By: Kent Davis and Anél De Meyer
The Financial Sector Regulation Act, 9 of 2017 (FSR Act) commenced on April 1, 2018, and overhauled the entire financial regulatory system in South Africa. In the six years since its enactment, the South African financial landscape has been besieged by high-profile matters of misconduct, for example, Steinhoff perpetrated fraud of approximately ZAR 250 million, whilst Tongaat Hulett made significant accounting irregularities in contravention of the Financial Markets Act, 19 of 2012. To add insult to injury, South Africa was grey-listed by the Financial Action Task Force for its failure to comply with international standards relating to money laundering and illicit financial flows.
These events have toughened the Prudential Authority (PA) and Financial Sector Conduct Authority's (FSCA) (the Regulators) resolve to enhance financial market integrity and the protection of financial customers. In its second "FSCA Regulatory Actions Report" for the period 1 April 2023-31 March 2024 (FSCA Enforcement Report 2024), the FSCA stated that it remains dedicated "to combating misconduct decisively and visibly" and that given the dynamic nature of the financial landscape their "enforcement processes continue to evolve although efficiency, fairness, and consistency remain paramount".
The FSCA is clearly intent on ensuring that it acts as a decisive and effective enforcer by acting swiftly against wrongdoers. In doing so, it not only serves as a strong deterrent to misconduct but also ensures that South Africa's reputation as a sound and safe financial market is protected. The PA is similarly empowered to take regulatory action.
How do the Regulators supervise the financial services industry when it comes to enforcement? The Regulators have a vast array of enforcement instruments at their disposal in terms of the FSR Act and it is important for financial institutions to take note of the powers the PA and FSCA may employ to counteract misconduct. These include:
Public warnings: When unauthorised, harmful, suspicious or illegal activities are identified, the Regulators issue public warnings on their websites to alert the public of potential risks.
Enforceable undertakings: The Regulators may negotiate 'enforceable undertakings' where the institution agrees to specific remedial action. An 'enforceable undertaking' can also include providing specific redress to financial customers. Enforceable undertakings are published on the relevant Regulator's website.
Withdrawal or suspension of authorisations: If (i) a licence condition has been contravened, (ii) the licensee has materially contravened a financial sector law, (iii) failed to comply with a directive, (iv) or defaulted on an enforceable undertaking, the Regulators may withdraw authorisations granted to such licensees. The Regulators may also suspend a licence if the non-compliance forming the basis of the suspension is not rectified. The Regulators will first provide the affected licensee with an opportunity to rectify the non-compliance before suspending the licence for a specified period.
Debarments: Natural persons who contravene a financial sector law, an enforceable undertaking, a foreign law that corresponds to a financial sector law, or attempted, conspired with, aided, abetted, induced, incited, or procured another person to contravene a financial sector law, in a material manner, may be disbarred from rendering financial services to the public. There are two processes of debarments - the process under section 14 of the Financial Advisory and Intermediary Services Act, 37 of 2002 (FAIS Act) which empowers Financial Services Providers (FSP) to debar its representatives, and the process under section 153 of the FSR Act which permits the FSCA to debar a natural person.
Appointment of statutory managers and curators: In cases of financial distress, or maladministration, the Regulators have two options: either they work with the institution in question to select a curator in accordance with their agreement, or they can apply to the High Court, on an ex parte basis, for the appointment of a curator to take control of, and to manage the whole or any part of, the business of an institution.
The Regulators may also appoint a statutory manager, by agreement with a financial institution and without the intervention of a court, if it appears that the financial institution has in a material respect failed to comply with a law, is likely to be in an unsound financial position or is maladministered. It is important to remember that this enforcement instrument can only be utilised, subject to obtaining consent from the South African Reserve Bank with regard to the resolution regime and a designated institution (Chapter 12A of the FSR Act).
Removal of persons from positions: If a person contravenes a financial sector law, has been involved in financial crime, has failed to take steps to prevent financial crime and no longer complies with the applicable fit and proper requirements, the Regulators may issue a directive that a person be removed from a specified position or function.
Directives: A financial institution or key person may receive orders from the Regulators, requiring them to take specific action. These actions may include ceasing to offer a specific product, modifying a term of a financial product, removing a person from a specified position or function, prohibiting the payment of a dividend, cease conduct which contravenes a financial sector law, and remedying the effects of a contravention of a financial sector law.
Investigations: The Regulators have a wide range of powers to conduct in-depth investigations. These include conducting interviews under oath, calling for information, subpoenaing documents and, in appropriate instances, executing search and seizure warrants.
Administrative penalties: If the person or financial institution has contravened a financial sector law or an enforceable undertaking, the Regulators may impose an administrative penalty, taking into account certain factors to determine a fair penalty, including, (amongst others) deterrence, degree of co-operation, seriousness of the contravention, loss or damage suffered as a result of such a contravention and the extent to which the conduct was deliberate or reckless.
The Regulators will use an enforcement instrument that most effectively remedies the effects of and penalises the misconduct, and that will deter others from similar conduct.
The FSCA Enforcement Report 2024 detailed that between 1 April and 31 March 2024, the FSCA (1) imposed 156 debarments (2) issued 104 public warnings (3) entered into 41 enforceable undertakings (4) withdrew 75 and suspended 1061 licenses (5) finalised 418 investigations and (6) imposed over ZAR 940 million in administrative penalties.
In respect of these enforcement instruments, the FSCA noted that there was a substantial increase in the use of enforceable undertakings as compared with the previous reporting period, as they have been proven to be an appropriate remedy in certain circumstances. The FSCA also noted that there was a significant increase in administrative penalties as compared with the previous reporting period, primarily due to the FSCA’s approach to enhancing deterrence. The FSCA also noted that during the reporting period, it collaborated with international counterparts on 45 matters and became a signatory to the International Organisation of Securities Commission's (IOSCO) Enhanced Multilateral Memorandum of Understanding to enhance the effectiveness of cross-border investigations and enforcement.
The above statistics indicate that the Regulators are taking great strides to enforce their mandates. Financial institutions must remain compliant with financial sector laws, or risk facing the multifaceted enforcement regime.
* Davis and De Meyer are partners at Webber Wentzel.
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