Is the FSCA losing its way?

Martin van Staden / Midjourney
Martin van Staden / Midjourney

This article was first published by Business Day on 15 November 2024

The Financial Sector Conduct Authority (FSCA), its predecessors once a beacon of discerning regulatory oversight, now appears to be adrift, entangled in the convoluted intricacies of the Financial Sector Regulation Act 9 of 2017—colloquially termed “twin peaks”. This Act, alongside an increasingly inscrutable and burdensome corpus of financial legislation and regulation, imposes a staggering annual cost exceeding R6 billion on the country, with compliance expenses escalating at a rate more than 1.5 times that of inflation. The FSCA alone now incurs operational costs nearing R1.5 billion per annum, whilst the Prudential Authority contributes a further R600 million. Industry-wide compliance however, adds a sum estimated to be at least double these amounts. Yet Ombudsman statistics alone would imply that the public might do just as well without them.

The “twin peaks” Act heralded the creation of no fewer than 17 new regulatory bodies, councils and committees, many of which remain effectively dormant or underutilized. Despite its extensive bureaucratic framework, the Act’s core objectives—ensuring financial stability, safeguarding consumers, and promoting sustainable economic growth—seem increasingly obscured. Rather than adhering to its foundational mandate, the FSCA has ventured into territories that are, at best, tangential to its purpose and, at worst, wholly misaligned with its capacity and expertise.

Mission creep: The FSCA’s ever-expanding agenda

Though the FSCA’s role is delineated by statute, it has embarked upon its own mission with an ambitious and uncharted expansion of its remit. Its website has proclaimed lofty and overreaching objectives, including:

  • Ensuring the stability of financial markets: A goal that even the venerable Federal Reserve in the United States has struggled to realise.
  • Driving transformation within the financial sector: A responsibility traditionally delegated to the Department of Trade, Industry and Competition, raising the question of why the FSCA should assume this role.
  • Promoting fair customer treatment: A task that, given the effectiveness and statistics of our ombudsman services in addressing consumer grievances, appears to be all but redundant.
  • Providing financial education: Yet there is scant evidence of any regular, comprehensive, nationwide financial literacy programs spearheaded by the FSCA. This is in any event the terrain of the SETA bureaucracies.
  • Fostering innovation: A peculiar claim, as regulatory bodies tend to suppress innovation through stringent compliance requirements, rather than encourage it.

While these objectives have since been subtly rephrased, they remain symptomatic of the FSCA’s tendency to extend its reach far beyond its statutory mandate. The authority now claims to aim at “improving industry practices to achieve fair outcomes” and “harmonizing regulatory frameworks”—aspirations that are vaguely defined and seem detached from the practicalities of implementation. Moreover, the objectives as set out in the Act do not, neither should they, include the word “outcomes”. In addition, the FSCA’s ambition to “empower households and small businesses” lacks clarity on how this will be achieved, particularly without the provision of significant financial resources.

Equally perplexing is the FSCA’s self-appointed role as an arbiter of innovation within the financial sector. By their very nature regulatory bodies constrain creativity through the imposition of compliance standards; the FSCA’s track record, along with that of its predecessors, provides little to suggest it is equipped to foster meaningful innovation.

Misaligned priorities: The FSCA’s overreach

The FSCA’s self-growing mandate has seen it intervene in areas that are peripheral, if not entirely unrelated, to its original responsibilities, drifting on to un-mandated terrain. It has, for instance, proposed the revocation of licenses for entities that do not meet Broad-Based Black Economic Empowerment (B-BBEE) requirements, and has suggested the creation of a committee to redistribute billions in unclaimed pension and insurance benefits. Even more audaciously, the FSCA has assumed an environmental regulatory role, purporting to assess the carbon footprints of financial institutions.

The FSCA has also introduced a new regulatory “Standard” for “Open Finance,” which posits that it should anticipate market developments and identify emergent risks. Such initiatives are emblematic of the FSCA’s mission drift. Its incursion into socio-economic and environmental spheres dilutes its focus and erodes its ability to fulfill its primary mandate—consumer protection and the regulation of fair treatment within financial services.

Redundancy and overrugulation: an exercise in duplication

Many of the FSCA’s recent proposals are redundant, duplicating legislative provisions that are already enshrined in existing law. Consider the following examples:

  • Informed consent: The Protection of Personal Information Act (POPIA) of 2013 and the draft Conduct of Financial Institutions (COFI) Bill of 2020 already cover the full spectrum of informed consent, rendering the FSCA’s additional requirements unnecessary.
  • Security standards: POPIA mandates that responsible parties take reasonable steps to protect the integrity and confidentiality of personal information, obviating the need for further FSCA regulation.
  • Disclosure requirements: The COFI Bill already envisages compeling financial institutions to provide clear, accurate information to consumers, a mandate that the FSCA’s new standards merely echo.
  • Data protection: The Cybercrimes Act of 2020 criminalizes the misuse of personal data, yet the FSCA insists on the introduction of a redundant “Cyber Joint Standard.”

These duplications do little more than add layers of conflicting bureaucracy, increasing compliance costs without improving consumer protection. Instead of streamlining regulatory processes, the FSCA’s proposals exacerbate inefficiency, encumbering financial institutions with unnecessary burdens that are ultimately borne by consumers in the form of higher fees and premiums.

A void of expertise and direction

At the heart of the FSCA’s drift lies the nebulous language of the “twin peaks” Act itself, which fails to provide the FSCA with clear, specific, objectively measurable directives. This legislative vagueness has allowed the FSCA to stray far from its original remit. It permits staff to interpret their given objectives subjectively on whim and megrim. Compounding this issue is the fact that many of the FSCA’s senior staff members possess limited direct experience within the financial industry. This is in part, a consequence of the regulatory doctrine of avoiding “regulatory capture”—the irrational notion that hiring industry insiders could compromise the independence of the regulator.

Without sufficient industry expertise, the FSCA risks making regulatory decisions that are either ineffective or counterproductive. To oversee a sector as complex and dynamic as financial services requires a profound understanding of the industry’s nuances—something the FSCA in its current form, seemingly lacks.

Precisely these same arguments can be made for scrapping the anachronism of insurance distribution price control. Purporting to know what the “correct” price is for anything, particularly commission paid to intermediaries on a one-size-fits-all basis, is a regulatory nonsense long since discredited across the globe. It is surprising that the FSCA wishes to continue bearing this burden.

A clarion call for reform

The FSCA’s current trajectory, characterised by mission creep and regulatory overreach, suggests an institution that has lost sight of its founding purpose. If the good folk at the FSCA wish to remain relevant and effective they must refocus on their core mandate. The primary function of the FSCA is, and should be, the regulation of fair treatment within financial services, the protection of consumers and the creation of an environment for dynamic growth. It should refrain from venturing into domains such as environmental regulation, B-BBEE compliance or price controls, which, to the extent necessary, are best handled by other government bodies with the requisite expertise.

Moreover, Parliament must consider revisiting the “twin peaks” Act to provide the well-meaning team at the FSCA with clearer, more defined objectives. Such a legislative overhaul would prevent the kind of mission creep that has led to the current regulatory confusion. By defining specific, objectively measurable goals, legislators will ensure that the FSCA remains focused on what it was established to do, while leaving broader socio-economic and environmental issues to more appropriate entities.

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The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation. This article may be republished without prior consent but with acknowledgement to the author.

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