Increased regulation of South Africa’s financial services sector is expected to revolutionise the burgeoning local fintech industry.
This was the word from John Gillmer, director of corporate and commercial practice and joint sector head for the private equity division at law firm Cliffe Dekker Hofmeyr.
Gillmer spoke at the recent “Growth of the fintech industry in Africa” webinar organised by the firm, in partnership with intellectual property services company Spoor & Fisher.
According to Gillmer, over the past few years, SA has seen the introduction of new frameworks and amended laws, which have resulted in more stringent regulation of fintech services, including the Financial Intelligence Centre Act, Pension Funds Act, Protection of Personal Information Act and Insurance Act.
Government is in the process of introducing the Conduct of Financial Institutions (COFI) Bill, which will consolidate the conduct standards of financial institutions. It is aimed at protecting financial customers, promoting the fair treatment and protection of financial customers by financial institutions, as well as supporting fair, transparent and efficient financial markets, among other objectives.
Finance minister Enoch Godongwana pointed out in his 2022 budget speech that the amendments to the new Bill, which forms part of the Twin Peaks regulatory framework, is due to be presented to Parliament in the first half of this year.
According to Gillmer, while financial compliance officers are already overwhelmed with new regulations, the COFI Act will disrupt and transform the local fintech sector.
“Regulation is coming… in fact, it's already here. In the South African context we've seen the migration specifically towards the Twin Peaks regulatory framework.
“In the last 18 months, we've seen the introduction of the Financial Sector Regulatory Act, among others. We have also seen significant amendments to our KYC regulatory regime under FICA. But if you think we are only catching our breath now, I hate to break the news to you, but we are only halfway there and there is a lot more regulation coming in the pipeline.
“The COFI is going to be a significant piece of legislation because it's going to completely overhaul the fintech services sector.”
Once enacted, the COFI Act will play an important role in paving a clear and detailed roadmap for fintech regulation in SA, he added.
Furthermore, the COFI Bill envisions the development of fintech regulation in SA to be premised, primarily, on the need to "promote innovative technologies" and encourage agile services within the financial services sector.
Evolving regulatory technologies
In 2018, SA’s financial regulatory system went through a fundamental change, as new Twin Peaks regulators came into operation − the Prudential Authority and Financial Sector Conduct Authority.
One is charged with maintaining the stability of the financial system – called prudential regulation − while the other is responsible for market conduct and consumer protection, what the South African authorities have termed the “good conduct” peak.
The Financial Sector Regulation Act was signed into law on 21 August 2017, marking an important milestone towards a safer and fairer financial system that is able to serve all citizens.
As part of the second aspect of the Twin Peaks, the COFI Bill is the next step in legislative reform that is expected to strengthen the regulation of the financial sector and general market conduct.
“COFI will also result in significant amendments to Regulation 28 of the Pension Funds Act, which deals with credential restrictions to pension funds and the infrastructure used to conduct services. This means we could see big institutional investors now climbing into the fintech space and pension funds being invested in the fintech space,” continued Gillmer.
As regulatory watchdogs home in on the local financial services industry, Gillmer highlighted a new frontier expected to enhance market supervising, dubbed supervisory technology. This trend can be defined as the use of innovative technology by supervisory agencies and regulators to digitise reporting and regulatory processes.
“We have already seen several jurisdictions across the world; for example, Australia, which uses a market intelligence system that monitors all trades automatically, through the use of artificial intelligence. As soon as the system picks up any on-market and off-market trade that may seem unusual, it flags it for investigation.
“In South Africa, the Financial Intelligence Centre Act will introduce a similar type of regulatory technology, which is quite an interesting development that we need to keep our eye on.”
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