GARY MOORE: FSCA is delusional in regarding itself as a BBBEE superregulator

In February the Financial Sector Conduct Authority (FSCA) invited the public to comment on its bewildering draft strategy for promoting financial sector “transformation”.  The press release stated that a “strategic objective of the FSCA” includes “supporting the transformation of the financial sector”. That was a misleading statement. The Financial Sector Regulation Act does not state that promoting sector transformation is an object of the FSCA.

The act defines “transformation of the financial sector” as transformation envisaged by the Financial Sector Code for Broad­-Based BEE (BBBEE) issued under the Broad­-Based BEE Act. Nowhere does the Financial Sector Regulation Act suggest it is an “objective of the FSCA”, let alone a “strategic objective of the FSCA”, to promote or support BBBEE transformation.

Perhaps the FSCA is relying on the draft Conduct of Financial Institutions Bill to help solve these problems? In September 2020 the Treasury invited public comment on a second draft of the Conduct of Financial Institutions Bill. Its media statement indicated that the Treasury aimed to finalise the bill, submit it to cabinet for approval, and table it in parliament “in early 2021”. Yet the bill has yet to be tabled in parliament.

The draft Conduct of Financial Institutions Bill states that a licensed financial institution that is subject to the Broad­-Based BEE Act and its financial sector code must have a transformation plan, must conduct its business in a way that promotes transformation in a manner reasonably consistent with its transformation plan, and that the FSCA may make conduct standards for financial institutions. 

A conduct standard so prescribed must be aimed at supporting the performance of the FSCA’s functions described in the Financial Sector Regulation Act. The Conduct of Financial Institutions Bill will amend the Financial Sector Regulation Act’s provision describing the FSCA’s functions by inserting a subclause that the FSCA must promote “transformation of the financial sector”. The bill will insert in the Financial Sector Regulation Act a provision that the FSCA may make conduct standards on transformation and matters that must be addressed in a transformation plan.

Revoke licence

The bill will also authorise the FSCA to make conduct standards under the bill about these matters. The bill does not require that a conduct standard issued by the FSCA should have been developed by stakeholders in the sector, in contrast to sector transformation charters and BEE codes issued under the Broad­-Based BEE Act.

The draft Conduct of Financial Institutions Bill states that a licensee must perform its licensed activities in accordance with the applicable requirements of the bill and conduct standards under it. The FSCA may revoke a licence granted under the bill, in accordance with the Financial Sector Regulation Act’s provisions about revocation of licences.

The Financial Sector Regulation Act’s provisions state that the FSCA may revoke a licence it issued if the licensee contravenes a “financial sector law” in a material way, and defines a financial sector law to include a conduct standard made by the FSCA. This means the FSCA will be able to revoke a licence if the licensee has contravened the bill’s provisions requiring the licensee to perform its activities in accordance with the requirements of the Conduct of Financial Institutions Bill, or of conduct standards prescribed by the FSCA itself.

The FSCA’s draft strategy envisages that the FSCA could under current laws issue conduct standards that introduce explicit requirements aimed at transformation. That is at present significantly beyond its powers. The draft strategy states that “some of the strategic initiatives […] can be achieved in phase 1” (within the current legislative framework), “while others are reliant on the legislative framework to be provided under the [2020 draft Conduct of Financial Institutions Bill]”.

Beyond powers

The strategy states that in phase 1 the FSCA will achieve the objective of “developing licensing, regulatory and supervisory frameworks that promote transformation of the financial sector. […] Where appropriate, regulatory instruments may also introduce explicit requirements aimed at transformation.” The strategy suggests that, despite the current legislation not criminalising a failure to achieve transformation targets, the FSCA wishes to set minimum BBBEE levels that must be targeted by each financial firm, require progression through levels of transformation over defined periods of time, and take action if firms don’t meet such targets.

But all that is beyond the FSCA’s powers in phase 1. Neither the Broad­-Based BEE Act nor the Financial Sector Regulation Act directs or authorises the FSCA to exercise such powers. In proposing measures in phase 1 that are beyond the FSCA’s powers the draft strategy violates the basic precepts of the rule of law. The strategy also proposes measures in phase 2 that are likely to violate everyone’s fundamental right to freedom of association, assuming parliament enacts the Conduct of Financial Institutions Bill along its 2020 lines.

One wonders why the FSCA thinks itself to be some form of superregulator, above the law and able to regulate anything and everything it wishes. Perhaps this is because without any reference to parliament the FSCA has been empowered to make its own laws (“conduct standards”). This state-within-the-state is thus able to issue compliance directives against financial institutions that contravene its laws, to impose discretionary “administrative penalties”, to use penalty amounts so extracted to cover its costs, to lay criminal charges against others, to impose fees and levies, and to use the proceeds for its own purposes.

Is it this that creates its own impression that it is indeed the “mighty organisation” by which it is reputedly known among its nearing 1,000 members of staff?

• 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 second in a two part series on the Financial Sector Conduct Authority's draft strategy for promoting financial sector transformation.