Financial Mail

A STRONGER WATCHDOG

This month marks a new era for financial regulation in SA. It brings with it the opportunit­y to dismantle the myths around how the former FSB operated

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Last week, the Financial Services Board (FSB) relaunched as the Financial Services Conduct Authority (FSCA) at a time when it was facing heightened scepticism from some quarters. In its Cover Story last week, the Financial Mail described the regulator as a “toothless watchdog”, casting unfortunat­e aspersions on the reforms of the Twin Peaks regulatory model, which was implemente­d precisely to fill the gaps in the previous regulatory framework.

First, I should say that Twin Peaks is the result of seven years of unstinting work from SA’S policy makers, who have been preoccupie­d with the best ways in which to plug those gaps. We accepted there were areas in the legislatio­n that were not clearly defined, leaving consumers vulnerable to abuse. This is why Twin Peaks — with the new conduct authority and prudential authority — has the power to regulate how companies conduct themselves in relation to their customers. It will help ensure companies are more sustainabl­e, too.

In an ideal world, no regulator should make mistakes. But mistakes do happen — and when they have, we’ve sought to correct them. But it is disappoint­ing when journalist­s fail to grasp that our regulatory scope has limits. Take the examples of Steinhoff, VBS Mutual Bank, Fidentia, various pension funds and Oakbay, which are held up as examples of incompeten­ce.

On VBS Mutual Bank, it is important to note that the FSB’S mandate extended only to nonbanking financial institutio­ns. We didn’t regulate VBS’S activities as a bank. Of course, in the new regulatory regime under Twin Peaks, we will have the power to regulate banking conduct. It’s a good example of how Twin Peaks recognises the interconne­ctedness of financial institutio­ns, the concentrat­ion risks in the sector and the need for coordinati­on between regulators.

Increased regulatory scope

It is equally unfair to blame the

FSB for not detecting fraud at Steinhoff, the furniture conglomera­te whose share price has tumbled 91% since December. Steinhoff is not a financial services company, so it was never regulated by the FSB, and it won’t be regulated by the FSCA either. While it is true that we investigat­ed claims of market abuse in trading in Steinhoff, you must remember the detection of any insider trading takes place at the exchange on which those shares are listed. Steinhoff’s primary listing is in Frankfurt, with a secondary listing on the JSE.

The market abuse cases in Steinhoff that we are investigat­ing now were opened in December 2017, so it is unfortunat­e that we are expected to have finalised our investigat­ion at this stage.

Steinhoff has appointed PWC to conduct a forensic investigat­ion into accounting irregulari­ties, and those findings are expected only by the end of the year. And our investigat­ion into Steinhoff can be finalised only once we have seen the details of Steinhoff’s restated 2015, 2016 and finalised 2017 financials — which will take months.

While it is true that there have been several pension fund scandals in recent years, it is the trustees who have a statutory fiduciary duty towards the members, which requires them to meet a minimum standard of competency.

We realise the challenges on this front, which is why we’re considerin­g incorporat­ing certain of the King 4 corporate governance standards in a directive that all pension funds will have to comply with. We also intend to make the trustee training toolkit compulsory for all retirement funds this year.

We have also increased the maximum penalty from R1,000 to R4,000 per day for noncomplia­nce by pension funds, including for delays in the submission of their financial returns. We also intend requiring funds to file monthly cash-flow statements, which will help identify unusually large movements of cash.

Until this point, the FSB has admittedly been very compliance driven and reactive. To some extent, this was a consequenc­e of the sectoral-based approach that prevented us from regulating the entire ambit of the financial sector.

But Twin Peaks changes that. It not only expands the jurisdicti­on of the new FSCA, but it also expands our approach. It gives the supervisor­s additional teeth, and additional resources to fill the gaps we’ve highlighte­d as creating vulnerabil­ities in our market.

Twin Peaks has the power to regulate how companies conduct themselves in relation to their customers

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123Rf/anna Bogatyreva
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