10 March 2021 by and Corporate & Commercial Alert

FSRA: Requirements for significant owners of financial institutions

Chapter 11 of the Financial Sector Regulation Act, 2017 (FSRA), which came into effect on 1 January 2019, read with Joint Standard 1 of 2020 (Joint Standard 1), which recently came into effect on 1 December 2020, provides for the regulation of significant owners of financial institutions. This note highlights the key requirements relating to approval and notification for changes in significant ownership, and the fit and proper requirements applicable to significant owners of financial institutions.

Please note that this is a non-exhaustive high-level summary and we recommend that you consult the detailed provisions of the relevant regulations to ensure proper compliance. This note is for information purposes only and does not constitute legal advice.

  1. Significant Owners

1.1      Section 157 of FSRA provides that a person (natural or juristic) is a “significant owner” of a financial institution if the person, 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. A person has this ability if:

1.1.1    the person, directly or indirectly, alone or together with a related or inter-related person, has the power to appoint 15% of the members of the governing body of the financial institution;

1.1.2    the consent of the person, alone or together with a related or inter-related person, is required for the appointment of 15% of the members of a governing body of the financial institution; or

1.1.3    the person, directly or indirectly1, alone or together with a related or inter-related person, holds a ‘qualifying stake’ (as that term is defined in FSRA2) in the financial institution.

  1. Approval and Notification Requirements

2.1      The approval and notification requirements provided for in section 158 of FSRA apply specifically to significant owners of ‘eligible financial institutions’ (defined to include banks, long-term and short-term insurers, and market infrastructures such as stock exchanges and central securities depositories), managers of collective investment schemes, and any other financial institutions as may be prescribed from time to time by the regulators (Applicable Financial Institutions). Certain changes in significant ownership of Applicable Financial Institutions require the prior written approval of the relevant Authority (being either the Financial Sector Conduct Authority or Prudential Authority, collectively referred to as the “Authorities”), whereas other changes in significant ownership merely require prior notification to the relevant Authorities, as more fully described below. Whilst our financial sector laws have for many years contained similar provisions regulating changes of significant holdings in such financial institutions, the provisions of FSRA capture a significantly wider range of transactions inter alia through an expansive definition of a “qualifying stake”, and catching “indirect” acquisitions of such stakes, which acquisitions need not even be “active” in the sense of purchases, sales or subscriptions for shares in an Applicable Financial Institution.

2.2      Section 158 of FSRA requires:

2.2.1    prior written approval of the relevant Authority to become a significant owner of an Applicable Financial Institution;

2.2.2    prior written approval of the relevant Authority to cease being a significant owner of an Applicable Financial Institution which has been designated by written notice from the Governor of the South African Reserve Bank as a systemically important financial institution in terms of Part 6 of the FSRA3;

2.2.3    prior notification to the relevant Authority to cease being a significant owner of a non-systemically important Applicable Financial Institution;

2.2.4    prior written approval of or notification to the relevant Authority, depending on the requirements of the relevant Authority as specified at the time of granting the initial approval referred to in paragraph 2.2.1, to increase or decrease the extent of the ability of the significant owner, alone or together, with a related or inter-related person, to control or influence materially the business or strategy of the financial institution.

2.3      For the purposes of 2.2.4, Joint Standard 1 provides that an increase or decrease of 5 or more in the percentages specified in paragraphs 1.1.1, 1.1.2, and the definition of “qualifying stake” referred to in 1.1.3, constitutes an increase or decrease in the extent of the ability of the significant owner, alone or together, with a related or inter-related person, to control or influence materially the business or strategy of the financial institution. This includes a cumulative increase or decrease over a period of time or a single increase or decrease.

2.4      An Applicable Financial Institution must notify the Authorities, in the manner and form determined by the Authorities4, within 30 days of it becoming aware of a change in significant ownership or potential change in significant ownership in respect of the Applicable Financial Institution.

2.5      If a person enters into an arrangement in contravention of section 158, the arrangement, insofar as it results in a change in significant ownership of an Applicable Financial Institution, is void. For the purposes of section 158, such arrangement need not involve the acquisition of, or disposition of, shares or other interests or property.

