This is the CONDUCT OF FINANCIAL INSTITUTIONS BILL. It wasn't something I was aware of until I was approached by Ruan Jooste, the editor of Citywire to write this article. I thoroughly enjoyed writing it too.
The gist of the article is that the FCSA is going to impose BEE requirements on licensees at some stage. This will happen after the Bill is assented to and a draft code of good practice is sent out for comment. I base this on ICASA's requirement for ownership and BEE performance in order to retain a licence. However ICASA has always had ownership requirements, insurance licences have never. I expect litigation. But - if you don't know what to do then you can contact us and we'll guide you through it.
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Much has been written about the Conduct of Financial Institutions Bill (Cofi) on Citywire South Africa. Published in 2018, the bill has been languishing in the comment pile for the last six years. However, the Financial Sector Conduct Authority (FSCA) thinks that the bill will be sent to parliament this year, according to Citywire’s March report.
Among its many objectives, Cofi intends to ‘promote financial inclusion’ and ‘promote transformation of the financial sector’.
However, the bill itself is vague as to how this transformation will be achieved – possibly by design. A type of code of good practice will likely be issued at a later stage mandating the FSCA to monitor and enforce compliance.
The bill itself doesn’t seem to understand the concept of black economic empowerment compliance. Compliance is expressly dealt with in clause 38.
If a financial institution is subject to requirements of the Broad-Based Black Economic Empowerment Act, 2003 (Act No. 53 of 2003) and the Financial Sector Code for Broad-Based Black Economic Empowerment issued in terms of section 9(1) of that Act, it must have a policy and plan in place to meet its stated commitments in terms of promoting the transformation of the financial sector in line with those requirements.
There are two distinct aspects to this clause.
The first is the term ‘subject to’. This is a difficult term to understand because it doesn’t specifically mean ‘legally obliged to’. The Britannica Dictionary explains that ‘subject to’ can have three possible meanings: ‘affected by or possibly affected by (something)’; ‘likely to do, have, or suffer from (something)’; or ‘dependent on something else to happen or be true’. None of which imply any legal obligation. My reading of this clause is that it implies some legal obligation that does not exist in law.
The second is that if a financial institution is subject to the specific code then it needs to have a policy to meet its stated commitments.
Herein lies the deception.
Codes of good practice
The Black Economic Empowerment Act says that the Minister of Trade and Industry and Competition (DTIC) may gazette a BEE code of good practice under section 9 of the Act which is exactly that – a code of good practice. In other words, should an institution wish to comply with a code then it would need to look at the targets contained in that code of good practice.
The only entities that are measurable under the codes are organs of state and public entities. All privately owned entities comply with BEE codes voluntarily. This is because BEE codes are fundamentally unconstitutional and if compliance was enforced they would be thrown out by the Constitutional Court.
Treasury itself in its Explanatory Policy Paper accompanying the Conduct of Financial Institutions (Cofi) Bill incorrectly writes that ‘The Broad-Based Black Economic Empowerment (BBBEE) Amendment Act was introduced in 2013 and provided for Generic Codes as binding requirements on companies’.
The only method of enforcing compliance with a BEE code of good practice that exists outside the allocation of mining licences is that of the allocation of licences or concessions. This is covered in section 10 of the BEE Act. I’ve seen applications for this requirement in Public Private Partnerships and the issuing of licences by the Independent Communications Authority of South Africa (Icasa).
The Icasa notice here (prescribing regulations for limitation of control and equity ownership by historically disadvantaged groups) is probably a fair indication of what the FSCA will do once the Cofi Bill has been promulgated. A type of code of good practice will be published for comment; in the case of BEE regulations the comment period is 60 days. Then the comments are considered (it’s doubtful whether any contrary comments are ever considered) and the code is finally gazetted.
We’ve waited years in some cases for the final code to be gazetted. The draft code will set out the empowerment requirements, which will probably be staggered over some time. The Icasa regulations require a 30% black ownership target to be achieved in 36 months from the date of gazetting and then set certain BEE levels over that same period.
There are challenges for the legislators. Empowerment criteria have never been a requirement for a licence to conduct financial services or a financial services-related business. The Icasa regulations have had empowerment criteria attached to licences for the last 20-odd years.
The migration to the new criteria is likely to be complicated and not without a fair amount of litigation.
South African businesses are becoming more litigious against badly thought out legislation and the FSCA would be foolish to expose itself to court challenges that it ultimately cannot defend.
Where do advisers stand?
The Cofi Bill remains a bill [for now], during an election year where it’s believed that there will not be a single majority party voted into power. Legislating is bound to be more complicated and perhaps lengthy. Once the bill is enacted then the Cofi Code of Good Practice would need to be submitted for comments and those comments considered.
When the code is gazetted, which could take upwards of a year, there would probably be a lead time of three to four years.
Using basic mathematics I would suggest that nothing will happen for at least 18 months after gazetting. We might see something happening in 2026 or 2027 and then there will be a lead time to meet that level 4 requirement that the FSCA talks about in its draft paper.
Three years is a very long time in the world of empowerment legislation.