1. Financial Sector Assessment Programme (FSAP)
Implications for SA legislative and regulatory agenda
National Treasury | 5 August 2015
Ismail Momoniat: DDG Financial Sector Policy

2. Context
Following the 2008 Global Financial Crisis, Presidents Motlanthe and Zuma joined other G20 Leaders, to commit to the fundamental reform of the global financial system
Objective was to make the financial sector safer to better serve the needs of the real economy and make it more resilient, starting with correcting the fault lines that led to the global crisis
These reforms were to be achieved by:
Strengthening international standards to build more resilient financial institutions and more robust markets.
The use of periodic peer reviews of G20 member countries by the IMF and G20 (via the Financial Stability Board (FSB)
Up to 2008, some G20 countries resisted FSAP, and the IMF suffering from lack of funds was not able to conduct such FSAPs

3. What is the FSAP?
The Financial Sector Assessment Programme (FSAP) is one of the principal periodic peer reviews of the financial sector of a country
The FSAP (established in 1999 but substantially intensified in 2009 after GFC), is a comprehensive and in-depth analysis of a country’s financial sector
Why FSAP?
Financial sector operates GLOBALLY but is regulated NATIONALLY
Global standards developed: banks (BASEL III), insurance, securities (IOSCO)
Countries commit to implementing the global standards, to enable their fin institutions to operate in other countries
Peer reviews allow investors and regulators from other countries to place reliance on standard of regulation
Other key peer revie that take place, and which SA has recently undergone:
The Mutual Evaluation: FATF (2009)
The FSB Peer Review: G20 (2013)
Peer reviews for Basel, OTC derivatives etc

4. What is FSAP?
FSAP in SA conducted by over 50 experts led by Cheng Hoon Lim during 2014
What is known as the FSAP is actually 3 distinct outputs:
The Financial System Stability Assessment (FSSA), which is an overall assessment of the financial system.
The Detailed Assessment Reports (DAR’s), which measures the strength of adherence to global principles of regulation in the areas of banking, insurance and securities; and
Technical Notes, which are thematic notes on issues that are relevant to South Africa, including OTC Derivatives, Crisis Management and Anti-money Laundering.

5. How are major SA banks and insurers supervised by UK and other African regulators?
The biggest SA banks and insurers operate in SA, but also operate in many other African countries, as well as in UK, USA, Australia and India.
Banking supervisor in SA (BSD at SARB) has to work with supervisors in other African countries, UK, USA regulators etc
FSB (SA) has to work with UK, other African and other supervisors
These institutions are SIFIs in SA, and often in other African countries
Two major SA fin institutions have their HQ in the UK, and have their primary listing at the London Stock Exchange
HOME REGULATOR for Barclays (ABSA) and Old Mutual is Bank of England in the UK (also regulated for mkt conduct by FCA in UK)
SA supervisors are their HOST regulators (BSD for ABSA,FSB(SA) for OMSA)
Barclays is a G-SIFI, OM is not a SIFI in the UK but a SIFI in SA
SA supervisors participate in BoE SUPERVISORY COLLEGES

6. Why are reviews (like the FSAP) important?
The financial sector is a system built on TRUST
Regulators in the financial sector have had to develop a framework for dealing with internationally active banks while being limited to domestic oversight tools.
Peer reviews represent the tool the G20 has developed to access the effectiveness and strength of other countries regulation, who in turn access South Africa’s regulatory effectiveness.
Countries that have sufficiently similar and demonstrably stringent financial regulations are then deemed to be “equivalent”.
International system is based on VERIFIABLE trust and equivalence

7. Risks of significant fines by overseas regulators
20 of the world's biggest banks have paid more than $235 billion (more than R2 trillion) in fines and compensation in the last 7 years for various misdeeds, ranging from fines for manipulation of currency and interest rate markets, to compensation to customers who were wrongly sold mortgages or insurance products.
This is roughly equivalent to the annual economy of Greece or Portugal.

8. Overall 2014 FSAP Assessment of SA (refer to exec summary and 2014 Article IV report)
SA’s financial sector operates in a challenging economic environment
Banks are increasingly exposed to credit risk, and households and firms to a rise in interest rates
Vulnerabilities and potential for spillovers exacerbated by concentration and interconnections, substantial expansion into Africa
Relatively high capital buffers and sound regulation and supervision mitigate above risks
Stress tests confirm capital resiliency banking and insurance companies to severe shocks but illustrate a vulnerability to liquidity shortfalls
Given significant downside risks to the economy, strong regulation and supervision essential to ensure fin sector resilience
Recommendations to implement Twin Peaks system and upgrade resolution framework
Promote a more competitive fin system to make it more efficient

9. Before 2014 FSAB, Fin Stability Board Peer Review findings
The 2013 (G20) FSB Peer Review assessments, which are conducted between FSAPs, highlighted two vulnerabilities
SA G20 FSB Peer Review (2013)- main findings:
Poor interagency coordination and regulatory structure.
Inadequate OTC Derivatives reforms. SA needs to create a framework for centrally clearing OTC derivatives where possible.

