Role of FSB in Financial Regulation: Insights & Initiatives

1. PRESENTATION TO THESTANDING COMMITTEEON FINANCEDevelopments in the regulation of non-banking financial institutions

2. THE FSB TEAM DUBE TSHIDI EXECUTIVE OFFICER JONATHAN DIXON DEPUTY EXECUTIVE OFFICER:INSURANCE JURGEN BOYDDEPUTY EXECUTIVE OFFICER:RETIREMENT FUNDS GERRY ANDERSON DEPUTY EXECUTIVE OFFICER: MARKET CONDUCT AND CONSUMER EDUCATION

3. AGENDA • ROLE OF THE FSB IN THE FINANCIAL SECTOR • LESSONS FROM THE FINANCIAL CRISIS • STATUS AND MAJOR INITIATIVES IN FSB REGULATED SECTORS • INSURANCE • INVESTMENT INSTITUTIONS AND CAPITAL MARKETS • RETIREMENT FUNDS • FINANCIAL ADVISORY AND INTERMEDIARY SERVICES (FAIS) • TREATING CUSTOMERS FAIRLY (TCF) • FINANCIAL INCLUSION • MICROINSURANCE • ENFORCEMENT • CONSUMER EDUCATION - (ACCOMPANYING PRESENTATION)

4. ROLE OF THE FSB • ESTABLISHMENT OF THE FSB: • The FSB was established by the Financial Services Board Act, No. 97 of 1990, to oversee primarily the non-banking financial services industry in South Africa in the public interest • THE MISSION OF THE FSB IS TO PROMOTE: • Fair treatment of consumers of financial services & products; • Financial soundness of financial institutions; • Systemic stability of the financial services industries; • Integrity of financial markets and institutions • THE FSB REGULATES THE FOLLOWING SECTORS: • Insurance, collective investment schemes, capital markets, private retirement funds, financial services providers • THE FSB CONDUCTS ITS WORK THROUGH: • Developing the regulatory framework (with National Treasury) • Off-site reporting • On-site visits • Inspections • Enforcement actions (including curatorships)

5. LESSONS FROM THE FINANCIAL CRISIS G20/Financial Stability Board recommendations: • Proper financial supervision critical to financial and economic stability • System-wide supervision • Include unregulated entities (e.g. hedge funds) • Conglomerate supervision • Macro-prudential regulation • Systemically significant entities • Macro-prudential surveillance and tools • Anti-cyclical capital requirements • Supervisory co-ordination • Supervisory colleges • Peer reviews

6. STATUS OF INSURANCE SECTOR • INDUSTRY ANALYSIS • Limited direct fallout from financial crisis • Recent recovery in asset markets has generally improved financial positions • Results have suffered from economic slowdown – lower sales and increased lapse & surrender rates • Increased number of smaller insurers experiencing financial strain

7. INSURANCE SECTOR: FSB INITIATIVES • SOLVENCY ASSESSMENT AND MANAGEMENT (SAM) • Responding to IMF/World Financial Sector Assessment Program (FSAP) recommendations • A revised, risk-based solvency regime for insurers to meet international standards, but adapted for SA circumstances • Covers technical provisions, regulatory capital requirements, risk management and reporting • Targeted implementation date January 2014 • Inclusive project involving industry and other stakeholders • INSURANCE GROUP SUPERVISION • Legislative provisions • Reporting • Supervisory co-ordination • CONDUCT OF BUSINESS • Binder regulations: oversight over outsourced functions • MICROINSURANCE

