations and duties.

On this basis, the FSCA has confirmed that, according to the definitions in POPIA, it is a 'Responsible Party' and the information it collects falls under 'Personal Information'.

South African Reserve Bank / Prudential Authority

South African Reserve Bank Working Papers Series WP / 21 / 20

On 27 September 2021, the South African Reserve Bank (SARB) published a working paper entitled "Short—term impacts and interaction of macroprudential policy tools" (Working Paper). The Working Paper sets out a large macro-econometric model with a detailed financial block to study the impacts of changes to capital requirements and the loan-to-value (LTV) ratio on key economic and financial indicators, which may include indicators such as gross domestic product, inflation, industrial production, and exchange rates. The Working Paper also shows that an increase in capital adequacy ratio (CAR) raises the bank's effective lending spreads and leads to a decline in economic activity. Conversely, a decrease in the LTV has a strong negative impact on wealth and household co​​​​nsumption and a smaller impact on investment expenditure.

Variations to capital requirements and the LTV ratio affect the liquidity coverage ratio and net stable funding ratio. This variation is capable of extensively amplifying the economic and financial impacts of macroprudential policy, and in some cases may become a source of financial instability. The Working Paper aims to discuss the effective use of macroprudential policy tools. It requires an understanding of how these tools, individually and collectively affect economic activity and financial behaviour.

Proposed Directive issued in terms of section 6(6) of the Banks Act 94 of 1990: Principles for the Sound Management of Operational Risk (Proposed Directive)

On 13 September 2021, the PA issued a Proposed Directive in terms of section 6(6) of the Banks Act, 94 of 1990 relating to the principles for sound management of operation risks by b​​anks. The Proposed Directive is based on the document published by the Basel Committee on Banking Supervision (BCBS) in March of this year, entitled "Revisions to the Principles for the Sound Management of Operational Risk". This document revises certain principles found in the 2011 publication of the document. Mainly, all banks are now required to have comprehensive risk management processes, practices, procedures and board-approval polices in place.

Accordingly, banks have been directed to assess their current policies, processes and practices against the principles contained in the BCBS' 2021 publication. The PA has c​onfirmed that it will be reviewing the operational risk policies, processes and practices of banks on a continuous basis to assess their alignment with the best practices noted in the latest publication.

Discussion Document on the Prudential Authority Government Bond Curve Review

On 23 September 2021. the PA published a discussion document on the constituent data set and the construction methodology underlying the 'PA Government Bond Curve' (Discussion Document).

The Insurance Act, 18 of 2017 mandates the PA to publish a government bond curve in accordance with Prudential Standard FSUI 2.2. Insurers must use the government bond curve as a risk-free interest rate term structure to discount cash-flows with the aim of valuing technical provisions. The Discussion Document presents the current methodology and data set which underlies the published PA government bond curve.

The first part of the Discussion Document presents the data set management framework and proposes enhancements to the framework for purposes of arriving at an optimal data set based on guiding principles. The second part of the Discussion Document presents alternative curve construction methodologies and their merits compared to the methodology used by the PA. The recommendation includes a constituent data set management proposal and a revision to the ultimate nominal forward rate to be considered. Additionally, the Discussion Document recommends that alterative curve construction methodologies be considered.

Comments from industry participants on the review and recommendations in the Discussion Document must be submitted by 23 November 2021 to (attention Ms Vuyile Luyaba).

Financial Sector Laws Amendment Bill [B15B – 2020]

The Select Committee on Finance invited all interested parties to submit written submissions on the Financial Sector Laws Amendment Bill (FSLAB) until 18 October 2021.

The FSLAB aims to amend various legislation, including the FSR Act, by establishing a framework for the resolution of designated institutions to ensure that the impact (or potential impact) of a failure of a designated institution on financial stability is managed appropriately.  To do this, the FSLAB designates the SARB as the resolution authority, and establishes a deposit insurance scheme as well as a Corporation for Deposit Insurance and a Deposit Insurance Fund.

Other statutes that are implicated by the proposed FSLAB include: the Insolvency Act, 1936, the SARB Act, 1989, the Banks Act, 1990 and the Insurance Act, 2017. The proposed amendments to these pieces of legislation are intended to align the legislation with the resolution framework that will be established under the FSLAB.
Further submissions will be made at public hearings to be held on Tuesday, 16 November 2021.