10. 2014 FSAP: What were the general findings
The FSAP highlighted the following issues:
FSAP main findings
Reduce systemic liquidity risk by introducing deposit insurance and variable net asset value (NAV) for MMFs.
Break down existing silos and enhance group-wide supervision to manage credit, concentration, interconnected, and cross-border risks; conduct system-wide STs on a regular basis.
Enhance the regulation of collective investment schemes (CIS) to address, in particular, gaps in disclosure and valuation.
Enshrine in legislation the objectives, operational independence and enforcement powers of supervisors, and the basis for government intervention.
Step up the surveillance of OTC derivatives markets to reduce counterparty and global liquidity risks, and consider establishing a local central clearing counterparty (CCP).

11. FSAP 2014: Priority recommendations
The key areas in which recommendations are made are:
Architectural reform (Twin Peaks)
Micro Prudential policy
Macro Prudential policy
Crisis Management (financial safety nets)
OTC Derivatives Market reform
Competition and market structure

12. Twin Peaks FSAP recommendation Proposed policy response
“Define clear and comprehensive institutional, governance and accountability arrangements for prudential and market conduct regulation, including NCR and other relevant institutions.”
Twin Peaks 2015
(NT/DTI)
Market Conduct Act 2016
(NT)
“Publish a roadmap for regulatory reform, with adequate resource allocation, monitoring and evaluation, to carefully implement the move to Twin Peaks and minimize transition risks.”

13. Macro Prudential FSAP recommendation Proposed policy response
Continue building a top-down ST framework for the banking sector and give SARB more resources for data collection and analysis.
Twin Peaks 2015
(NT)

14. Micro Prudential FSAP recommendation Proposed policy response
Strengthen group-wide supervision, focusing on credit and interconnectedness risks;
monitor intra-group transactions and aggregate exposures, and conduct joint on-site visits.
Twin Peaks 2015
(NT/DTI)
Clarify objectives and strengthen the operational independence of all financial sector supervisors in the relevant legislation in line with international standards.
(NT)
Enhance regulatory requirements of CIS, particularly for disclosure, valuation and accounting,
introduce variable net asset valuation for MMFs, and strengthen the supervision of CIS managers.
(NT/MCA)
Fully implement Solvency Assessment and Management (SAM) and Treating Customers Fairly initiatives; give high priority in legislation to protecting policyholder rights and entitlements.
Market Conduct Act 2016
Insurance Bill 2015

15. “Financial Safety Nets” / “Living Wills” / Resolution
FSAP recommendation
Proposed policy response
Introduce a resolution regime compliant with the Key Attributes for, and make the SARB the resolution authority of, all banks and SIFIs.
Resolution Bill 2015/16
(NT/SARB)
Adopt depositor preference and introduce an ex ante funded DIS, with a back-up credit line from the NT.
Remove constraints to early intervention powers and improve legal protection for resolution officials.

16. OTC Derivative Reform FSAP recommendation Proposed policy response
Improve data collection of OTC derivatives and enhance surveillance of the OTC derivatives market.
OTC Derivative Regulations 2015
(NT/SARB)
Consider establishing a local CCP, with credit lines from the SARB and securities collateral placed at a central securities depository to reduce dependency on local banks.

17. Competition and market structure
FSAP recommendation
Proposed policy response
Adopt international best practices on provision and disclosure of market information to retail customers and to potential entrants into the payments and clearance systems.
Market Conduct Act 2016
(NT)
Adopt a transparent entry and exit framework, and lower entry hurdles to the financial system.
Banks Act Review 2017
(NT/SARB)

18. Detailed Assessment Reports (“DAR”)
Banking (Basel Core Principles)
Insurance Core Principles
Securities (IOSCO)

19. DAR BCBS: Basel Core Principles for Effective Banking Supervision
Finding: Objectives of Supervision not clearly defined.
Purpose of financial sector supervision clearly articulated in FSR Bill.
Finding: Delegation of Powers to amend regulations should be at the prudential regulator.
Authority to issue and amend regulatory instruments is revised in the FSR Bill, under the Prudential Authority.
Finding: Powers and terms of employment of head of banking supervision need revision.
FSR Bill overhauls supervisory structures and includes employment and performance criteria for CEO.
Finding: Structure of SA legal framework.
Long-term reform is in place to restructure financial sector acts, regulations and regulatory instruments. The FSR Bill already creates this architecture.

