Recently, we discussed the Financial Sector Conduct Authority (FSCA). In this edition, we consider the Prudential Authority (PA). Both of these regulators were introduced as part of the Twin Peaks model of financial sector regulation to regulate financial institutions1 (which includes retirement funds, administrators and insurers) under the Financial Sector Regulation Act (FSRA). Both regulators are now established. Many of the sections of the FSRA became effective on 1 April 2018, other sections will become effective at later dates.
The PA's website is up-and-running and you can find it at www.prudentialauthority.co.za.
What is the Prudential Authority and what is its relationship to the Reserve Bank
The PA is a juristic person which falls under the administration of the South African Reserve Bank (Reserve Bank).
The PA has separate powers and duties under the FSRA to the Reserve Bank. An example of this is that the governor of the Reserve Bank (the governor) is empowered to determine a systemic event and then the financial sector regulators2 (of which the PA is one) have certain duties towards the Reserve Bank, for example to provide information and consult before acting in relation to a systemic event, in certain circumstances.
What does the Prudential Authority do?
The PA exists to enhance the safety and soundness of financial institutions and assist in maintaining financial stability.
The objective of the PA is to:
- Promote and enhance the safety and soundness of financial institutions that provide financial products and securities services
- Promote and enhance the safety and soundness of market infrastructures
- Protect financial customers against the risk that financial institutions may fail to meet their obligations
- Assist in maintaining financial stability
The PA, among other things, cooperates with and assists other financial sector regulators such as the FSCA, Council for Medical Schemes, Competion Commission and the National Credit Regulator (NCR) on matters of mutual interest and as required in the FSRA.
The PA's power to ensure financial soundness of retirement funds is delegated to the FSCA for three years under the FSRA.
The deputy governor of the Reserve Bank and the CEO of the PA
Kuben Naidoo is a Deputy Governor of the Reserve Bank (Prudential Authority) and CEO of the PA. He would thus be a member of the Financial Stability Oversight Committee (FSOC) established under the FSRA.
Structure of the PA
The PA has four departments and they are headed by the people specified below.
The four departments of the PA are responsible for the following financial institutions and functions:
The Banking, Insurance, Market Infrastructure Supervision and Cooperative Financial Institutions Department is responsible for the prudential supervision of standalone banks, insurance companies, financial market infrastructure and co-operative financial institutions.
Insurers are one of the first financial institutions to feel the change related to the establishment of the PA. Insurance companies are now already subject to two regulators (as of 1 April 2018). The PA is entrusted with duties under the Long-term Insurance Act (LTIA) and the Short-term Insurance Act (STIA). (Note that this will be the case until the new Insurance Act, 10 of 2018 becomes effective on 1 July 2018 [this is the date currently envisaged] when this new Act will replace substantial parts of the LTIA and STIA.) These PA powers operate in addition to the FSCA's duties and powers in terms of these insurers, which FSCA powers include such market conduct activities as the Policyholder Protection Rules. The PA has issued a number of Draft Prudential Standards Discussion Documents for consultation.
The Financial Conglomerates Supervision
Department is concerned with the consolidated
prudential supervision of those financial institutions
which are designated as financial conglomerates3.
The PA has recently issued a Discussion Paper called
the Financial Conglomerate Supervision Framework.
This department is also responsible for anti-money
laundering and combating the financing of terrorism
regulation and supervision.
- The Risk Support Department is responsible for
providing regulatory support on credit risk,
operational risk and market risk. It also provides
quantitative and actuarial analysis as well as
statistics on financial institutions for the PA's use.
- The Policy, Statistics and Industry Support Department formulates policy, develops supervisory frameworks, provides operational and regulatory support, provides industry analyses, the enforcement and resolution of prudentially regulated financial institutions (which include retirement funds) and industry technical support on capital and accounting.
Publish regulatory strategy
In terms of the FSRA, the PA must, within six months of 1 April 2018, adopt a regulatory strategy for itself to give general guidance in the achievement of its objectives and the performance of its regulatory and supervisory functions for the next three years. This strategy must be reviewed annually. The PA must invite comment from certain regulators such as the FSCA and ensure that it minimises inconsistencies with the FSCA's strategy.
The Financial Stability Oversight Committee
The FSOC exists to (a) support the Reserve Bank in its functions related to financial stability and (b) to facilitate collaboration, cooperation and coordination of action between the Reserve Bank and the financial sector regulators.
The FSOC advises both the Reserve Bank and the minister of finance and makes recommenda ons relating to financial stability to the governor and other organs of state. In addition, this committee makes recommendation to the governor regarding the designation of systemically important financial institutions.
The members of the FSOC are:
- The Governor (currently EL Kganyago) – Chair
- Deputy General (financial stability) (currently FE Groepe [financial stability and currency])
- The CEO of the PA (currently Kuben Naidoo)
- Commissioner of the FSCA (including acting Commissioner – currently Abel Sithole)
- The CEO of the National Credit Regulator (currently Nomsa Motshegare)
- The Director General of National Treasury (currently Dondo Mogajane)
- The Director of the Financial Intelligence Centre (currently Xolisile Khanyile )
- A maximum of three additional persons appointed by the governor
The provisions of the FSRA relating to the establishment of the FSOC became effective on 1 April 2018.
1 “Financial institution” means any of the following other than a representative:
(a) A financial product provider
(b) A financial service provider
(c) A market infrastructure (as defined in the Financial Markets Act)
(d) A holding company of a financial conglomerate
(e) A person licensed or required to be licensed in terms of a financial sector law
2 “Financial sector regulator” means:
(a) The PA
(b) The FSCA
(c) The National Credit Regulator (certain parts of the relevant legislation apply)
(d) the Financial Intelligence Centre (certain parts of the relevant legislation apply)
3“Financial conglomerate” means a group of companies designated by the PA as a financial conglomerate under the FSRA. This may require the holding company to be licensed under the FSRA, in which case the PA then has power over the holding company in terms of the FSRA and must comply with relevant prudential standards and directives. There are also provisions relating to acquisitions and disposals of material assets by financial conglomerates.
This article was first published in Glassock Guidelines, Edition 13. This publication does not provide advice. If you have any questions/comments on the above, please contact your consultant.