Discussion document on the proposed valuation requirements for resolution planning purposes

The SARB has published a discussion document entitled "Valuation requirements for resolution planning purposes" (Discussion Paper), for public comment.  The Discussion Paper expands on section 3.9 of the 2019 discussion paper titled 'Ending too big to fail: South Africa's intended approach to bank resolution'.

The Discussion Paper applies to all designated institutions as defined in clause 45 of the FSLAB, which is the proposed section 29A of the FSR Act. As the title suggests, the Discussion Paper deals with how assets and liabilities are to be valued during open and closed resolution processes.  In the resolution of a designated institution, the value of its assets and liabilities can have a significant impact on the resolution approach adopted by the SARB, as resolution authority.  Therefore, it is critical that assets and liabilities be valued appropriately in a speedy manner to reduce the depreciation of the designated institutions assets, as much as possible.

The valuation informs various decisions, such as whether to trigger resolution and the selection and execution of the appropriate resolution option to limit the impact on financial stability.  A valuation at the end of the resolution process will also be required to determine whether the resolution complied with the no creditor worse off than in liquidation safeguard.  The Discussion Paper requires designated institutions to have the necessary valuation capabilities to ensure the resolution authority can obtain good quality and timely valuations prior and after the resolution action is taken.

The responsibilities of the resolution authority will include: developing resolution plans and identifying adequate resolution strategies for each designated institution based on, among others, a reliable valuation of the designated institution’s balance sheet in both business-as-usual and stressed times, determining whether the designated institution must be placed in resolution based on a valuation of its balance sheet by the designated institution’s management information system using the criteria and assumptions applicable at the time and aligned to the conditions set out in the Discussion Document, and determining the post-resolution capital requirements for designated institutions where bail-in was applied by using a post-resolution valuation to calculate the designated institution’s risk-weighted assets and the available qualifying capital.

In preparing this Discussion Paper, the SARB considered the Financial Stability Board's guidance and its adoption by other jurisdictions, such as the Bank of England.
It is intended that following the consultative process, as well as after the promulgation of the FSLAB, the series of discussion papers will be adapted into a regulatory instrument. The closing date for comments was 31 October 2021.

Johannesburg Stock Exchange

Amendments to the JSE Debt Listings Requirements

In September of 2021, the JSE introduced sustainability-linked debt securities that are intended to be forward-looking performance-based debt securities with varying financial and/or structural characteristics, depending on whether the applicant issuer has achieved the pre-defined sustainability/ESG objectives pursuant to the sustainability-linked standards.

The JSE also plans to introduce transition debt securities which accommodate applicant issuers that are raising funds for climate transition-related purposes.
The new debt securities must comply with all the provisions of the debt requirements dealing with conditions of listing, listing particulars, financial information and corporate governance.

These changes are in line with the growing trend towards impact and responsible investments, and have been made to meet investor requirements for socially responsible investing.

Board Notice 130 of 2021: Approved amendments to the JSE interest rate and currency derivatives rules and the JSE derivatives rules – Emigrant client concepts

The FSCA has published a board notice confirming the approval of the amendments to the JSE derivatives rules.  The amendments relate to the removal of all 'emigrant client' and related concepts from the rules.

International Chamber of Commerce

Uniform Rules for Digital Trade Transactions Version 1.0

​On 1 October 2021, the International Chamber of Commerce (ICC) published the Uniform Rules for Digital Trade Transactions (URDTT) Version 1.0 following its lengthy drafting process.

The ICC Banking Commission has approved and issued electronic rules to advance the digitalisation of trade finance practices by releasing electronic supplements to the existing Uniform Rules for Collections (URC 522) and Uniform Customs and Practice for Documentary Credits (UCP 600) rules. The eURC and eUCP establish rules for electronic records associated with existing and well-established trade finance products. However, owing to an ongoing reliance on manual reconciliation processes, these rules are not fully digitalised. The URDTT aims to create as an overarching framework for a future, fully digital, trade environment. 

The URDTT rules extend beyond banks into the corporate world and the growing community of non-bank service providers. The URDTT are intended to govern across a digital landscape by considering recent developments, not only in distributed ledger technology, but also in the use of artificial intelligence, natural language processing, machine learning, data analytics, smart contracts, smart objects and the Internet of Things, all of which will have a material impact on the ways in which we will do business in future.