20. DAR BCBS: Basel Core Principles for Effective Banking Supervision
Finding: Improve supervisory processes, especially wrt stress testing, conglomerate supervision, shadow banking and intrusive inspections.
Revision underway currently. Supervisory process overhaul and alignment amongst regulators will follow creation of the PA.
Finding: Support supervisory development in African countries where SA banks operate, especially wrt cross-border resolution.
SA participation in IMF regional training, and membership in AACB and CCBG support on-going cooperation and development.
Finding: Technical corrections – restructured credit, limits on related party exposures, internal interest rate measurement review, public disclosures oversight.
Generally issues have been addressed or are WIP.
Finding: Incorporate a risk-based approach to AML/CFT assessments and ensure enforceability of FIC guidance.
To be addressed.

21. DAR BCBS: Basel Core Principles for Effective Banking Supervision
Summary of key findings
South Africa has a high level of compliance with the BCPs.
The South African banking system is highly concentrated with more than 90 percent of banking assets being controlled by the five largest banks.
The SARB, as a member of the BCBS, is committed to the adoption of international standards and sound practices promulgated by the BCBS, as well as other relevant international standard-setting bodies.
Since the previous assessment conducted in 2010, the BSD has made several significant improvements to its supervisory framework.
There are a few areas in relation to the legal and regulatory frameworks as well as powers that still warrant improvement.
As the country’s financial sector oversight is going through a substantial transition, efforts should be made to maximize the benefit of the new Twin Peaks structure.

22. DAR IAIS: Insurance Core Principles (ICPs)
Number of ICPs 26
Observed 6
Largely observed
Partly observed
Not observed
Main areas of concern:
Governance structures of the FSB
Corporate governance requirements for insurers
Risk management and internal controls requirements for insurers
Creditor protection for policyholders in winding-up of insurers
Public disclosure requirements for insurers
Countering fraud in insurance
Formal framework for group-wide supervision of insurance groups

23. DAR IAIS: Insurance Core Principles (ICPs)
Measures taken / underway to address concerns:
Solvency Assessment and Management (SAM) framework
New risk-based solvency framework for insurers, aligned with international standards, in development with industry stakeholders since 2010.
Includes enhanced requirements for: (i) governance, risk management & internal controls; (ii) financial soundness requirements; and (iii) public disclosure.
Interim measures: Board Notice on Governance & Risk Management Framework for Insurers, effective 1 April 2015
Final measures: Insurance Bill, 2015
Envisaged implementation date: early 2016
Financial Sector Regulation Bill
Twin Peaks implementation – PA and FSCA strengthening supervision
Other initiatives
Resolution framework

24. DAR IOSCO: Objectives and Principles of Securities Regulation
While South Africa’s level of implementation of the IOSCO Principles is complete in several areas, there is room for enhancement.
The securities regulatory structure is complex. Responsibility is divided across several authorities with differing mandates and resources that report to two different government ministries.
Some areas of supervision and enforcement require strengthening.
Certain aspects of the FSB’s governance structure raise concerns about its independence, although there were no indications of any interference with its day-to-day operations.

25. DAR IOSCO: Objectives and Principles of Securities Regulation
IOSCO is recognised as the International Standard setter for Securities Regulation.
IOSCO Objectives:
• Protecting investors
• Ensuring that markets are fair, efficient and transparent
• Reducing systemic risk
IOSCO Principles are some of the key standards and codes recognised as key to sound financial systems
Eight new principles issued in June 2010
Based on the lessons learned from the financial crisis and subsequent changes in the regulatory environment.
Their proper implementation is critical to the creation and maintenance of a sound global regulatory system.

26. DAR IOSCO: Objectives and Principles of Securities Regulation
FSAP recommendation
Proposed response
Principles 16,18 and 20
The Companies Act provisions should be amended to shorten the deadline for publishing audited annual financial statements to 120 days or less
With regards to the proposed changes to the Companies Act, appropriate representations and engagements will be made to the DTI under which jurisdiction this Act falls.
The Registrar issued a letter to the JSE proposing that consideration be given to the implementation of the recommendations made by the assessment team
The Companies Act should be amended to require publication of interim financial statements at least semi-annually, within a reasonable period after the period end.
The Companies Act should be amended to require public disclosure of material changes including a change in auditor
The JSE is encouraged to make the de facto 90 –day deadline for audited financial statements a firm requirement
The JSE should also consider shortening the reporting period for interim statements
Principle 22
The FSB should fully implement its supervisory plan, by conducting sufficient on-site visits and other ongoing supervision of credit rating agencies.
A supervisory plan has been fully implemented.
On site visits have been conducted at all licensed CRAs

