The term “regulatory instrument” appears in the Financial Sector Regulation Act and includes, inter alia, a prudential standard, a conduct standard and a joint standard.
These regulatory instruments form part of the Financial Sector Regulation Act and thus have the same effect as the actual legislation. The most important of these insofar as financial services providers are concerned is, arguably, the authority to create Conduct Standards, according to Alan Holton, an associate of Moonstone Compliance. He summarises this as follows:
The Financial Sector Conduct Authority (FSCA, or “new FSB”) may make conduct standards for, or in respect of—
- financial institutions;
- representatives of financial institutions;
- significant owners of such financial institutions;
- key persons of financial institutions; and
The term “financial institution” is also defined and includes a financial product provider and a financial service provider.
Conduct standards must be made in order to ensure the protection and fair treatment of financial customers and to enhance the efficiency and integrity of the financial system. These standards may also be made to reduce the risk that financial institutions, representatives, significant owners, key persons and contractors engage in conduct that is or contributes to financial crime and to assist in maintaining financial stability.
It is important to note the definition of a “key person”, as all key persons are subject to the conduct and prudential standards issued by the relevant authority. A key person includes:
- A member of the governing body of the financial institution;
- the chief executive officer or other person in charge of the financial institution;
- a person other than a member of the governing body of the financial institution who makes or participates in making decisions that affect the whole or a substantial part of the business of the financial institution or in making decisions that have the capacity to affect significantly the financial standing of the financial institution;
- a person other than a member of the governing body of the financial institution who oversees the enforcement of policies and the implementation of strategies approved, or adopted, by the governing body of the financial institution;
- the head of a control function of the financial institution; and
- a person performing a function in or for the financial institution that a financial sector law requires to be performed.
According to Alan Holton, the Bill defines a “significant owner” as any person, who directly or indirectly, alone or together with a related or inter-related person –
- has the power to appoint a person to be a member of the governing body of the financial institution;
- the person’s consent is required for the appointment of a person as a member of a governing body of the financial institution;
- holds 15% or more of the issued shares (companies)
- is able to exercise or control the exercise of 15% or more of the voting rights (close corporations and trusts)
No person may, without the approval of a financial sector regulator, –
- become a significant owner of a financial institution
- increase or reduction in a significant owner’s interest in a financial institution
The financial sector regulator who makes a legislative instrument must, prior to making a legislative instrument, publish a draft of the instrument that must be accompanied by a statement explaining the need for the instrument, the intended operation of the instrument, a statement of the expected impact of the regulatory instrument and a notice inviting submissions in relation to the regulatory instrument and stating where, how and by when submissions are to be made. The notice must indicate where and how submissions may be made, and the period for making submissions, which must be at least two months. Once submissions have been received, legislated consultation arrangements must be followed.
In his address at the Insurance Regulatory Seminar, Mr. Jonathan Dixon, DEO Insurance at the FSB, pointed out that the FSCA can skip the consultation process if the delay is likely lead to prejudice to financial customers or harm to the financial system, or defeat the object of the proposed regulatory instrument, but the consultation process must start as soon as practicable after it is issued and include in the explanatory statement reasons why the regulatory instrument were made urgently.
This consultation process was followed in the past by most departments, but it will now be obligatory when the Financial Sector Regulation Act becomes effective.