JOINT STANDARD 1 OF 2020: FITNESS, PROPRIETY AND OTHER MATTERS RELATED TO SIGNIFICANT OWNERS

The Financial Sector Conduct Authority (FSCA) and the Prudential Authority (PA) published Joint Standard 1 of 2020 (Joint Standard) on 1 June 2020, which sets out the requirements for fitness, proprietary and other matters related to ‘significant owners’, as defined in section 157(1) of the Financial Sector Regulation Act, 2017 (FSRA). It is set to take effect on 1 December 2020.

A financial institution is defined in section 1 of the FSR Act to include, inter alia, market infrastructures (such as central counterparty, a central securities depository and an exchange), a holding company of a financial conglomerate (to date no financial conglomerate has been identified by the Authorities) or a person licensed or required to be licensed in terms of the financial sector law as provided in schedule 1 of the FSR Act (such as a bank in terms of the Banks Act, 1990 or a manager in terms of the Collective Investment Schemes Act, 2002).

The Joint Standard applies to the significant owners of financial institutions and to financial institutions. In terms of section 157(1) of the FSR Act, a significant owner of a financial institution is a person who directly or indirectly, alone or together with a related or inter-related person, has the ability to control or influence materially the business or strategy of the financial institution. Control or material influence is constituted as the person, directly or indirectly, alone or together with a related or inter-related person:

  1. having the power to appoint 15% of the members of the governing body of the financial institution;
  2. consenting to the appointment of 15% of the members of a governing body of the financial institution, if such consent is required; or
  3. holding a qualifying stake in the financial institution.

Roles and responsibilities

A significant owner must have procedures in place for assessing and attesting to, on an annual basis and also upon written request by an Authority, its fitness and propriety as per the requirements of this Joint Standard. The assessment and attestation must be conducted within one year of the date of commencement of this Joint Standard and annually thereafter.

A financial institution must notify the Authorities, in the manner and form determined by the Authorities, within 30 days of it becoming aware of significant ownership or potential significant ownership in respect of the financial institution.

A significant owner must notify the Authorities, in the manner and form determined by the Authorities, within 30 days of it becoming aware of non-compliance with this Joint Standard or a change in the fit and proper status of the significant owner occurring.

Certain persons have been exempted from the Joint Standard, in terms of FSCA General Notice 3 of 2020. These exempt persons include:

  • an authorised financial service provider (FSP), as contemplated in the Financial Advisory and Intermediary Services Act (FAIS), other than an authorised FSP that is also:
  • a credit rating agency as defined in the Credit Rating Services Act, 2012;
  • a friendly society as defined in the Friendly Societies Act;
  • a pension fund organisation as defined in the Pension Funds Act;
  • a financial product provider or FSP that is not subject to a financial sector law other than the FSRA;
  • a significant owner of any person referred to above that is exempt from the requirements of the Joint Standard.

Certain persons have been exempted from the Joint Standard by the Prudential Authority (PA), in terms of Exemption Notice 1/2020. These exempt persons include:

  • a branch of a foreign banking institution as referred to in section 18A of the Banks Act, 1990;
  • a branch of a foreign reinsurer as defined in the Insurance Act, 2017;
  • a co-operative bank as defined in the Co-operatives Banks Act, 2007;
  • a co-operative financial institution as defined in the Co-operatives Banks Act, 2007;
  • an insurer, as defined in the Insurance Act, that is also a co-operative registered under the Co-operatives Act, 2005;
  • Lloyd’s or Lloyd’s underwriters as defined in the Insurance Act, 2017;
  • a significant owner of any person referred to above that is exempted from the requirements of the Joint Standard.

On 1 June 2020, the FSCA published FSCA FAIS Notice 32 of 2020 which amended several exemptions relating to Private Equity Funds, with the effect that where an exemption was set to expire on 30 June 2020, it has now been extended until 30 June 2021.

Exemption of Certain Persons conducting Financial Services related business with Private Equity Funds

On 13 December 2012, an Exemption of Certain Persons conducting Financial Services related business with Private Equity Funds (Board Notice 208 of 2012) was published which provided Category II FSPs who only manage private equity funds with relief from some of the requirements in respect of a discretionary investment mandate and certain of the financial soundness requirements. Subsequent Notices extended the expiry date of certain of the exemptions set out in the Notice and on 28 June 2018, FSCA FAIS Notice 37 of 2018 was published which further amended the exemption to reference the new Determination of Fit and Proper Requirements (Board Notice 194 of 2017). The effect of the Notice which exempted Category II FSPs from meeting certain requirements, and subsequent amendments, is as follows:

Mandates

Risk statement

Any mandate that was entered into before 13 December 2012 does not have to include a general statement pertaining to risks associated with investing in local and foreign financial products, and particular reference to currency risks (as required in terms of s5(1)(j) of the Code of Conduct for Discretionary FSPs) as long as these investors were informed, in writing, of these risks within six months of the publication of Board Notice 208 of 2012 (i.e. 13 June 2013). Although this exemption still stands it only affects older mandates that were concluded before this date.

Mandate termination

Any mandate that was concluded before 13 December 2012 is exempted from the requirement that the mandate must make provision for termination in writing of not more than 60 calendar days.

Any mandate entered into after 13 December 2012 is exempted from the provision requiring a mandate to be able to be terminated upon 60 calendar days written notice, providing clients, who in the aggregate have committed 75% of capital to the private equity fund, have the right to terminate the mandate for any reason whatsoever, after notice in writing of not more than 180 days.

FIT AND PROPER REQUIREMENTS – Financial Soundness

A Category II FSP is exempted from meeting the liquidity requirement set out in the Determination of Fit and Proper Requirements (s48(2)) until 30 June 2021, provided it only manages private equity funds. In addition, the Category II FSP does not have to submit the Liquidity Calculation Declaration to the FSCA whilst this exemption applies.

CONDITIONS

It is important to note that any Category II FSP that wishes to rely on the abovementioned exemptions, must register the exemption with the FSCA in the format which is prescribed and is also required to notify the FSCA if there are any changes to the information submitted when registering the exemption. The Application Form that must be completed when applying for these exemptions is set out in Board Notice 208 of 2012.

Exemption of Certain FSPs conducting Financial Services related business with Private Equity Funds from Section 13(1)(c) of the Act

FAIS Notice 70 of 2015 which came into effect on 1 July 2015, exempted a Category II FSP that renders financial services to a private equity fund from Section 13(1)(c) of the FAIS Act, which says that a person cannot render financial services or contract to do so, other than in the name of the FSP itself. The expiry date of this exemption has been extended to 30 June 2021.

An FSP that wishes to rely on this exemption, must register the exemption with the FSCA and must inform the FSCA if there are any changes to the information submitted, within 15 days after the change has taken place.

Exemption of Certain Juristic Representatives from the Liquidity Requirements

Board Notice 194 of 2017 (the new Fit and Proper requirements) introduced financial soundness requirements for Juristic Representatives. FSCA FAIS Notice 88 of 2018 exempted juristic representatives of a Category II FSP that only renders financial services to private equity funds from having to meet the liquidity requirement. In terms of FSCA FAIS Notice 32 of 2020 this exemption will continue until 30 June 2021. For the duration of this exemption, these juristic representatives are also not required to submit a Liquidity Calculation Declaration to their FSP as prescribed by the new Fit and Proper requirements.

However, this exemption is subject to the Juristic Representative not becoming the subject of a decision, order or directive which may result in debarment, the imposition of an administrative penalty or being removed from a specified position or function in or in relation to a financial institution. If this condition is not met, the exemption will no longer apply.