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eNewsletter

The FSCA’s Approach to Fintech Regulation


Contents Editor’s note

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Our new FinTech Department - where services and technology meet

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 FSCA’s six strategic priorities 6 The approach to licensing under the COFI Bill

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The FSCA and Financial Intelligence Centre host task force evaluation workshop

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Microinsurance workshop adds value to the financial services sector

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Share your feedback – we’re listening

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Pause for thought

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Disclaimer: The FSCA eNewsletter is published quarterly. Reproduction, copying or extractions, by any means, of the whole or part of this publication may not be undertaken without the permission of the Editor.

2 Editorial Team: Tembisa Marele, Basetsana Taku, Reneilwe Mthelebofu • Design and Layout: Litha Communications, 011 484 7663, teresa@lithacommunications.co.za


Editor’s Note The first year in the life of a newly established organisation is always a noteworthy milestone – and that certainly has been the case for the FSCA. An incredible amount of work has been done this past year, with the intention of improving the way customers are treated in the sector. One of our key priorities in the past year was to strengthen our organisational structure, and include new units focusing on the banking sector, FinTech, and strengthening regulatory policy. The FinTech team, working with the FinTech structures of fellow supervisors, is developing protocols of engagement that will include establishing criteria for participation in Innovation Hubs, sandboxing and tailored licensing requirements. In this issue, the head of this department, Kagiso Mothibi, shares some of his plans in the short to medium term. The team will be research-driven and is working closely with international counterparts to enable best practice in South Africa from a FinTech, SupTech and RegTech perspective using technology to enable and enhance the regulation and supervision of FinTechs.

FSPs and co-operative financial institutions interested in obtaining a microinsurance licence. We bring you some of the highlights from these workshops. Please enjoy our final issue for the year, and take a moment to complete our quick and easy survey at the end of the newsletter to help us make this newsletter an even better offering for you. We wish you a wonderful festive season, and we look forward to hearing from you in the new year! We value your feedback, so get in touch with us at publications@fsca.co.za Tembisa Marele

We also delve into the inner workings of our new Licensing and Business Centre, which is the ‘point of entry’ for all FSCA external stakeholders and is essentially operating as an information management hub for the Authority. The FSCA recently hosted the Financial Action Task Force (FATF) Mutual Evaluation process workshop aimed at preparing supervised entities on what they might encounter if selected for an interview by the Task Force Mutual Evaluation assessors. We also hosted (in collaboration with the Prudential Authority) the Microinsurance Workshop, focused on microinsurance for SMME

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 ur new FinTech O Department – where services and technology meet The FSCA has a dynamic new FinTech department established to drive one of the FSCA’s six key priority areas – understanding new ways of doing business and disruptive technologies (see sidebar – Our six priorities). Heading up this department is Kagiso Mothibi who brings into the portfolio extensive experience in FinTech, telecoms, media and technology. The rationale behind establishing the department is to enable the FSCA to proactively respond to innovations in the sector, bearing in mind that: • New entrants are not just fringe players on the periphery of the sector • New financial products and services don’t wait for regulation to catch up

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• New players cannot comply with regulations they don’t understand • Innovation will not slow down • Regulators cannot be left behind and need to fully understand the implications and impact of industry innovations Research conducted by the department shows that a total of 222 FinTechs active in South Africa in 2019 – most of which were established in the past 11 years and were not born out of the corporate structure of any incumbent financial services provider. The largest and most mature of the segments is payments, with 67 entities. It is thriving largely due to the need for migrant workers to send money to their home countries in sub-

Kagiso Mothibi: Head of FinTech Department


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The largest and most mature of the segments is payments, with 67 entities. It is thriving largely due to the need for migrant workers to send money to their home countries in sub-Saharan Africa. The second largest is business-to-business (B2B) technologies that enable financial service providers (i.e. machine learning and analytics, robotics process automation), with 48 active entities. Most FinTech companies in SA offer services already provided by traditional financial services, but in a cheaper and faster manner, primarily serving lowincome and under-banked customer. As the driver of this function, Kagiso brings extensive experience to the role. He holds an MSc from Oxford University, an MBA from GIBS, and a BS in Finance from UCT. His previous roles include being the Executive Head of Strategy at Vodacom, responsible for crafting Vodacom’s FinTech and M-Pesa strategy, as well as advising the executive on consumer business growth, digital, and operations transformation strategies. He held similar roles at McKinsey, Standard Bank, and Barclays, advising on various matters including unlocking performance to identifying the next wave of growth opportunities. As Head of FinTech responsibilities include:

