ASTUTE September 2016

1. ASTUTESeptember 2016 Caroline Da Silva DEO: FAIS

2. STRATEGIC DRIVERS: GLOBAL FINANCIAL CRISIS / UNEMPLOYMENT ECONOMICS

3. TWIN PEAKS – IN BRIEF A new financial regulatory architecture structured around ‘objectives’ of financial regulation and supervision rather than an ‘industry silos’ approach Rationale: • Incorporates lessons from financial crisis • Judged particularly relevant for SA: • Prominence of financial conglomerates • Financial stability enhanced through role of SARB • Allows for dedicated focus on market conduct issues

4. TWIN PEAKS MARKETCONDUCT PRUDENTIAL FINANCIALSTABILITY Financial Stability Oversight Committee Banking ConductofBusiness Financial Market Infrastructure Insurance MarketIntegrity Financial Conglomerates Resolution Authority ConsumerEducation FSCA PA SARB

5. BARRIERS TO ACCESS OF FINANCIAL PRODUCTS AND SERVICES Access barriers prevent a target market/clients from using financial products and services. These barriers include: affordability; physical proximity; appropriateness of product/service features for the target market; eligibility requirements imposed by financial service providers to access the service; and regulatory requirements that influence whether a person can access a product/service or not. SOURCE: Cenfri, Finmark Trust and UNCDF, 2014, “The MAP Toolkits: Making Access Possible”.

6. ACCESS INITIATIVES • PROMOTING ACCESS THROUGH AN ENABLING LEGAL AND REGULATORY FRAMEWORK • Micro-insurance Framework • Proposed Regulatory Framework for Funeral Service Providers • Advice and Intermediary Services: FAIS • FAIS Competency Framework • Framework to enable appropriate product development and access to distribution and advice • Access to finance for SMEs through capital markets • Enabling technological innovation in the provision of financial services and products • Ongoing review of sectoral laws in transitional period

7. BARRIERS TO USAGE OF FINANCIAL PRODUCTS AND SERVICES RRIERS TO USAGE OF Usage barriers discourage a target market from using a product or service. These may include: Lack of trust in the service provider; perceptions of the affordability or value of the product/service; level of financial capability of the potential clients; and fear of formalities. SOURCE: Cenfri, Finmark Trust and UNCDF, 2014, “The MAP Toolkits: Making Access Possible”.

8. BUILDING TRUST AND CONFIDENCE IN THE SECTOR TO ENCOURAGE USE OF APPROPRIATE FINANCIAL SERVICES AND PRODUCTS • FSCA Mandate • Strengthening financial literacy through better education • Treating Customers Fairly (TCF) • Dispute Resolution • Unclaimed Benefits

9. STRATEGIC DRIVERS: CONSUMER TRENDS CONSUMER TRENDS

10. REGULATORY RESPONSE TO CONSUMER TRENDS CONSUMER TRENDS

11. WHERE WE HAVE COME FROM… Supervisor: • Backward-looking • Compliance-based • “One-size-fits-all” – not risk-based • “Industry silo” approach to regulation and supervision Outcomes: • Despite rules, too many examples of poor customer outcomes • Culture not customer-centric • Conduct and integrity risks not proactively managed

12. WHERE WE ARE GOING… • Guiding principles: • Forward-looking • Pre-emptive and proactive • Outcomes focused • Risk-based and proportionate • Comprehensive and consistent • Intensive and intrusive… • National Treasury • “A safer financial sector to serve South Africa better” • February 2011

13. MANDATE OF THE FSCA • The objective of the Financial Sector Conduct Authority (FSCA) is to protect financial customers by: • ensuring that financial institutions treat financial customers fairly; • enhancing the efficiency and integrity of the financial system; and • providing financial customers and potential financial customers with financial education programs, and otherwise promoting financial literacy and financial capability.

14. IMPLICATIONS FOR FSCA • Centralised capacity along ‘functional’ lines • Regulatory framework (standard setting), licensing; supervision; and enforcement functions organised centrally to ensure consistency • IT system support to drive efficiency • Information system upgrades to support efficient business processes and to enable analysis and identification of risks • Skills development to drive ‘judgment-based’ supervision • Outcomes focused approach requires supervisory judgment • Need specialist support teams and skills development

15. IMPLICATIONS FOR FSCA (cont.) • Enhanced checks and balances • Expanded powers and ‘judgment-based’ approach require a robust system of review for consistency of regulatory decisions • Robust mechanisms for consultation and cooperation • Stakeholder consultation on standard setting • Coordination with other regulators