8. COLLECTIVE INVESTMENT SCHEMES • INDUSTRY ANALYSIS • Substantial inflows into domestic CIS funds in the past year

9. INVESTMENT INSTITUTIONS AND CAPITAL MARKETS: FSB INITIATIVES • COLLECTIVE INVESTMENT SCHEME ISSUES • Well-regulated sector, considerable inflows • Looking at: “white label” funds, “black box” products and types of investments under Notice 1503 • HEDGE FUND REGULATION • Joint NT/FSB working group developing regulatory proposals based on international best practice (IOSCO and FSB/G20 guidance) • OVER THE COUNTER (OTC) DERIVATIVES • Working group established with representation from stakeholders (NT, industry) to investigate the need for regulation of OTC products • CREDIT RATING AGENCIES • Discussion paper and draft Bill on regulation of credit rating agencies submitted to the NT for consideration, informed by international best practice (IOSCO and FSB/G20 guidance) • JSE/BESA MERGER • JSE TRADING FAILURES • IOSCO CONFERENCE 2011

10. MARKET ABUSE • DIRECTORATE OF MARKET ABUSE (DMA) • Committee of the Board of the FSB responsible for combating abuse in capital markets • Looks at issues such as insider trading, market manipulation and publication of false or misleading statements related to listed companies • During financial crisis, number of market manipulation cases linked to single stock futures increased • Post crisis, number of insider trading cases increased Number of cases:

11. RETIREMENT FUNDS • PENSION FUND SURPLUS APPORTIONMENT • As at 31 July 2010: 7,984 surplus apportionment schemes and nil returns in respect of standalone funds have been submitted (out of an estimated 8,000 – 8,500) • 7,265 have been approved and noted • In addition, schemes in respect of a number of participating employers of umbrella funds still have to be submitted • Total amount of surplus apportionment approved to date: R18,9 billion 15B SURPLUS APPORTIONMENTS 15B “NIL” RETURNS

12. RETIREMENT FUNDS: FSB INITIATIVES • TRUSTEE GOVERNANCE • PF130 dealing with good trustee governance being converted to a directive (becomes mandatory) • TRUSTEE TRAINING • Web-based Trustee Training Toolkit being developed • Implementation by mid-2011

13. FINANCIAL ADVISORY AND INTERMEDIARY SERVICES (FAIS) • INTERMEDIARY PROFESSIONALISATION • 24 regulatory exams to be rolled out by November 2011 • Each will be piloted beforehand • Level 1 regulatory exams piloted in Aug 2010 for roll-out in Oct 2010; Level 2 regulatory exams to be piloted in Oct 2010 (focusing on deposits, short-term insurance, pension fund benefits) • CODE ON CONFLICTS OF INTEREST • Extended code issued April 2010, to be implemented in stages • FSP STATISTICS • 20,252 applications processed since FAIS Act requirements commenced in Sept 2004

14. TREATING CUSTOMERS FAIRLY (TCF) • An outcomes-focused approach to ensuring that companies have an embedded culture of treating their customers fairly throughout the product life cycle • Based on UK Financial Services Authority (FSA) approach, adapted to SA circumstances • Behavioral change will be a multi-year project and requires: • Clear regulatory guidance • Self-assessment by financial institutions of their TCF culture • Effective supervisory approach • Visible enforcement • Discussion Paper issued April 2010 • Further guidance by end-2010

15. FINANCIAL INCLUSION • MICROINSURANCE • Response to problems of unregistered insurance business and consumer abuse • NT/FSB Policy position paper – September 2010 • Dedicated legislative framework aimed at reducing regulatory barriers to broadening access to insurance by low income consumers • Encouraging informal players (e.g. funeral parlours) to formalise • Visible enforcement

16. ENFORCEMENT • ENFORCEMENT COMMITTEE (EC) • Established in terms of the Financial Institutions (Protection of Funds) Act • EC used to deal solely with sanctions arising from the Directorate of Market Abuse, but mandate expanded with effect from November 2008 • Registrar may refer contraventions of any FSB law, regulations, directives and codes of conduct to the EC • EC may impose unlimited penalties and make compensation and cost orders • EC determinations are published • EC is a major step forward for FSB enforcement as it allows for speedy administrative sanction • EC has adjudicated on cases against 63 respondents, and imposed a total of approximately R17 million in penalties, since 2006.

17. CONCLUSION WE WOULD BE PLEASED TO ANSWER ANY QUESTIONS THANK YOU