at

FSCA,

Kagiso’s

• Leading ongoing research and monitoring of FinTech trends and innovations to understand their impact on our sector and customer outcomes, to ensure agile and relevant regulatory and supervisory responses to FinTech developments • Leading the formulation and implementation of a FinTech innovation hub and ‘regulatory sandbox’ environment for testing new innovations to facilitate innovation and evolving regulatory frameworks • Providing thought leadership and support to financial services industry, the public, other regulatory bodies, and FSCA’s Supervision Division

• Driving internal innovation within FSCA to encourage improved regulatory reporting (RegTech) and enhanced supervisory methodologies (SupTech)

execution of the FinTech strategy – namely internal support within FSCA, external partnerships and ecosystems, and a sound operating model.

“I get to immerse myself on a day-to-day basis in a fascinating area that intersects technology, financial services, entrepreneurship, innovation, customers, regulations, and engaging and collaborating with the FinTech ecosystem,” says Kagiso.

Kagiso’s advice to young people starting out in this industry sector is quite specific. He says: “Read up as much as you can on shifts in consumer and enterprise behaviour, and how technology can address these; go beyond desktop research and do your own field research where possible to gain further insight; think out of the box; and stay informed about regulatory developments.”

His enthusiasm about the future is infectious as he describes the three key enablers that will contribute to the successful

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An avid marathon runner and a voracious reader, Kagiso’s personal interests serve as a metaphor for the industry he is tasked with supervising: the need for great strategy, in-depth knowledge, and an appetite for learning. His current read Super Pumped: The Battle for Uber by Mike Isaac, embodies this. “I am fascinated by the transition that unicorn start-ups make from infancy to mature organisations and the growing pains they experience along the way.” Kagiso also provides coaching and mentorship to small business owners on growing their businesses and gives career advice to graduates.

FSCA’s six strategic priorities When FSCA launched in 2018, we identified six strategic priority focus areas that form the foundation of our operations: 1. Building a new organisation 2. An inclusive and transformed financial sector 3. A robust regulatory framework that promotes fair customer treatment 4. Informed financial customers 5. Strengthening the efficiency and integrity of our financial markets 6. Understanding new ways of doing business and disruptive technologies

Caroline Da Silva: Divisional Executive Regulatory Policy

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The approach to licensing under the COFI Bill

Our Licensing and Business Centre Division is a vital part of the FSCA’s operations, managing the licensing and authorisation financial institutions and serving as a point of entry for external stakeholders. It is in this division that all FSCA licence applications are processed to the point of recommending their approval or rejection to our executive committee, where queries and complaints, statutory submissions, and responses to regulatory information requests are attended to. The Licensing function needs to be particularly highlighted as it takes centre stage in the Conduct of Financial Institutions (COFI) Bill, which represents the next step of legislation aimed at reforming the financial sector. The bill is focused on the conduct of financial institutions and is aimed at addressing the multiple standards of legislation through consolidation under a single framework. It represents a move away from the traditional compliance tick-box approach to a more outcome-focused approach that will be supported by principles-based legislation, regulation and supervision. How licensing will be approached under the new conduct framework represents a significant shift from the current system. South African financial institutions are currently granted licences on an institutional basis. This institutional approach has been found lacking in the regulation of business conduct and is susceptible to gaps. The new licensing framework entrenches the activity-based approach of the FSCA, implying that any financial institution that carries out one or more identified activity will be required to be authorised for each activity. An institution that carries out multiple activities – as many financial institutions currently do – will therefore obtain a single FSCA licence but with multiple activity authorisations. “The establishment of our new centralised Licensing Division prepares us for this future model,” says Felicity Mabaso,

