This article helps you to understand the FSCA’s Draft Strategy on Transformation in the Financial Sector (the Draft). It is important to note that the strategy is still in draft and the FSCA is seeking public input on their envisioned strategy. As with all legislative changes, it is important to define the terms and to look at the context.
What is transformation?
We often hear the terms “transform”, “transformed”, “transformation” without it being well-defined. The Cambridge Dictionary defines transformation as “a complete change in the appearance or character of something or someone, especially so that that thing or person is improved”, and the OED defines it as a “complete change in somebody/something”. The meaning is dependent on where you are and in the South African legal context transformation has various meanings that again depend on the context of its use. Transformation generally means to evidence the change in the makeup of an industry to reflect South Africa’s racial makeup. It is generally accepted that the principle of transformation is based on the constitutional imperative to have an egalitarian society away from a position of dominance by a few. The Financial Sector Regulation Act (FSR Act) defines transformation as “envisaged by the Financial Sector Code for B-BBEE issued in terms of section 9 (1) of the B-BBEE Act”.
It is beyond this article’s scope to go into the finer details of its historical development, the best way to achieve transformation, which basis it is measured on or, more fundamentally, about the merits of it to the industry, to the economy or to the country as a whole. We aim here to help you understand the FSCA’s approach, at the current point in the process to change the law, to understand what your options are and how to effect change, and in this help you to, going forward, make important decisions for your business.
The FSCA’s starting point
The FSCA acknowledges that the financial sector is a key contributor to the South African economy. That while some measure of transformation has been achieved, continued transformation is hampered by several factors, the change can thus be improved, and it seeks the public’s input on its draft strategy for achieving this.
Government has indicated in the past that changes to the Conduct of Financial Institutions (COFI) Bill would see transformation becoming an explicit part of the FSCA’s functions. More broadly, in parliamentary hearings from 2017 it was recognised that while the Broad-Based Black Economic Empowerment Act of 2003 (B-BBEE Act) remains the overall policy framework for B-BBEE transformation, the National Treasury and financial sector regulators play a more active role in driving transformation.
In a nutshell, the FSCA wants to create “an inclusive and transformed financial sector” and support “financial sector transformation as one of” its strategic outcomes. The Draft sets out the FSCA’s approach within the existing policy (legal) framework and an approach under the future COFI Act framework.
- The B-BBEE Act provides the main legislative framework for transformation. Other acts that influence this are the FSR Act and the Insurance Act. Adherence is supervised by the B-BBEE Commission.
- The Financial Sector Code (FS Code) which is set and monitored by the Financial Sector Transformation Council (FSTC).
The B-BBEE Act seeks to “address the legacy of apartheid and promote the economic participation of black people in the South African economy”. In 2014, the B-BBEE Commission was constituted under the B-BBEE Act. This Commission is responsible for, among other things, overseeing, supervising, and promoting compliance with the B-BBEE Act in the public good.
The FS Code came about due to the participation between various interest groups and Government, and was published in 2017. It aims to achieve transformation by improving opportunities and monitoring outcome in the financial sector by facilitating and increasing black ownership and management in the financial sector; investing in skills development and training; increasing empowerment financing and access to financial services; and by “achieving equitable representation in all occupational categories and levels in the workforce”. An overview of the Code is included in the Draft under “Annexure A”. Through the existing legislative framework, the FSTC is not authorized to act against financial institutions for failing to meet the FS Code’s targets or failing to report on compliance.
How transformation applies to the FSCA
The B-BBEE Act requires every organ of state and public entity, such as the FSCA, to take a code of good practice issued in terms of the Act into account when determining qualification criteria for the issuing of licenses, concessions, or other authorisations. This obliges the FSCA apply the FS Code when issuing licences. However, financial sector authorities’ direct engagement in supporting sector transformation has mostly been restricted. This is due in part to the lack of transformation-enabling financial sector laws. It is generally accepted that regulators such as the FSCA can better assist the FSTC in making substantial progress toward the FS Code’s commitments. Regulators can impose requirements on regulated entities during the licensing process and on an ongoing basis (provided they are connected to the regulatory objectives), and they can ensure alignment with these requirements.
In line with this, the FSCA could do the following:
- Require a transformation plan;
- Set minimum B-BBEE levels – especially for larger businesses;
- Consider transformation plans during licensing;
- Supervise progress against its plans;
- Take action for a lack of commitment to achieving of targets in its plans; and
- Minimise regulatory hurdles to entry for black-owned businesses and support these through suitable regulatory compliance requirements.
The FSCA’s approach – the future of transformation
The law that empowers the FSCA to effect the needed changes is still under development and it is therefore taking a phased-in approach. Phase 1 will focus on the FSCA’s position within the current legal framework, namely the FSR Act, the B-BBEE Act, and the FS Code. The FSCA’s functions within the COFI Act legal framework will be the focus of Phase 2.
Phase 1 summary:
- Engaging with financial institutions on transformation plans and what has been achieved.
- Improve transformation data quality and availability.
- Building of co-operative relationships with the FSTC and B-BBEE Commission.
- Coordinate supervisory transformation drives with the Prudential Authority.
- Support Nedlac and FSTC transformation drives.
- Support small businesses.
- Develop transformation-supporting regulatory frameworks.
- Internal preparation for Phase 2.
Phase 2 summary:
- Start supervision activities and regulatory actions that promote transformation – subject to the final legislative transformation framework for the financial sector.
- Regularly engage with the FSTC and B-BBEE Commission.
- On an ongoing basis, evaluate the effectiveness of the legislative frameworks and their application.
The biggest change in future will be that brought about by the COFI Act.
Implementation by and engagement with the FSCA on its proposed strategy
The final strategy will be implemented by the FSCA’s Regulatory Policy Division through its Market, Customer and Inclusion Research Department. It will develop, and update it annually, an Implementation Plan that supports its strategy and which will provide for the activities undertaken by its various departments and divisions for each financial year. The FSCA invites all interested parties to provide feedback by using Annexure B. All feedback and comments must be provided by Friday 29 April 2022 by sending your feedback by email to firstname.lastname@example.org.