Financial institutions without acceptable empowerment plans could lose their licences

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Gary Moore | Lawyer | Senior Researcher | Free Market Foundation | mail me |


In 2020, the National Treasury published for public comment a draft Conduct of Financial Institutions Bill, as an update of its draft two years earlier.

This 2020 draft bill aims, ambitiously, at revising the separate laws which regulate the conduct of financial institutions of all kinds, be they banks, insurers, pension funds or medical schemes; and which regulate the conduct of providers of financial advisory, administration or payment services.

Consolidating many laws into one framework

The draft bill seeks to consolidate as many laws as possible into one framework. It would repeal half-a-dozen existing statutes and amend ten others, some comprehensively. Not content with this extensive rejigging of the financial landscape, the 2020 draft bill also addresses black economic empowerment (BEE).

The 2017 Financial Sector Regulation Act establishes the sector’s supervisory arrangements. Its stated object is to achieve a stable financial system that works in customers’ interests and supports growth, by establishing a regulatory framework that “promotes transformation of the financial sector” among other things.

The 2017 Act defines “transformation of the financial sector” to mean transformation envisaged by the Financial Sector Code for Broad-Based BEE (the Financial Sector Code) issued in terms of the 2003 Broad-Based BEE Act (the 2003 BEE Act).

The 2003 Broad-Based BEE Act aims at promoting economic transformation, in order to enable meaningful participation of Africans, Coloureds and Indians in the economy, and achieving a substantial change in the racial composition of ownership and management and in the skilled occupations of existing and new enterprises.

Determining the qualification criteria

That 2003 Act requires government bodies to apply a relevant code of practice when procuring goods or services from private suppliers or when entering public-private partnerships. And government must apply a relevant code of practice in determining qualification criteria for the “issuing” of business licences required by any law.

Yet the 2003 BEE Act does not also go so far as to say that any business enterprise which then fails to comply with transformation commitments in any applicable business sector’s code of good practice may be subject to “cancellation” of its business licence. Nor indeed does the 2017 Financial Sector Regulation Act stipulate that a financial institution which fails to comply with transformation commitments in the Financial Sector Code issued in terms of the 2003 Act may be subject to cancellation of its business licence.

But this 2020 draft Conduct of Financial Institutions Bill now aims to fill that perceived gap, with clauses that will render any financial institution that fails to comply with transformation commitments in the Financial Sector Code liable to have its business licence cancelled.

The 2020 draft bill states that its object is to establish a regulatory framework that supports the achieving by the Financial Sector Conduct Authority (the Conduct Authority) of its functions specified in the 2017 Financial Sector Regulation Act. The bill will amend the 2017 Act to specify that the conduct authority “must”, among its functions, promote transformation of the financial sector.

The draft bill will also amend the 2017 Act to provide that the conduct authority “must” prescribe conduct standards that promote the Act’s object (of establishing a regulatory framework that promotes transformation of the financial sector) and supports the conduct authority’s functions (including promoting sector transformation).

Promoting transformation of the sector

The 2020 draft bill requires any financial institution which is subject to the BEE Act and the Financial Sector Code issued in terms of it to have “a plan” in place to meet its commitments for promoting transformation of the sector as that Act and Code requires.

The 2020 draft bill also authorises the conduct authority to make conduct standards on “transformation and matters which must be addressed in a transformation plan”.

The draft bill stipulates that, without holding a licence issued in terms of the bill, nobody may provide banking, insurance, pension or medical scheme products, or administration or advisory services about financial products.

The draft bill requires a licensed financial institution to conduct its business “in a manner that promotes transformation” consistent with its transformation plan, and to implement “governance arrangements that are reasonably necessary to ensure adherence” to that plan. The 2020 draft bill read with the 2017 Act authorise the conduct authority to issue a directive to a financial institution to take specified action if the institution contravenes the 2020 draft bill or 2017 Act or a conduct standard by the conduct authority.

Significantly, the draft bill and 2017 Act together authorise the conduct authority to revoke a financial institution’s licence if the licensee materially contravenes the draft Bill or 2017 Act or a conduct standard or directive of the conduct authority.

The effect

The overall effect is that the conduct authority will have power to revoke a financial institution’s licence to carry on business, if the institution contravenes a conduct standard or directive about transformation or does not have a transformation plan or has one that contravenes a conduct standard about what a transformation plan should address.

The draft bill declares that anyone who is required to be licensed in terms of the bill, but is unlicensed, commits an offence and is liable on conviction to a fine of up to R15 million or imprisonment for up to ten years, or both.

The 2017 Act, as said, defines transformation to mean transformation envisaged by the Financial Sector Code issued in terms of the 2003 Broad-Based BEE Act. That 2003 Act authorises the Minister of Trade & Industry to specify indicators for measuring Broad-Based BEE and the weightings attaching to each indicator.

The minister has specified as the main indicators for measuring an enterprise’s levels of empowerment the racial composition of its ownership, the racial composition of its senior management, the extent of senior management of its black employees’ skills, and the extent to which it purchases goods and services from empowered suppliers.

The indicators are elitist. Their intended beneficiaries are not the masses of unemployed, but people more privileged. Owners, senior managers and skilled employees are drawn from within an enterprise or from other businesses. An enterprise’s suppliers are also already in business. The indicators were framed by the Minister of Trade & Industry, not the Minister of Employment & Labour.

Be all this as it may, after the 2003 Broad-Based BEE Act was amended in 2013, trade associations in the financial sector framed a draft code which the Minister of Trade & Industry gazetted in 2017 as a substantial amended Financial Sector Code (replacing the sector’s 2012 code).

The 2020 draft Conduct of Financial Institutions Bill is not “currently before Parliament” or “wending its way through Parliament”, contrary to general understanding. The Bill has not yet been formally tabled or introduced in Parliament in any final form.

In conclusion

In July 2023, it was reported that the Conduct Authority believed that the National Treasury has made “good progress” in preparing the bill for submission to Parliament. In September, Sanlam’s financial-services subsidiary stated that the bill was set to be tabled in Parliament “before the 2024 national elections”. Many industry players are said however to express doubt over whether it will progress further this year.

The national elections will take place on 29 May. If before then the bill is tabled in Parliament with its controversial empowerment clauses, it is doubted that it will be a vote-catcher for the government, those clauses being as mentioned elitist rather than job-creation measures.

When the bill is eventually tabled, it remains to be seen if it still contains these controversial clauses.


 



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