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Divisional Executive: Licensing and Business Centre. “Licensing is important and must be rigorous in order to ensure that only good, sustainable applications that will not pose unnecessary risk to the customer are accepted.� The licensing approach is three-tier in nature, comprising a financial institution that is authorised to carry out an activity linked to a specific financial product/s and which is then linked to the customers that the activity applies to. Licences will be issued in terms of the primary law and will specify the activities that a licensed institution is authorised to perform. The conditions accompanying that licence will specify the products and customers to which authorised activities will apply. This means that should a financial institution want to add or remove any of the activities that it is authorised to perform, it will require a change to its primary licence. However, should there be amendments to the products or customers that an activity relates to, it would require only a change to licensing conditions. Mabaso also adds that the FSCA is mindful that the activitybased licensing model must ensure that licensing requirements do not become an unnecessary barrier to entry into the financial services sector. Moving to an activity-based licensing model will also form a critical component of the supervisory role that the FSCA is required to play. To this end, we will work towards ensuring that the licensing model is brought in line with the approach of the FSR Act and is built around the specific regulated activities carried out by financial institutions.

Treatment of existing licences under a new licensing regime Once the COFI Bill is enacted, to ensure certainty and expediency, a financial institution that is licensed under existing financial sector laws will have its licence converted into the new regime following a mapping process of its activities to the new framework, over a staggered period. This is similar to the approach taken in implementing the 2017 Insurance Act. The mapping process, led by FSCA, will involve ongoing engagement to assist financial institutions understand what they must be authorised for, and what obligations are imposed as a result. To minimise disruption, a transitional period will be granted to comply with the requirements of the COFI Bill. New entrants requiring a licence after the COFI Bill is enacted will be subject to the new regime, and provision is made to developmentally support these entities where necessary, including in support of transformation.

Main categories of authorised activities The COFI Bill sets out the categories of financial activities requiring a licence. The schedule includes sub-categories as well as descriptions of each of the activities, including: 1. Providing a financial product or financial instrument 2. Distributing financial products 3. Financial advice 4. Managing and administering investments 5. Benefit administration 6. Professional fiduciary or custodian service 7. Payment service 8. Financial markets activities 9. Providing benchmarks and related services 10. Service related to buying or selling of foreign 11. Credit rating service 12. Debt collection service

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Advocate Dube Tshidi, FSCA Executive Head, addressing attendees during the workshop

Advocate Nonku Tshombe, the current FAIS Ombud also presented during the workshop

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The FSCA and Financial Intelligence Centre host task force evaluation workshop


The FSCA and Financial Intelligence Centre set the scene for the Financial Action Task Force SA Mutual Evaluation process by hosting a workshop on 2 October, at FSCA’s offices in Pretoria. The event was designed for intimate engagement, and a few accountable institutions from various sectors were invited to attend. The Financial Action Task Force (FATF), together with the Eastern and Southern Africa Anti-Money Laundering Group (ESAAMLG) and the International Monetary Fund (IMF) will be carrying out an assessment of South Africa’s AntiMoney Laundering and Counter-Terrorism Financing (AML/CTF) system to ensure it conforms with the Task Force standards on combating money laundering and terrorist financing. The aim of the workshop was to prepare supervised institutions on what they may encounter if they are selected for an interview by Task Force Mutual Evaluation assessors. Peer reviews of each member are regularly conducted by the Task Force to assess levels of implementation of the FATF recommendations, to provide an in-depth description and analysis of each country’s system for preventing criminal abuse of the financial system. The peer reviews give country members the opportunity to assess other countries. The assessors conducted reviews in South Africa between 21 October and 12 November, enabling South Africa to demonstrate how well the country executes each of the 11 Immediate Outcomes (IOs). Under the Task Force Methodology, the onus is on countries to show how effective they are.

A Mutual Evaluation Report is compiled following the peer review, providing an in-depth description and analysis of a country’s system for preventing criminal abuse of the financial system, as well as focused recommendations to the country to further strengthen its system. The highly interactive workshop gave delegates the opportunity to hear a range of speakers on this crucial topic and to fully participate in discussions related to the mutual evaluation. Aspects relating to the Task Force Recommendations and adherence to them were discussed, as well as how entities perceive and address money laundering and terrorist financing risks within their organisations. At the close, the FSCA received names of volunteers from accountable institutions to participate in the assessment. The FSCA will continue to provide updates on ongoing developments related to the mutual evaluation. On a risk-sensitive basis, we continue to monitor the extent to which the supervised entities comply with their anti-money laundering and counterterrorism financing requirements.