2.6      It is important to note that section 158 does not affect any other requirement in terms of a financial sector law to obtain approval or consent in respect of an acquisition or disposal. In other words, to the extent that any other relevant financial sector law requires the approval of any regulatory authority in respect of an acquisition or disposal, such approval should be obtained in addition to the approval and/or notification requirements under section 158.

2.7      In light of the above, and given that the interpretation of section 158 has significant practical implications which may easily be overlooked, it is critical to obtain advice as to the applicability and requirements of section 158 in transactions involving Applicable Financial Institutions.

  1. Fit and Proper Requirements

3.1      Joint Standard 1 requires that all significant owners of financial institutions and financial institutions (as that term is defined in section 1 of FSRA5) must meet certain fit and proper requirements. It sets out the criteria that must be met by significant owners of financial institutions in order to be considered fit and proper as well as factors that would constitute, on a prima facie basis, evidence of the absence of fitness and proprietary. Fitness and proprietary of significant owners is linked to financial standing, competence and integrity.

3.2      The Authorities recognise that the assessment of fitness and proprietary requires an application of judgment, therefore the Joint Standard sets out the factors to be considered when exercising such judgment. In order to assist the Authorities with oversight of the fitness and proprietary of significant owners, Joint Standard 1 places certain reporting obligations on financial institutions.

3.3      Although Joint Standard 1 applies to all financial institutions, the Authorities issued exemption notices which exempts significant owners of certain financial institutions from the application of Joint Standard 1, including, inter alia, authorised financial services providers6, credit rating agencies, friendly societies, pension fund organisations, branches of foreign institutions as referred to in section 18A of the Banks Act, branches of foreign reinsurers, co-operative banks, co-operative financial institutions, co-operative insurers, and Lloyds or Lloyds underwriters.   

3.4      A copy of Joint Standard 1 and the relevant exemption notices is accessible here.

Footnotes

1     It is unclear from the legislation how an “indirect” stake is determined. 

2     Section 1 of FSRA defines “qualifying stake” to mean, in respect of a company that is a financial institution “that a person, directly or indirectly, alone or together with a related or inter-related person”:-

(i)     holds at least 15% of the issued shares of the financial institution;

(ii)    has the ability to exercise or control the exercise of at least 15% of the voting rights attached to securities of the financial institution;

(iii)   has the ability to dispose of or control the disposal of at least 15% of the financial institution’s securities; or

(iv)   holds rights in relation to the financial institution that, if exercised, would result in the person, directly or indirectly, alone or together with a related or inter-related person:-

(aa)   holding at least 15% of the securities of the financial institution;

(bb)   having the ability to exercise or control at least 15% of the voting rights attached to shares or other securities of the financial institution; or

(cc)   having the ability to dispose of or direct the disposal of at least 15% of the financial institution’s securities.

           Section 1 also provides for a definition of “qualifying stake” in respect of financial institutions which are close corporations or trusts.

3     In November 2019, the South African Reserve Bank (SARB) designated six of South Africa’s largest banks as systemically important financial institutions, namely Absa Bank Ltd, The Standard Bank of South Africa Ltd, FirstRand Bank Ltd, Nedbank Bank Ltd, Investec Bank Ltd, and Capitec Bank Ltd. In October 2020, the SARB published a discussion paper on the methodology to determine which insurers are systemically important within the South African context. The designation of a systemically important financial institution must be published and the relevant financial institution will receive notification of such designation.

4     Application and notification forms for significant owners of financial institutions registered under financial sector laws for which the Prudential Authority is the responsible authority are available at: http://www.resbank.co.za/PrudentialAuthority/FinancialSectorRegulation/Pages/Significant-owners---applications-and-notifications.aspx

      The Financial Sector Conduct Authority has advised that it will publish the application and notification forms for significant owners of financial institutions registered under financial sector laws for which it is responsible in due course. In the interim, applicants must submit applications in terms of section 158 in a format of their choice.

5     Not restricted to the Applicable Financial Institutions discussed in paragraph 2, but excluding the exempt financial institutions referred to in paragraph 3.3.

6     Other than authorised financial services providers who are ‘eligible financial institutions’ or managers of collective investment schemes.

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