The Twin Peaks model is set to shift the approach to licencing

According to the FSB – which will change to the Financial Sector Conduct Authority (FSCA) under the new Twin Peaks financial regulatory model – there is going to be a shift from the current sectoral licensing model to a more centralised, activity-based licensing model.

This shift, however, will only take place in the second phase of implementation of the Twin Peaks model. Until then, the regulator says, the licensing of entities will continue to take place under the existing financial sector laws. Towards an activity-based licensing model.

In the second phase of Twin Peaks implementation, the proposed Conduct of Financial Institutions (CoFI) Bill, which is currently being drafted, will provide the framework for licensing based on activities.

According to the current proposals, financial institutions will, in the second phase, be required to apply for a licence from the FSCA to render a financial service in respect of specific, defined activities they perform – as opposed to under different sectoral laws. The CoFI Bill will define all of these activities in a single, overarching law.

All new applicants, irrespective of their size and complexity of business (from small financial advice practices to large financial services groups), will be subjected to a thorough licensing process.

Licensing is a critical component in the regulatory framework and serves a key function in the supervision value chain. It facilitates and provides an entry point for all applicants before they are allowed to conduct any business. It is therefore essential that licensing systems are not only efficient but also robust.

It is important to note that the principle of proportionality will apply, to ensure that there is no “one-size-fits-all” licensing approach. Instead, the approach and requirements will be proportionate to the risks underlying the businesses activities of different entities. According to the supervisor, this will ensure that the licensing requirements do not pose any unnecessary barriers to entry into the financial services sector.

A more collaborative approach

In instances where licence applications are under the supervision of multiple regulatory authorities, the FSCA will enter into Memoranda of Understanding (MOUs) with the other authorities, such as the Prudential Authority (PA) and the National Credit Regulator (NCR). These MOUs will govern the relationships, cooperation and obligations between the different authorities.

As an example: The NCR remains responsible for licences issued under the National Credit Act. In the first phase of Twin Peaks implementation, the PA will be the licensing authority for Banks and Insurers The FSCA will be the licensing authority under the other financial sector laws. In the second phase of Twin Peaks implementation, certain entities will need to be licensed by both the FSCA and the PA, under their respective laws.

The MOUs between the authorities will ensure that this process is streamlined and co-ordinated.

A more trusted and stable financial system

The new licensing framework is designed to support the objective of the Financial Sector Regulation (FSR) Act, which is to: Achieve a stable financial system that works in the interests of financial customers and supports balanced and sustainable economic growth in the Republic. It does this by establishing – in conjunction with the specific financial sector laws – a regulatory and supervisory framework that promotes:

  • Financial stability;
  • The safety and soundness of financial institutions;
  • The fair treatment and protection of financial customers;
  • The efficiency and integrity of the financial system;
  • The prevention of financial crime;
  • Financial inclusion;
  • Transformation of the financial sector; and
  • Confidence in the financial system.

The process for phasing in the final Twin Peaks licensing framework is expected to be set out in the draft CoFI Bill and supporting National Treasury explanatory documents, which will be published for comment in the next few months. It is important to note that existing licences will be mapped to the new activity framework and converted to the Conduct licence to ensure continuity of business