Figure 1: The Mutual Evaluation Process

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Microinsurance workshop adds value to the financial services sector The FSCA has partnered with the PA on a series of microinsurance workshops aimed at guiding the industry on the legislative requirements applicable to all microinsurers. The workshops are targeted at SMME financial services providers and cooperative financial institutions that have an interest in obtaining a microinsurance licences. A range of topics relating to product design, data management, claims and complaints, and distribution channels were covered during the workshop.

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Historically, financial exclusion has always been a challenge for the financial sector. A 2008 National Treasury Discussion Paper titled ‘The Future of Microinsurance Regulation in South Africa’ outlines the development of a coherent regulatory framework to encourage and facilitate the provision and distribution of good value, low-cost products appropriate to the needs of low-income consumers by a variety of market players, who must treat their policyholders fairly and manage the risks of providing insurance. This is in line with

Jabhile Mbele, Senior Specialist in the Market, Customer interacting with attendees during the session

Louisa Basitere - Manager: Micro Insurers and Access Pro workshop


r & Inclusion Research

oducts during the

the government’s objective of increasing financial services for the poor and providing a supportive regulatory environment for the implementation of the Financial Sector Charter. The paper is based on the underlying principle that regulation should be tailored to underlying risks, meaning that insurers that only offer microinsurance products, should operate under a reduced regulatory environment. This new microinsurance framework will allow for broad participation in the market and the graduation of entities from small, underwritten entities to larger, more sophisticated options. The purpose of the workshop is to develop a support programme for emerging SMEs, blackowned entities and micro institutions, to support a transformed and inclusive financial sector, with the overall objective of providing information on key prudential and market conduct factors relating to obtaining a microinsurance license and promoting entry into the microinsurance segment of the insurance sector. It gave delegates insight into key areas, such as the requirements for the fair treatment of policyholders, particularly in product design. An insurer must act honourably, professionally and with due regard to the fair treatment of policyholders and must have appropriate policies and procedures in place to achieve the fair treatment of policyholders. The fair treatment of policyholders should achieve some of the following outcomes: • The fair treatment of policyholders is central to the insurer’s culture • Products are designed to meet the needs of identified types of policyholders and are targeted accordingly • Policyholders are given clear information and are kept appropriately informed before, during and after entering into a policy • Where policyholders receive advice, the advice is suitable and takes their circumstances into account • Policyholders are provided with products that

perform as insurers have led them to expect, and the service is of an acceptable standard and they have been led to expect • Policyholders do not face unreasonable postsale barriers to change or replace a policy, submit a claim or make a complaint During product design or development insurers should make use of adequate information on the needs of identified types, kinds or categories of policyholders, undertake a thorough assessment, by competent persons with the necessary skills, of the main characteristics of a new product, the distribution methods intended to be used and disclosure documents, and ensure that it is consistent with insurers strategic objectives, targets appropriate policyholders while mitigating risk of product being used by inappropriate policyholders and takes into account fair treatment of policyholders. Before an insurer starts to market, offer or enter into specific policies in respect of a new product, a senior manager of the insurer must in writing approve the product, this of course applies to new product and material changes to existing products. The workshop included an overview by Jabhile Mbele, Senior Specialist in the Market, Customer & Inclusion Research, who explained microinsurance as per the Microinsurance Policy Paper: “Microinsurance refers to insurance that is accessed by the low-income population, provided by a variety of different providers and is managed in accordance with generally accepted insurance practice. It forms part of the broader insurance market, distinguished by its particular focus on the low-income market, which translates into distinct means of product design and distribution.” During her presentation, she outlined the difference between a financial services provider (FSP) and a financial product provider or supplier, the retail distribution channels available, and due diligence and governance.

“Microinsurance refers to insurance that is accessed by the lowincome population, provided by a variety of different providers and is managed in accordance with generally accepted insurance practice. It forms part of the broader insurance market, distinguished by its particular focus on the low-income market, which translates into distinct means of product design and distribution.”

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Pause for thought

Look up at the stars and not down at your feet. Try to make sense of what you see, and wonder about what makes the universe exist. Be curious. Stephen Hawking 15


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