Financial Sector Conduct Authority (FSCA) responsibilities
The Financial Sector Conduct Authority (FSCA) which is at the apex of each pyramid is, inter alia, responsible for supervising and regulating the financial markets other than the function of accepting deposits from the general public. The Financial Markets Act (FMA) stipulates that “the registrar must perform the functions assigned to the registrar by or under this Act and must supervise and enforce compliance with this Act”. The FSCA is an independent institution established by statute (Financial Sector Conduct Authority Act, No 97 of 1990) to oversee the South African financial services industry. The FSCA became operational on 1 April 1991, and is financed by the financial services industry itself by means of levies, with no contribution coming from government.
The FSCA is committed to promoting and maintaining a sound financial investment environment in South Africa.
As such, it has a responsibility to further the objects of the FMA which includes:
- Ensuring that the financial markets are fair, efficient and transparent;
- Increasing the confidence in the South African market;
- Promoting the protection of regulated persons, clients and investors;
- Reducing systemic risk; and
- Promoting the international and domestic competiveness of the South African financial markets and securities.
Powers of intervention and inspection
For practical reasons, the regulatory arrangements by the Registrar do not place strong emphasis on formal supervision other than on CSDs, Exchanges and Clearing Houses. Compliance by the Authorised Users and Participants with the FMA, Rules and Directives of the relevant Exchange or CSD, is not directly supervised by the FSCA. This will be driven mainly by complaints by investors and others, as well as by the application of sanctions for non-compliance with the Rules. The FSCA has powers to investigate or conduct an on-site visit or inspection on any matter where it receives a complaint, charge or allegation, or if the FSCA has reason to believe that a person who provides securities services is contravening or is failing to comply with any provision of the FMA. This means that the CSD is not only bound by its own Rules, but must also enforce them. Drastic measures can be taken against the CSD where it fails to perform its duties in terms of the FMA. After an investigation or on-site visit, the Registrar is authorised to:
- Apply to court for the winding-up of the respondent or apply to the court to begin business rescue proceedings in respect of the respondent.
- Apply to the court for the appointment of a curator for the business of a respondent.
- Direct the respondent to take any steps, or to refrain performing or continuing to perform any act.
- Direct the respondent to prohibit or restrict specific activities of a director, managing executive, officers or employee of the respondent, if the Registrar believes that the director, managing executive, officer or employee is not fit and proper to perform such activities.
- Hand the matter over to the National Director of Public Prosecutions provided that the contravention or failure constitutes an offence in terms of the Act.
- The Registrar may make known the status, details and outcome of any inspection or on-site visit if it is in the public interest.
- The Registrar has the power to impose a fine in the case of any failure by a regulated person to submit to the Registrar, within any period specified by or under the Act, any statement, report, return or other document or information as required in terms of the Act.
The FSCA has comprehensive enforcement powers over Strate. The Registrar may refuse to renew the CSD’s licence. This sanction is very powerful as Strate recognises that the CSD business is its core business. On refusal to renew the CSD’s licence, the Registrar may take such steps as are necessary to achieve the objects of the FMA, which steps may include the transfer of the business to another similar CSD or the winding down of the CSD in terms of the Act. This sanction could also be very powerful as a new CSD could be licensed and the existing CSD closed down. The Registrar can also refer a matter to the Enforcement Committee in terms of the FMA. This Committee acts independently of the Registrar and gives the Registrar more effective enforcement powers.
The SARB performs multiple roles, namely:
The Bank Supervision Department of the SARB is responsible for the regulation and supervision of banks, especially the prudential supervision thereof. Seven of the existing Participants are banks. As such a co-regulatory environment exists between Strate and the SARB in so far as bank Participants are concerned. An MOU, signed between STRATE Supervision and the SARB, serves as the agreement by which regulatory / compliance information on relevant prudential issues is shared between the two entities.
SARB is also responsible for the payment and settlement system (SAMOS) operated for the banks in the clearing system.
The JSE is responsible to the FSCA for the supervision of Authorised Users, including the accounting, trading and custody activities. In turn the Authorised Users use Participants for their settlement activities. Strate has no regulatory or supervisory responsibility for Authorised Users. The JSE and Strate, in their roles as regulators, do however have a need to exchange information relevant to their respective regulated entities. An MOU recognises the co-regulatory relationship that exists between the JSE and STRATE Supervision.
Since all but three of the Participants are banks, the prudential regulation and supervision of the bank Participants is performed by SARB. For bank Participants, STRATE Supervision’s regulatory scope is confined to functional regulation, i.e. Participant related activities of an accepted entity. The STRATE Supervision/SARB MOU, mentioned above, serves as the agreement by which information is shared on relevant prudential issues. Accordingly, STRATE Supervision will not duplicate the activities of SARB in this regard. However, the prudential regulation of non-bank Participants (Eskom SOC Holdings, Computershare Propriety Limited and Link Investor Services) requires increased involvement by STRATE Supervision as these entities do not fall within the SARB regulatory net.
In respect of the bonds environment, Strate is the appointed Clearing House (previously UNEXcor). Strate is licensed as a CSD for the maintenance of immobilised and dematerialised securities holdings and is also responsible for the settlement of money market securities for the South African market.
