The FSCA is in consultation phase with draft amendments relating to Joint Standard 1 of 2020 (the Joint Standard) in so far as it applies to significant owners of FSPs who were previously exempt. The FSCA has proposed that significant owners of FSPs become subject to fitness and propriety related requirements.
Background
On 1 June 2020, the FSCA and Prudential Authority published the Joint Standard on Fitness, propriety and other matters relating to significant owners which took effect on 1 December 2020 and applies to financial institutions as well as significant owners of financial institutions.
This Joint Standard set out the criteria for significant owners to be considered fit and proper as well as factors that would constitute evidence of the absence of fitness and propriety. It also prescribes what constitutes an increase or decrease in the extent of the ability of the person, alone or together with a related or interrelated person, to control or influence materially the business or strategy of the financial institution. The Joint Standard further places specific reporting obligations on significant owners and financial institutions.
The Joint Standard was published together with an exemption notice in 2020, which exempted certain entities from the application of the Joint Standard. FSPs (excluding banks, insurers and managers of collective investment schemes) were among the entities that were exempt and therefore did not have to comply with the requirements contained in the Joint Standard.
The rationale to exempt significant owners of FSPs at the time was that “These financial institutions vary significantly in nature, scope, size, complexity and the type of services provided. Further work on appropriate fit and proper person requirements best suited for these types of financial institutions will be undertaken. Once this work is completed significant owners of financial service providers, or specific types of financial service providers, might be included in the standard.” [1]
Reassessment of the Joint Standard
The FSCA has reassessed the Joint Standard based on the need to identify owners of financial institutions more effectively. This need was also highlighted in the Financial Action Task Force (FATF) Mutual Evaluation Report (MER) of South Africa. One of the key findings in the MER related to “while fit and proper criteria are in place for many sectors, these often do not apply to beneficial owners”. The FSCA stated that although a significant owner and a beneficial owner is not exactly the same thing, the definition of a significant owner in the FSR Act captures a relatively broad scope of beneficial owners.
FATF Recommendations not fully remediated or significantly progressed by October 2022 can lead to South Africa being placed on the FATF grey-list, which could have dire consequences for the country as a whole. The FSCA confirmed that the FATF MER has therefore exacerbated the need to amend the Exemption relating to the Joint Standard on an urgent basis and is viewed as an interim step to address a finding reflected in the FATF MER, pending further legislative amendments.
Proposed Changes
The FSCA has proposed to amend the Exemption to ensure that significant owners of FSPs are subject to the requirements set out in the Joint Standard. The requirements reassessed by the FSCA and the extent to which they should apply are:
- Honesty and Integrity
The main aim of the Joint Standard is to ensure that significant owners are honest and have the necessary integrity. The FSCA believes that honesty and integrity is an essential characteristic that all significant owners should exhibit, and that this requirement will not create an undue burden on significant owners of FSPs, including significant owners of small FSPs.
- Procedures for assessing fitness and propriety, and reporting
The Joint Standard requires significant owners to:
a) have procedures in place for assessing and attesting to, on an annual basis, its fitness and propriety;
b) notify the FSCA of non-compliance with the Joint Standard or if a change in the fit and proper status of the significant owner occurs;
c) notify the FSCA if it becomes aware of:
– significant ownership or potential significant ownership; and
– non-compliance with the Joint Standard by a significant owner.
The FSCA believes that these requirements will not place an undue burden on significant owners of FSPs, including significant owners of small FSPs. The FSCA is of the view that these requirements are necessary to supporting the implementation of, and monitoring the compliance with, the honesty and integrity requirements, as well as support the FSCA in executing its project focused on identifying owners of financial institutions more effectively.
- Competence and financial standing required to support the business of a financial institution
The Joint Standard requires that significant owners have the competence and financial standing required to support the business of a financial institution of which it is a significant owner. The impact of the requirements to have the competence and financial standing to support the business of a financial institution might be onerous on some significant owners of FSPs, especially smaller FSPs. This has been acknowledged by the FSCA and it has therefore decided to keep this exemption in place for now.
When the proposed amendments to the Exemption take effect, this will mean that significant owners of FSPs who were previously exempt from the Joint Standard, will now be subject to the requirements pertaining to honesty, integrity, reporting and procedures for assessing fitness and propriety. The FSCA stated that this will align to its objective of identifying owners of financial institutions more effectively and ensure that, amongst other things, regulatory measures aimed at preventing criminals or their associates from controlling financial institutions exist.
Click on the links below to download:
- FSCA Communication 22 of 2022 – Amendment of Exemption Notice to Joint Standard 1 of 2020
- Notice – Amendment of Exemption by the FSCA of certain persons from Joint Standard 1 of 2020
- Joint Standard for Significant Owners
[1] Statement of the need for, expected impact and intended operation of a regulatory instrument: Joint Standard on fitness, propriety and other matters related to significant owners – Table 1