16. WHATIS FINTECH:DEFINITIONS • FinTech: • Technology applied to financial services. (EY) • But it is not internet banking, ATMs, etc. which may fall under the above. • “intersection between financial services and new technologies” (BIS) • “technologically enabled financial innovation that could result in new business models, applications, processes, or products with an associated material effect on financial markets and institutions and the provision of financial services” (FSB) • Typically includes non-banks from, startups to BigTech (spending billions)

17. SIX HIGH LEVEL INSIGHTS ON INNOVATION IN FINANCIAL SERVICES

18. RISKS ANDOPPORTUNITIES

19. PROVIDING DIGITAL FINANCIAL PRODUCT ADVICE TO RETAIL CLIENTS It is clear that industry would like, and would benefit from, guidance about how the regulatory obligations apply to digital advice providers and certainty about what providers need to do to comply. The FAIS Act currently caters for the inclusion of digital advice with a few amendments to the subordinate regulation – fit and proper requirements.

20. CURRENT REGULATORY REQUIREMENTS FOR ADVICE-FAIS • FAIS regulates advice and intermediary services through principles and rules • Advice is defined as: • Any recommendation, guidance or proposal of a financial nature furnished by any means or medium to any client or group of clients”

21. Under the FAIS Act, you are required to hold an FSP licence, or to be an authorised representative of an FSP licensee, if you are rendering advice. • Fintech start-up business wanting to provide digital advice will need to apply for their own FSP license or become an authorised representative of an FSP licensee. • If a company already holds an FSP licence and is authorised to provide financial advice, their licensing arrangements may not need to change to provide financial product advice digitally.

22. FSP’s may need to review their business arrangements, however, to ensure they are maintaining compliance with their general obligations • FSP licensees are required under the FAIS Act to: • Maintain competence to provide the financial services covered by their licence • Ensure that their representative are adequately trained and competent to provide those financial services

23. Natural person who provide financial product advice to clients are required to meet the minimum competence standards for advisers • In a digital advice context, the financial product advice is generated by algorithms, so there is no natural person directly involved in providing the advice. As such, the training and competence standards do not apply. • Different measures should therefore be introduced to ensure fair customer outcomes and these could be included in the fit and proper requirements or code of conduct where digital advice is introduced . Examples include: • Have human resources in the FSP that generally understand the technology and algorithms used to provide the digital advice;

24. Have a human resource in a Fintech FSP that match the competency of a human advisor • Processes to review the digital advice generated by algorithms • Human review by qualified advisors on the advice generated • Have processes and procedures in place to monitor and test algorithms and amend code to address poor outcomes • Cyber risk protection • Outsource management and due diligence requirements

25. CROWDFUNDING • Crowdfunding is a growing phenomena for small and medium sized enterprises (SMEs) when it comes to raising capital for their businesses. • There are various types of crowdfunding including donation, debt crowdfunding, and equity crowdfunding. • The Capital Markets dept has developed a concept paper addressing the topic of equity crowdfunding, the due diligence process involved with equity crowdfunding platforms, the possible benefits and disadvantages for the market and a gap analysis of other jurisdictions. • Crowdfunding is also included in the FSB strategy on Inclusion

26. CROWDFUNDING • The Financial Markets Act does not give the Registrar of Securities Services the mandate to regulate this activity as it does not fall within the definition of an exchange nor securities services. • An cross sectoral FSB working group was established to consider how crowdfunding can be regulated within FAIS, CIS and Capital Markets. • On site visits have been conducted on equity crowdfunding platforms - through the crowdfunding association. • Regulatory approach will proposed based on these findings

27. STRATEGIC DRIVERS: REGULATION REGULATION

28. RetailDistributionReviewUpdate

29. Adviser categorisation

30. CONFLICT CONTROLS • Confusing terminology - especially “multi-tied” – will not help customers understand advice status • Main test of independence should be extent of product supplier influence • Focus areas of potential conflict include: • Production or sales targets • Ownership or other interests • Binders and outsourcing – stricter conflict controls needed (see later in this presentation) • Other conflicted arrangements – covered by FAIS GC

31. A POSSIBLE TWO-TIER ALTERNATIVE • Two licencecategories: • (i) Registered product supplier agent; • (ii) Registered financial adviser - adviser cannot be both • A registered financial adviser / adviser firm may also describe itself or its advice as “independent”, provided that: • no binder or outsource arrangements/ no ownership interests either way/ no other forms of product supplier influence exist • Being “independent” would not be a separate licence category

32. A POSSIBLE TWO-TIER ALTERNATIVE • Either a registered financial adviser or a registered product supplier agent may also describe themselves as a “financial planner”, provided they meet the applicable standards for financial planning • The principle that degree of product supplier responsibility in relation to advisers will be aligned to degree of influence, will be retained

33. STRATEGIC DRIVERS / RDR RDR The distribution landscape is evolving… X X X X X X X X X X X X