FSCA – Regulators, Educators and Innovators

South Africa’s financial services sector is a sophisticated network boasting dozens of domestic and foreign institutions providing a full range of services. These encompass commercial, retail and merchant banking, mortgage lending, insurance and investment, and are all backed by a sound regulatory and legal framework.

Often described as one of the most well-regulated and stable financial services industries in the world, South Africa’s financial industry was historically the jurisdiction of the FSCA’s predecessor – the Financial Services Board (FSB).

Running until 2018, the FSB supervised and regulated the non-bank financial services industry in the public interest, and by all accounts, with relative success. So what prompted the formation of the FSCA?

CHANGE IN SCOPE

“Despite the FSB’s successes, there was a clear need for South Africa to have a dedicated conduct regulator that would ensure that financial institutions prioritise treating their customers fairly,” explains Tembisa Marele, Head of Communications at the FSCA.

“The FSCA not only regulates how financial firms conduct themselves, but also empowers customers to make better financial decisions,” she goes on. “As part of our strategy, our mandate as a conduct regulator is to promote fair customer outcomes, provide financial education and assist in maintaining financial stability in South Africa.

“The FSCA’s prioritisation of financial inclusion is not just about increasing consumer access to financial products and services as an end,” Marele clarifies. “We want and need to ensure that this access enables South Africans to use appropriate financial products that meet their needs and improve their quality of life.”

The FSCA has a much broader remit than the FSB enjoyed, with oversight of financial products and services like banking, services related to credit, and the buying and selling of foreign exchange. “This requires a shift in approach from the FSB’s traditional compliance driven model to one that is proactive, pre-emptive, risk-based and outcomes focused,” Marele impresses.

The scale of the change required has been significant, impacting how the FSCA is structured, resourced and skilled as well as how regulatory and supervisory frameworks are designed. “In this time,” Marele describes of the changeover, “we made key appointments to the executive team, provided support in the development of primary legislation, drafted and published several regulatory instruments and assisted the industry to navigate the changes in regulation and legislation.

“We also prioritised engagements with our key stakeholders, as it remains our belief that it is only through a collaborative approach that we can effectively regulate the sector.” Marele is conservative, even humble in her assessment of the FSCA’s impact to date, but it has been keenly felt throughout the industry. 

“We should look at the industry and its milestones in terms of whether or not it’s treating its customers fairly, and while there is some progress, it remains something that needs to continuously be prioritised and scrutinised.

“The concept of treating customers fairly is not new to the industry and for the past seven years we have sought to entrench it. Although we continue to see progress, our efforts have been intensified under the FSCA.”

EDUCATION AND INNOVATION

One important aspect of the FSCA’s mandate requires it to provide education to financial customers and promote financial literacy and inclusion, which drives its consumer education strategy. Marele goes on to describe the form that this takes. “We are working to develop best practice for the monitoring and evaluation of the impact of consumer education initiatives undertaken by the financial services sector,” she delineates.

“We want to drive industry initiatives that are better coordinated to maximise the impact of the sector’s spend on financial education, and ensure that this leads to changes in the behaviour of South Africans when it comes to money.

“We’ve partnered with the Department of Public Works to provide financial literacy to participants of the Expanded Public Works Programme (EPWP), and we’re coordinating national financial education projects such as Money Smart Week and the Financial Literacy Schools Speech Competition,” Marele adds, by way of illustration.

Perhaps chief among the imminent causes of excitement for Marele is the FSCA’s Fintech Innovation Hub, which, in partnership with the South African Reserve Bank (SARB), will see the body collaborate with all other regulators in the Fintech sector to create solutions for the South African market.

“The decision to follow a multi-regulator approach to the regulation of Fintechs uses an agile and design-thinking approach,” says Marele, “which has culminated in the impending establishment of the Innovation Hub.

“The idea is to facilitate innovation in the sector in a manner that is coordinated, collaborative and controlled.”

The Hub will be used as a vehicle to engage with the Fintech ecosystem, enabling regulators to craft new policies and innovate. “The Hub encompasses a Regulatory Guidance Unit, which is the first entry point for Fintech firms to obtain support in navigating the regulatory landscape and data and insights from the Unit will inform policy development,” Marele expands.

“There will also be a Regulatory Sandbox that will provide a live testing environment, that balances the risks and benefits of introducing innovative solutions to the market and which cannot be addressed within the current regulatory framework. An Innovation Accelerator will drive innovation, with common benefits across participating regulators and solutions.

“Additionally, an Internal Innovation Function will be owned by each regulator and will interface with the Innovation Hub. This is where disruptive technologies and leading practices identified in the Hub will be recommended for consideration by individual regulators.”

Fintech is recognised to be rapidly transforming the essence of global financial services, and no more is it in evidence than in the SA space. South Africa has been posited as the Fintech capital of the continent, with the industry managing to grow its investment value from $15 million to $170 million in 2018, and continuing this positive trajectory in 2019.

Marele is in absolute accordance with the suggestion of a fundamental shift towards the widespread integration of technology into the sector moving forward. “There are currently 217 active operational Fintech companies in South Africa operating across eight of the sub-segments,” she says. “Some Fintechs operate across more than one segment which increases the total number of Fintechs to 224. These were founded in the last eleven years and the number is expected to grow as the adoption of technology increases.

“In the future, financial regulators will be faced with the challenge of achieving a balance between supporting innovation, and managing the potential risk they pose,” Marele warns of the flip side to the many opportunities such endeavours present.

“They are imperative to supporting Fintech growth, but at the same time we must maintain a stable financial system.” This is really the essence of the FSCA: doing everything in its power to educate and facilitate the needs of consumers, while keeping the all-important equilibrium to ensure the continued success of one of South Africa’s true success sectors.