The FSCA is proposing that significant owners of FSPs become subject to the honesty and integrity requirements of Joint Standard 1 of 2020, saying the amendment is required urgently to prevent South Africa from being placed on the Financial Action Task Force’s grey list.
Joint Standard 1 of 2020 (“Fitness, propriety and other matters relating to significant owners”) applies to the significant owners of financial institutions and to financial institutions, unless exempted.
A “significant owner” is defined in section 157 of the Financial Sector Regulation Act (FSRA). Essentially, a person is a significant owner of a financial institution if he or she, directly or indirectly, alone or together with a related or inter-related person, has the ability to control or influence materially the institution’s business or strategy.
The FSCA exempted the significant owners of FSPs (excluding banks, insurers and managers of collective investment schemes) from the requirements of the Joint Standard, in terms of General Notice 3 of 2020.
In a communication published on 5 August, the Authority said it is proposing to amend the exemption to ensure that the significant owners of FSPs are subject to the requirements in Joint Standard 1 pertaining to honesty, integrity, reporting and procedures for assessing fitness and propriety.
The FSCA’s proposed amendments to the exemption are contained in the notice called “Draft Amendment of the Notice on Exemption by the Financial Sector Conduct Authority of Certain Persons from Joint Standard 1 of 2020”.
The proposed amendment is the result of the Authority’s reassessment of the Joint Standard, as well as the findings contained in the FATF’s Mutual Evaluation Report of October last year.
Exemptions that won’t – and will – apply to the significant owners of FSPs
The FSCA said its reassessment of the extent to which the requirements of the Joint Standard should apply to significant owners of FSPs concluded that:
Honesty and integrity
The main aim of the Joint Standard is to ensure that significant owners are honest and have the necessary integrity.
In the FSCA’s view:
- Honesty and integrity are a fundamental characteristic that should be displayed by significant owners of all financial institutions; and
- The requirement to be honest and have integrity will not create an undue burden on the significant owners of FSPs, including the significant owners of small FSPs.
Procedures for assessing fitness and propriety, and reporting
The Joint Standard requires significant owners to have procedures in place for assessing and attesting to its fitness and propriety.
It requires significant owners to notify the FSCA of non-compliance with the Joint Standard, or if there is a change in the fit and proper status of the significant owner.
It also obliges a financial institution to 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.
In the FSCA’s view:
- The above requirements will not place an undue burden on the significant owners of FSPs, including the significant owners of small FSPs;
- The requirements are necessary to support the implementation of, and monitoring compliance with, the honesty and integrity requirements; and
- The requirements will support the FSCA in executing its project focused on identifying the owners of financial institutions more effectively.
Competence and financial standing
The Joint Standard requires that significant owners have the competence and financial standing required to support the business of a financial institution.
The FSCA has decided to retain, “for now”, the exemption for the significant owners of FSPs. It said imposing the requirement might be onerous for some significant owners of FSPs, particularly smaller FSPs.
“If a significant owner of a small FSP is required to have substantial financial resources to support the business of the FSP and is found lacking, this would amount to a contravention of the Joint Standard and may result in the removal of the significant owner. In the FSCA’s opinion, the latter would be contrary to the objective of supporting development of small businesses.”
FATF’s finding on beneficial ownership
The FSCA said the FATF’s Mutual Evaluation Report has “exacerbated” the need to amend the exemption “on an urgent basis”.
The Authority drew attention to FATF Recommendation 26: “Countries should ensure that financial institutions are subject to adequate regulation and supervision and are effectively implementing the FATF recommendations. Competent authorities or financial supervisors should take the necessary legal or regulatory measures to prevent criminals or their associates from holding, or being the beneficial owner of, a significant or controlling interest or holding a management function in, a financial institution.”
In this context, the FSCA said one of the report’s key findings was that although “…fit and proper criteria are in place for many sectors, these often do not apply to beneficial owners. Most regulators do not conduct criminal checks or verify self-declarations of applicants, although police criminal clearance certificates are required for applicants in the ADLA [Authorised Dealers with limited authority] and CIS manager sectors.”
Although a significant owner is not the same as a beneficial owner, the definition of a significant owner in the FSRA captures a relatively broad scope of beneficial owners, the FSCA said.
Withdrawing the exemption for significant owners of FSPs will bring a broader scope of beneficial owners (through the definition of significant owner) within the scope of the Joint Standard, thereby subjecting them to the fit and proper requirements and, as a result, partially address the FATF’s finding.
What the FSCA hopes to achieve
The FSCA said subjecting FSPs to the requirements in the Joint Standard pertaining to honesty, integrity, reporting and procedures for assessing fitness and propriety will ensure that regulations aimed at preventing criminals or their associates from controlling financial institutions exist.
The proposed amendment also aligns to the FSCA’s objective of identifying owners of financial institutions more effectively.
It was also an urgent interim step to address the FATF’s finding, pending further legislative amendments that will create an enabling framework for the regulation and supervision of beneficial owners holistically.
To download the FSCA’s communication, the draft amendment notice, and the comments template, go to www.fsca.co.za > Regulatory framework > Documents for consultation > General FSCA legislation.
Comments must be submitted to FSCA.RFDstandards@fsca.co.za, on the comments template, by 29 August.
For further information, contact the FSCA’s Regulatory Framework Department by emailing Hannelie Hattingh at Hannelie.hattingh@fsca.co.za.
A government department talking “honesty and integrity?” Bwahaaaaaaaaaaaaaaaa!!!!