27. DAR IOSCO: Objectives and Principles of Securities Regulation
FSAP recommendation
Proposed response
Principle 30
The FSB should adopt a more risk-sensitive capital formula for FSPs based on the risks undertaken by the firm and reflecting riskier activities and larger exposures attracting higher initial and on-going capital  requirements.
FSPs including authorised users should be required to update their accounting records on a more timely basis.
More frequent capital reporting should be required of all FSPs 
A new early warning obligation on FSPs should be implemented to give notice to the FSB when the firm’s capital has declined below an early warning threshold.
 Members capital requirements to address exposures to off-balance sheet transactions and to any related company should be amended.
Although it was mentioned in the final Detailed Assessment Report that off-balance sheet transactions are not widely used in the jurisdiction, it was recommended that the JSE should consider amending its capital requirements to address exposures of the firm to off-balance sheet transactions and to any related company.
Further clarity on this recommendation is required as the JSE indicated that this sort of financial engineering transaction might be used by banks, but not by JSE equities members.
Principle 31
The FSB and JSE should require FSPs and members to have a periodic review of their internal controls and risk management conducted by someone who can render an independent assessment, preferably an external expert such as an auditor.
The FSB and JSE should examine the division of responsibility for the supervision of JSE members that are also FSPs to ensure there is a common understanding of their respective responsibilities and that there are no gaps in or duplication of efforts in that supervision.
The FSB and JSE should routinely share inspection reports regarding firms that are JSE members and FSPs.
The FSB and JSE should consider requiring firms to put in place written account agreements for all accounts.
It was proposed that quarterly meetings are held between the JSE, FAIS Department as well as Capital Markets Department of the FSB to discuss matters and share information.

28. DAR IOSCO: Objectives and Principles of Securities Regulation
FSAP recommendation
Proposed response
Principle 32
Each of the FSB and JSE should have written plans in place outlining what actions will be taken (and by whom), if and when one of their respective regulated entities is in financial difficulty.
It was recommended to the JSE that consideration be given to compile the proposed plan.
Principle 36
The FSB, the SAPS and the NPA should continue to work towards the objective to enhance the use of criminal enforcement to combat market abuse.
It is acknowledged that more criminal enforcement is required that the prohibition of insider trading should be extended to unlisted derivatives that have a listed security or derivative as an underlying instrument.
Financial Sector Regulation Bill
The government is encouraged to consider extending the
prohibition of insider trading to unlisted derivatives that have a listed security or derivative as an underlying instrument.
Principle 37
The JSE and/or the FSB should introduce a short selling reporting regime and increase the monitoring of short selling activities.
It was proposed that the JSE introduce a short selling reporting regime to increase the monitoring of short selling activities.

29. DAR IOSCO: Objectives and Principles of Securities Regulation
CIS
Main Areas of Concern
FSB Measures Undertaken / Underway
Registrars lack of authority to demand information from CIS Managers.
Inadequate record keeping requirements imposed on CIS Managers.
Depth of on-site visits should be enhanced and include CIS Trustees.
Regulation of conflicts of interest are insufficiently granular.
Disclosure requirements for CIS managers are limited.
No specific accounting standards apply to CIS.
Requirements for valuing CIS assets are too general and there is no regulatory requirements on pricing errors.
CISCA to be amended
Implemented
Conflicts of interest provisions will be enhanced through subordinate legislation.
Addressed with promulgation of Board Notice 92 in August 2014.
CISCA to be amended to permit Registrar to prescribe accounting standard.
Pricing and valuation standards being developed that will become part of subordinate legislation.

30. Technical Note: Anti-Money Laundering and Combating the Financing of Terrorism
Main recommendations and responses:
Conduct a national assessment of money laundering / terrorist financing risks in an inclusive and cooperative manner.
A national process to assess money laundering and terrorist financing risks will be developed in conjunction with partner departments and agencies in the JCPS Cluster.
Require financial institutions, including banks, to identify and verify the identity of beneficial owners in line with the standard.
An Amendment Bill to the FIC Act is being developed to provide for this requirement.

31. Technical Note: Anti-Money Laundering and Combating the Financing of Terrorism
Main recommendations and responses:
Enhance capacity (in particular in terms of specialized AML knowledge) within the law enforcement and prosecutorial agencies to enable them to pursue complex money laundering cases.
This will be pursued in conjunction with partner departments and agencies in the JCPS Cluster as part of a national risk assessment process.

