South Africa lays groundwork for FinTech regulation

By Caroline da Silva, Financial Sector Conduct Authority (FSCA)

Financial Technology (FinTech) has become an increasingly popular phenomenon, with people familiarising themselves with crypto-currencies such as Bitcoin, SAFcoin and many others. The main issue with all these currencies is that they operate in a relatively unregulated environment; thus government is unable to either track or protect consumers from potential fraud that may be associated with these platforms.

According to an article published on the official site of Moneyweb (http://www.moneyweb.co.za/), 'the South African Reserve Bank (SARB) issued a position paper on virtual currencies in 2014. At the time, the central bank opted not to oversee, supervise or regulate the virtual currency landscape as it posed no threat to financial stability. The SARB did, however, reserve its right to change its position, should the landscape warrant regulatory intervention.'

Although this seemed like a positive paradigm shift, the financial risks involved when it comes to cryptocurrencies and tokens and the fact that they are not regulated and there are no legal requirements or standardised documents for the issuer to adhere to, made it necessary for a regulatory framework to be developed.

The SARB later announced the establishment of the FinTech programme, designed to assess the emergence and regulatory implications of FinTech. FinTech is simply the process of infusing technology into financial services, which will potentially yield benefits, including improving financial inclusion - this a definition adopted by the various policymakers and key industry players in SA.

The SARB has recently decided to establish a broader FinTech programme, with dedicated full-time staff members. Although it is at an early stage, this programme will be required to strategically review the emergence of FinTech and assess the related user cases.

According to Francois Groepe, Deputy Governor of the South African Reserve Bank, 'The primary responsibilities are expected to include the facilitation of the development of refreshed policy stances for the SARB across the FinTech domain. This will be done by robustly analysing both the pros and the cons of emerging FinTech innovations as well as the appropriate regulatory responses to these developments. A critical success factor of the programme will be the ongoing collaboration with our fellow regulators.'

The newly established Inter-Governmental FinTech Working Group (IFWG), which comprises the National Treasury (NT), the Financial Sector Conduct Authority (FSCA) and the Financial Intelligence Centre (FIC), introduced its inaugural market outreach workshop. The Working Group was formed to develop a common understanding among regulators and policymakers of FinTech developments and relevant policy and regulatory implications for the South African financial sector and economy. It also seeks to develop and co-ordinate an approach to FinTech policy making in the country.

According to the National Treasury, the workshop brought regulators, policymakers and industry players together to develop a ‘harmonised’ approach to FinTech-driven innovation and consider appropriate policies and regulatory frameworks.

The conference conceded that a robust regulatory framework would be beneficial to protect and educate investors against bad actors. Regulators have an option to either amend existing laws by changing current definitions to cater for emerging innovation or create a new overarching regulation that would cater for FinTech. To monitor the quality and credibility of issuers it was proposed that registering all ICOs with a central body would be ideal.

The workshop discussion also brought up a few regulatory issues that may be hampering South Africa’s progress on financial inclusion.

Two debates emerged among the workshop delegates. Both sides of the debate recognised the role that technology must play.

A tangential question was where this innovation should be sourced from. The discussion emphasised the importance of understanding the financial service needs of the currently underserved consumers. The second major issue indicated by delegates was the difficult Know-Your-Client/Customer (KYC) requirements that are placed on financial institutions, assigned by global Anti Money Laundering and Counter Terrorism Financing (AML/CTF) standards that South Africa subscribes to. These approaches would require regulatory changes in whatever kind of KYC due diligence is acceptable among financial institutions.

Going forward

The market participants, in particular, were excited that regulators were taking steps toward making the environment in South Africa more enabling for innovation, showing that South Africa was indeed ‘open for business’ to investors and entrepreneurs looking to make an impact in the local financial market.

The discussions that occurred throughout the workshop have influenced the production of a draft policy paper which will set out the policy position on FinTech and innovation in South Africa’s financial sector by 2019.[1]

The IFWG will host another industry workshop before the end of 2018.

In this workshop there will be more discussion on issues that were not covered in the first workshop. The SARB National Payments Service Department will also host its payments and innovation workshop.

The National Treasury has indicated that a FinTech framework will form part of the much-anticipated Conduct of Financial Institutions (COFI) Bill, which may also include the introduction of a ‘regulatory sandbox’-type initiative to encourage innovation within a controlled environment.

One of the FSCAs priority focus area in the newly released Regulatory Strategy is understanding new ways of doing business and disruptive technologies. This will assist the Authority to understand the impact this focus area will have on the consumers by institutions.

Furthermore, research will need to be conducted to inform the FSCAs position in FinTech. There are discussions with the regulatory quarters to establish innovation hubs, acceleration hubs, and sandboxes, where financial institutions can approach the conduct authority for direction on how regulation impacts on new innovative developments and to test new innovations in a safe environment.

The fact that regulators and supervisory bodies across the world are creating ‘regulatory sandboxes’ as controlled environments within which innovation can occur is evidence that they acknowledge that FinTech presents both opportunities and challenges. Some of these challenges arise in the areas of risk and regulation.

This article first appeared in the FSCA Bulletin, quarter 2 2018/2019 and permission to use it was granted by the author.

 

[1] A consultation paper by the IFWG was issued on 16 January 2019 for comment by 15 February 2019, and are available on the websites of the SARB, National Treasury and SARS.