Prudential Authority Annual report – Looking beyond the many acronyms and numbers

The South African Reserve Bank’s Prudential Authority (PA) has just published its first annual report for the 2018/19 financial year, covering the state of the country’s banking and insurance sectors. Besides focussing on the annual numbers, what are the other key take outs for the financial services industry? What triggers the reader to focus on significant facts? The overview of the legislative landscape changes and implementation of regulatory structures over the past year puts everything in perspective again, and introduces a substantial number of new acronyms.

Implementation of the Twin Peaks model

In his overview, Lesetja Kganyago, Governor of the South African Reserve Bank and Chairperson of the Prudential Committee takes us back to the implementation of the Twin Peaks model. According to Kganyago this model seeks to attain regulatory efficiency by creating specialist peaks for prudential and conduct regulation respectively. The foundational legislation underpinning this regulatory approach, namely the Financial Sector Regulation Act 9 of 2017 (FSR Act), was signed into law on 21 August 2017.

Kganyago notes that the FSR Act makes three significant changes to the South African financial sector regulatory landscape. Firstly, it gives the South African Reserve Bank (SARB) an explicit mandate to lead the process of achieving and maintaining financial stability. Secondly, it establishes a prudential regulator, the PA, to promote the safety and soundness of individual financial institutions. Thirdly, the FSR Act also establishes a market conduct regulator, the Financial Sector Conduct Authority (FSCA), to ensure that customers are treated fairly and that the financial products and services offered by the industry are safe. The PA, the FSCA as well as other financial sector regulators in turn play a major role in supporting the financial stability mandate of the SARB.

“The PA is a juristic person operating within the administration of the SARB. As such, the PA supervises banks, insurance companies, cooperative financial institutions (CFIs) as well as securities and derivative market infrastructures”, Kuben Naidoo, CEO of the Prudential Authority further shares. Naidoo highlights that the success of the Twin Peaks framework requires close cooperation and collaboration with National Treasury and other regulators, including the FSCA, the National Credit Regulator and the Financial Intelligence Centre.

In 2017, Personal Finance reported on the implementation of the FSR Act and the introduction of the Twin Peaks Model. According to this article the Act “heralds the commencement of a complete regulatory overhaul of the South African financial services sector, although changes will not be noticed immediately.”

What are the changes that have been implemented since then?

Delivering on the PA’s strategy

According to the report significant work geared toward strengthening the regulation and supervision of banking institutions is currently underway. While there is still a long road ahead, the PA has started amending the requirements for banks in line with the updated standards from the Basel Committee on Banking Supervision (BCBS). The PA is also in the process of assessing the regulatory framework and requirements for mutual banks and co-operative financial institutions (CFIs).

Further development includes:

  • Engagements with the industry to develop the financial conglomerate regulatory framework, which will inform a holistic view and supervision of group-wide activities, intragroup transactions and large exposures.
  • A newly developed team for financial market infrastructure supervision also collaborated with the Financial Sector Conduct Authority (FSCA) as well as the National Payment System Department of the South African Reserve Bank (SARB) to develop the PA’s prudential regulatory framework, which is aimed at strengthening the resilience of market infrastructures and ensuring that international principles related to them are adhered to, where appropriate.
  • Good progress with embedding the Solvency Assessment and Management (SAM) principles within the prudential regulation and supervision of insurance companies, as enabled through the Insurance Act 18 of 2017 (Insurance Act) and the related Prudential Standards.
  • The development of a Regulatory Framework, as well as the Joint Standard on Significant Ownership, has been subject to the first round of public consultation. This work is expected to reach completion in the new financial year.

The report also mentions the PA’s additional supported priorities:

  • Participation in the various subcommittees led by the Financial Sector Transformation Council to update the financial sector codes for the broader financial sector;
  • Sustainable competition in the provision of financial products and services; and
  • Financial inclusion as well as developments in financial technology (fintech), in collaboration with the SARB and other financial sector regulators.

All the developments have been done through collaboration and coordination with the South African Reserve Bank, the Financial Sector Conduct Authority and other regulatory bodies.

By 1 October 2018, the PA had also concluded and published its memorandums of understanding (MoUs) with the FSCA, the National Credit Regulator, the Financial Intelligence Centre (FIC) and the SARB’s Financial Stability Department.

It appears that quite a lot has changed in the world of the PA.

Click here to download the Prudential Authority’s Annual Report

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