The Regulated Entity
The body of the pyramid depicts the flow of information to and from the various parties with regard to Rules, Directives and legislation. The roles performed by various parties vary with regard to the making, updating and implementation of Rules and Directives and the supervision thereof. These are depicted in the downward direction. The upward direction depicts the flow of information from regulated entities to those involved in the supervision of such entities.
Controlling Body and Committees of the Controlling Body
The Controlling Body of Strate is responsible for the following five activities:
- The legislative function
- The enforcement function
- The gatekeeping function
- The policing function
- The investigative function
The Controlling Body has delegated certain functions to the Strate Regulatory and Supervisory Committee to which STRATE Supervision has a reporting function. Generally, the Controlling Body is responsible for the performance of the CSD. Good corporate governance should be fostered for a number of reasons. A primary need is that poor governance can harm economic performance and ultimately effect financial stability. This is because poor corporate governance structures lead to poor decision-making. Weak processes and ineffective procedures and controls prevent early warning signs appearing and hence highlighting deteriorating conditions within an organisation. Transparency and accountability attracts new business and gives financial incentive to the investing community. In order to attract and retain large pools of capital from investors, credible and recognisable corporate governance arrangements need to exist. Weak corporate governance undermines confidence in a financial system and the market as a whole.
The CSD Rules and Directives require the appointment of a qualified Compliance Officer by each Participant accepted by Strate. The Strate Compliance Officer’s duty is to ensure compliance with the provisions of the FMA, CSD Rules and Directives and to report breaches to STRATE Supervision. They must have sufficient support and authority from their organisation to discharge this duty.
Management and Staff
The staff of Strate must have the necessary skills and competencies to ensure they are able to discharge their responsibilities. STRATE Supervision staff also requires judgment to balance their supervisory responsibility without creating a prescriptive regime. They must act with professionalism and empathy but with an appropriate sense of urgency when needed.
With regards to the management and staff of a Participant, adequate levels of training and experience must exist to be able to discharge their responsibilities. In addition, management should embrace values, ethics and relationships with their staff and stakeholders, which promote good corporate governance. The CSD Rules stipulate the eligibility criteria for Participants and include a requirement to have competent and experienced management and staff. On an annual basis the directors of a Participant, in their annual report to STRATE Supervision, are required to confirm that their organisation has adequately skilled and competent staff. STRATE Supervision does not determine what constitutes “adequate and skilled personnel” - this is a responsibility of the Participant’s management.
Internal and External Audit
Participants should have an effective internal audit function, which has sufficient authority and competence to justify reliance being placed on its work. The program of work should cover the custody and settlement function of the Participant at least annually. Reports on their findings should be made available to STRATE Supervision. STRATE Supervision does not currently mandate the submission of internal audit reports of a Participant. The CSD Rules do however give STRATE Supervision the power to call for these reports if required.
External audits complement the work of internal audit. By agreement with the Independent Regulatory Board for Auditors (“IRBA”), specific audits are carried out which provide assurance to STRATE Supervision. The scope of these audits and the nature of the reporting requirements have been agreed with STRATE Supervision and are detailed in the Strate Circular.
The Base of the Pyramid
The bottom line of the pyramid shows entities in the securities industry, whether regulated or not.
The FMA defines a Participant as “a person authorised by a licensed central securities depository to perform custody and administration services or settlement services or both in terms of the central securities depository rules, and includes an external participant, where appropriate.” In terms of the FMA, Strate must supervise compliance with the FMA and CSD Rules by Participants and their clients. Participants must advise their clients of their obligations in terms of the CSD Rules. STRATE Supervision has developed a supervisory program for Participants. Enforcement and disciplinary strategies have also been developed if any Participant fails to act in accordance with the FMA, CSD Rules and Directives.
Securities Lending and Borrowing (“SLB”)
The SLB industry is unregulated. Accordingly the activities of SLB lending desks do not fall within the ambit of Strate’s regulatory responsibility. However, SLB lending desks in the equities environment have contractually bound themselves as Business Partners to Strate with respect to the settlement of SLB transactions. Compliance with these contractual obligations will be monitored and corrective action taken if necessary.
In terms of the FMA, a nominee means “a person approved under section 76 of the act to act as the holder of securities or of an interest in securities on behalf of other persons”. The FMA further states that “A nominee of a participant must be approved as a nominee by the central securities depository in terms of depository rules and comply with the requirements set out in the rules.”
The nominee of an Authorised User is approved by the exchange in terms of the exchange rules and the Registrar (FSCA) is responsible for the approval of all other nominees. The FMA mandates that the requirements for the approval of a nominee of a Participant, authorised user or other nominee must be equivalent.
The transfer secretarial industry is unregulated. Transfer secretaries, in so far as they are acting as agent of an Issuer, must also comply with the JSE listing requirements and Strate Eligibility Requirements.
Issuers are regulated by the exchange to the extent that its listing requirements impose responsibilities on Issuers. A section has been included in the JSE listing requirements, which refers to eligibility to operate in the Strate environment. Strate must ensure compliance therewith before accepting the Issuer’s securities for dematerialisation.
The diagrams further depict the co-regulatory environment where MOU’s form the basis of mutual co-operation and sharing of information. It is essential to avoid duplicating or over regulating the market.