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Enforcement under Twin Peaks: What will it look like?

In the past, critics have complained that regulators have not been able to adequately reign in or punish law breakers. In cases where they have been able to, the process has taken too long.

Different regulatory authorities have previously approached enforcement in varied ways, driven by the legislative frameworks in which they operate. Competition law enforcement, for example, could be described as an external enforcement system. In that system, the Competition Commission does investigative work and then refers the matter to the Competition Tribunal for a decision.

The South African Revenue Service (SARS), on the other hand, follows an internal enforcement model. SARS determines any penalties to be paid for non-compliance, and levies them.

To date, the FSB has followed a hybrid internal/ external enforcement model. In instances where the FSB finds that a penalty is the appropriate sanction, it refers the decisions to the Enforcement Committee. Although this Committee is made up of external, objective experts, it is still “inside” the FSB, in the sense that it reports to the Board of the FSB, and so has no independent legal personality.

The Twin Peaks model will follow a similar hybrid approach, while introducing new instruments to give regulatory more room to apprehend transgressors.

Enforcement under Twin Peaks

Although the Financial Sector Conduct Authority (FSCA) follows an internal enforcement model, it has also established the Financial Services Tribunal, which fulfils the role of independent arbiter to challenge administrative actions (i.e. actions that are taken internally by the authorities in terms of the legislation, regulations and rules).

While the authorities may take an administrative action on their own, all administrative actions can be appealed to the Tribunal and reviewed by the courts.

If the future PA or FSCA detects a breach of a financial sector law – including breaches of a prudential or conduct standard – it faces a range of decisions.

The authority can impose administrative penalties, or institute criminal prosecutions in relation to the offences in terms of the Financial Sector Regulation (FSR) Act or a financial sector law.

Alternatively, the authority can choose to remedy the situation, either by issuing directives, declaring practices as undesirable, applying to the court for appropriate orders, or entering into Enforceable Undertakings. The aim of this remediation is to rectify the breach and ensure it does not recur.

Enforceable Undertakings

Although they have only been introduced into the Financial Services Board Act recently – and are also provided for in the FSR Act – Enforceable Undertakings are a new instrument most sectors can use.

An Enforceable Undertaking provides the authority with broad remedial powers under an agreement with those who break the law. Enforceable Undertakings typically involve a number of detailed steps, which the transgressor contractually commits to follow to correct a flaw in a process or system used by the financial institution, and/or pay compensation to affected customers.

In the event that a financial institution fails to meet the agreed terms of the Enforceable Undertakings, the authority may:

  • Impose an administrative penalty;
  • Apply to a court for an order directing that person to comply with the terms of the Enforceable Undertakings, or any other order the court considers appropriate;
  • In the case of a licensed financial institution, suspend or withdraw the licence.

Details of an Enforceable Undertaking are generally made public, in an effort to deter other transgressors.

The FSCA may institute proceedings in the High Court, compelling a financial institution to:

  • Comply with a financial sector law;
  • Cease contravening a financial sector law;
  • Comply with a lawful request, directive or instruction made, issued or given by the authority in terms of a financial sector law;
  • Obtain a declaratory order relating to any financial sector law or the business of a financial institution;
  • Prevent the concealment, removal, dissipation or destruction of assets or evidence by a financial institution;
  • Seize and remove the assets of a financial institution for safe custody, pending the exercising of any other legal remedy that may be available to the authority.

Debarment Orders

Authorities can use Debarment Orders when they wish to protect certain groups; or financial customers generally, from certain individuals. The authority must first determine that a person has:

  • Contravened a financial sector law, a regulator’s directive or an Enforceable Undertakings;
  • Attempted, conspired with or aided, abetted, induced, incited, instigated, instructed or commanded, counselled or procured another person to contravene a financial sector law;
  • ontravened or failed to comply with a law of a foreign country that corresponds to a financial sector law.

The authority may then make an order debarring the person for a specified period from:

  • Providing financial products or services, providing a specified category or sub-category of financial product or service, or providing a financial product or service to a specified category or sub-category of financial customer;
  • Acting as a key person or representative of a financial institution;
  • Being involved in managing a financial product or service provider;
  • Being involved in providing a specified financial product or service.

If the authority is satisfied that a person has contravened, or has failed to comply with, a provision of a financial sector law, the authority may impose an administrative penalty in respect of the contravention.