Article 17 provides for the URDTT supplementing the choice of the applicable law agreed between the parties to the extent that it is not prohibited by, and not in conflict with, that applicable law or any applicable regulation.

Financial Services Tribunal

Niemiec v Constantia Insurance Co Ltd and The Prudential Authority PA1/2021

The decision concerns the treatment of accident and health insurance policies by the PA as part of the conversion of the then existing licence registration of Constantia Insurance Co Ltd (Constantia) as a short-term insurer under the Short-term insurance Act 53 of 1998 to a non-life insurer under the Insurance Act, 2017.

The applicants applied to the Tribunal for the reconsideration of a decision made by the PA in terms of Schedule 3 item 6(5) of the Insurance Act. According to item 6(5), if the PA does not convert particular policies under the old regime into substantially similar policies under the new regime because they have both life and non-life components, the PA must direct the insurer to follow one of three causes of action, namely:

  • discharge its obligations under all insurance policies entered into in respect of that class or subclass before the conversion of that insurer’s registration;
  • ensure the orderly resolution of that insurance business of the insurer; or
  • transfer that insurance business to another insurer under section 50 of this Act by a specified date.

The PA directed Constantia to follow the second option. Given that the policies had both life and non-life risk components, they could not be legally underwritten by a licenced non-life insurer. Accordingly, Constantia had to offer each policyholder a replacement policy with a personal accident death policy, as well as discounted individual funeral products.

The question in this application was whether the direction given by the PA to Constantia in relation to the accident and health policies was procedurally and substantially “appropriate”.

Before concluding, the Tribunal reiterated its own powers: A person aggrieved by a decision of the PA may apply to the Tribunal for a ‘reconsideration’ of the PA's decision. A reconsideration constitutes an internal remedy as contemplated in section 7(2) of the Promotion of Administrative Justice Act 3 of 2000 (PAJA). However, when reconsidering a decision, the Tribunal is limited to one of two actions, namely setting aside the decision and remitting the matter to the PA for reconsideration or dismissing the application altogether. The Tribunal may not set the decision aside and substitute it with their own decision. The final decision remains that of the PA. Although the Tribunal can review the process followed by the PA, it is not empowered to change the substance of the decision made.

The applicants raised four main arguments are summarised below:

Procedural Unfairness and Lack of Audi:

The applicants argued that the PA had not given them the opportunity to make their case before it made a decision. However, the Tribunal found that any concerns that the applicants had could be raised in the matter before the Tribunal itself, and thus any procedural fairness concerns that the applicants may have had regarding the PA’s process could be cured by a full and fair hearing on appeal to the Tribunal. Moreover, the applicants were unable to show that the PA had come to an incorrect decision specifically because they had followed an incorrect procedure.

Cancellation of the Policies:

The applicants submitted that the Act did not entitle the PA to cancel policies or to direct Constantia to do so, and that the High Court had held as much. They argued that the decision of the PA amounted to a cancellation of the policies by the PA or Constantia. However, the Tribunal found that the policies were not cancelled; rather they lapsed because Constantia was no longer permitted to offer insurance policies with life risk components. 

Refund of Premiums: 

The applicants' argument that the PA had not considered the option of refunding premiums and that its decision should be set aside on that ground.

The Tribunal noted that premiums are paid monthly for cover which is provided monthly, so there is no build-up of funds. Essentially, the policyholder pays for the insurer being on risk. Where the insurer is not on risk, the policyholder will not pay and vice versa. The Tribunal therefore found that there was no basis to refund the premiums.

The Run-Off Option: 

The applicants’ case was that the policies must run their normal course (“run off”) because they could not have been terminated. But the Tribunal pointed out that the High Court held that the option was not legally available. Item 13 does not allow the PA to bypass the objects of the Act indefinitely. The period of the policies was meant to end at the death of the last surviving policy holder, but the new statutory dispensation only accounted for a transition period of two years.

Ultimately, the Tribunal was satisfied that the PA had made its decision in a procedurally fair manner and consequently dismissed the application. 

1 - Universal life policies are life insurance policies where the total premium payment has two components to it, i.e.: the risk premium and a payment towards an investment or savings component of the policy.


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: October 2021
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