GARY MOORE: No legislation enables the FSCA to beget transformation

On February 28 2022, the Financial Sector Conduct Authority (FSCA) issued a press release inviting the public to comment on its astonishing draft strategy for promoting financial sector transformation. The release stated that a “strategic objective of the FSCA” includes “supporting the transformation of the financial sector”. This is a decidedly misleading statement. The Financial Sector Regulation (FSR) Act states that promoting sector transformation is an object of the Act. Nowhere does it suggest it is an object of the FSCA.

The FSCA’s transformation role is merely to attend deliberations of a working group or subcommittee set up to deal with that topic, and then only if the Financial System Council of Regulators (FSCR) selects the FSCA as a member. The subcommittee then deals only with an agenda determined by that council, not by the FSCA. Tellingly, the draft strategy document actually acknowledges that the FSCA is restrained from begetting transformation, there being no legislation enabling it to do so.

‘Entirely erroneous’

The FSR Act defines “transformation of the financial sector” as transformation envisaged by the financial sector code for broad-based BEE (BBBEE) issued under the BBBEE Act, which declares that it is a statute to establish a national policy on BBBEE through socioeconomic strategies that include increasing the number of black people, communities and black women that manage, own and control enterprises, and to facilitate BBBEE by promoting economic transformation.

Nowhere does the FSR Act suggest that it is an “objective of the FSCA,” let alone a “strategic objective of the FSCA”, to promote or support BBBEE transformation. The BBBEE Act also does not authorise the FSCA to publish transformation strategies. It is therefore curious that the FSCA’s press release and strategy suggest the authority is currently empowered to take action if companies do not meet BBBEE or transformation, when this assertion is entirely erroneous. Under neither the BBBEE Act nor the FSR Act is the FSCA directed or empowered to involve itself with such matters.

The FSR Act’s “transformation” definition refers to the BBBEE Act’s financial sector code definition, the strategy for which is to be issued by the trade, industry & competition minister, not by the FSCA. Additionally, the BBBEE Act says if a sector develops a “transformation charter,” it is the minister who must gazette it. The FSCA has no direct role in developing, issuing or enforcing a BBBEE charter or standard. (A “conduct standard” is a term used by the FSR Act to describe a regulation by the FSCA, along with such other of the FSCA’s regulations known as a “directive”.)

Even more concerning is that while failure to achieve a certain level of BBBEE compliance is not an offence, the FSCA plans to make it an offence and cancel financial institutions’ licences if licensees fail to achieve their transformation targets. Among other things, what the FSCA’s strategy envisages is to make the financial sector answerable to two masters in regard to BBBEE and transformation. As the Gospel of Matthew says, no man can serve two masters. Adding insult to injury is the fact that, once again, no socioeconomic impact assessment has been produced by the FSCA, thereby overturning the legitimacy of its draft strategy.

The BBBEE Act states that the trade, industry & competition minister must issue a strategy for BBBEE. The Act authorises neither the FSCA nor its responsible minister — the finance minister — to publish a strategy for BBBEE or for promoting transformation. The Act states that it is the trade, industry & competition minister who must publish and promote a transformation charter for a particular sector of the economy, after being satisfied that it was developed by major stakeholders in that sector.

Industry cannot report to two masters

In 2007, the minister issued a Financial Sector Charter (FSC), which stated that it was voluntarily developed by the financial sector. This established targets, principles and responsibilities for the implementation of BEE in the sector and for monitoring and reporting progress, and established an independent charter council to oversee implementation. The targets would be achieved consistent with sound business practice.

The BBBEE Act does not authorise the FSCA to publish transformation charters or strategies, whether or not developed by the major stakeholders in the financial sector. It authorises the trade, industry & competition minister to issue codes of good practice on BEE. Such a code may include further definition of BBBEE, and indicators to measure it and the weighting to be attached to them, and specify target dates by when they must be achieved.

The minister’s amended guidelines for developing sector codes says the main responsibilities of sector charter councils are to develop the sector codes and monitor their implementation. The FSCA is excluded from being called upon to undertake such monitoring, and for good reason. Industry cannot be expected to report to two masters on the same issue without the inevitability of confusion and conflict.

The BBBEE Act states that every organ of state and public entity must apply any relevant code of good practice issued under the Act “in determining qualification criteria for the issuing of licences” or other authorisations of economic activity in terms of any law. The trade, industry & competition minister issued a Financial Sector Code in 2012, which stated that it was a harmonisation of the charter prepared by the financial sector and gazetted in 2007, and of the generic (not sector-based) codes issued under the Act.

The minister issued an amended Financial Sector Code in 2017, which states that it is a harmonisation of the 2012 Financial Sector Code and the amended generic codes. The 2017 amended Financial Sector Code records that the Financial Sector Transformation Council (FSTC), formerly known as the Financial Sector Charter Council, was of the opinion that the 2017 code met all requirements of the provision in the amended guidelines that set out the procedure for developing sector codes. This includes the requirement that the sector body seeking to have a sector code gazetted must provide evidence of compliance with the BBBEE Act’s provision that requires the trade, industry & competition minister to publish a sector transformation charter, but only if satisfied that it was developed by major stakeholders in that sector.

Perhaps the FSCA is relying on the draft Conduct of Financial Institutions (CoFI) Bill to help solve these problems? That question merits the attention of a further article.

• Moore, a senior consultant at the Free Market Foundation, was a practising attorney in Johannesburg for 30 years. He writes in his personal capacity. This is the first in a two part series on the Financial Sector Conduct Authority's  draft strategy for promoting financial sector transformation.