32. Technical Note: Anti-Money Laundering and Combating the Financing of Terrorism
Main recommendations and responses:
Provide more guidance to banks and set reasonable and clear supervisory expectations to facilitate the application of a risk-based approach to AML/CFT preventive measures.
The above-mentioned Amendment Bill will provide for the application of a risk-based approach - guidance will be provided in conjunction with enactment of these amendments.
Ensure that accurate beneficial ownership information of legal persons can be accessed by the competent authorities in a timely manner.
This requires a review of legislation under control of the DTI and the DoJ & CD – a proposal will be prepared for Cabinet consideration.

33. Technical Note: Anti-Money Laundering and Combating the Financing of Terrorism
Other recommendations and responses:
The BSD’s risk-based AML/CFT supervision also needs to improve.
The BSD is completing its first supervisory cycle concerning compliance with the FIC Act – and will continue this process on a risk-based approach.
The statistics maintained by the financial intelligence, law enforcement and prosecutorial agencies could be improved.
This will be pursued in conjunction with partner departments and agencies in the JCPS Cluster as part of a national risk assessment process.

34. South Africa’s response to FSAP

35. How is SA responding to FSAP?
FSAP affects may players in SA, not just the major regulators and supervisors like National Treasury, SARB and FSB
Also affects dti, NCR, CIPC, prosecuting authorities etc
Cabinet has agreed in Nov 2014 on the need for SA to respond to FSAP in detail after publication in Dec 2014
Treasury has convened a process with core regulators to respond to the three standards, and also with other non-core players to develop a response
Core regulators responding to specific principle-by-principle response outlined in DARS
Non-core stakeholders to be consulted, but may require architectural changes to current twins peak model as well as system out of twin peaks
Proposed response will be taken to Cabinet before the end of this year

36. SA Response BEFORE FSAP: Regulatory Architecture
Prudential Authority
promote and enhance the safety and soundness of financial institutions that provide financial products;
promote and enhance the safety and soundness of market infrastructures;
protect financial customers against the risk that those financial institutions may fail to meet their obligations; and
assist in maintaining financial stability
Financial Sector Conduct Authority
Enhance, support efficiency & integrity of financial system;
protect financial customers by– - promoting that financial institutions treat financial customers fairly; and - providing financial customers and potential financial customers with financial education programs, and otherwise promoting financial literacy and the ability of financial customers and potential financial customers to make sound financial decisions; and
assist in maintaining financial stability.
Financial Services Tribunal and Enforcement
Regulators will have clear internal policies & procedures for enforcement, enhanced transparency & accountability, strong appeal mechanism
Financial Stability (FSOC)
Inter-agency co-ordination of financial stability issues

37. Twin Peaks as a comprehensive system
Twin Peaks as a “single system” presents a decisive shift away from a fragmented regulatory approach in order to reduce and eliminate the possibility of regulatory arbitrage or forum shopping.
It does not only deal with financial stability and the setting up of prudential and market conduct regulators (establishing the FSCA and PA is just the first step), but focuses on the entire product and regulatory cycle, and a harmonised and holistic system of :
Licensing;
Supervision;
enforcement;
customer complaints (including ombuds);
appeal mechanism (tribunal) ;
Information gathering;
Subordinate regulation making powers;
Scope and objectives of regulation;
consumer education, etc

38. Twin Peaks an opportunity for better regulation
SA financial sector is well developed, complex, interconnected and concentrated; financial inclusion brings benefits and risks to vulnerable groups.
Twin Peaks provides for:
Common system of regulation: build deep overarching market conduct, prudential & stability frameworks  address Minister dti request for stronger enforcement, minimise stability “scare-mongering”
Dedicated and strong market conduct authority  mitigates tensions between prudential/conduct regulation
New focus on financial groups

39. How will the implementation of FSAP policy response to be phased in?
Establish two new regulators
FSOC
Enforcement
Phase 1
New laws underpinning twin peaks
New consolidated market conduct law
Extension of prudential law (MMFs, Shadow Bank, Narrow Banks)
Phase 2
Focus is on WHO REGULATES?
Focus is on HOW DO THEY REGULATE?
2014
2015
2016
Phased approach reduces risks & simplifies implementation

40. How will the implementation of FSAP policy response to be phased in?
A phased approach reduces risks and simplifies implementation
Phase 1: Who regulates? 
Phase 2: How do they regulate? 
Tabling revised FSR Bill in Parliament
Establish new regulatory authorities (target 1 April 2016)
Provide regulator and supervisory powers
Stability oversight
New laws underpinning Twin Peaks
Conduct framework – draft legislation in 1Q 2016

41. Thank you