Joint Standard on significant owners is now published

Background

The financial sector reform, which followed the promulgation of the FSR Act in August 2017, recognised, inter alia, the importance of significant owners of financial institutions due to their ability to control and materially influence the business and strategy of a financial institution.

With effect from 1 January 2019, every person who becomes a significant owner of a financial institution on or after such date is required to seek written approval in terms of section 158 of the FSR Act.

A financial institution is defined in section 1 of the FSR Act to include, inter alia, market infrastructures (such as central counterparty, a central securities depository and an exchange), a holding company of a financial conglomerate (to date no financial conglomerate has been identified by the Authorities) or a person licensed or required to be licensed in terms of the financial sector law as provided in schedule 1 of the FSR Act (such as a bank in terms of the Banks Act, 1990 or a manager in terms of the Collective Investment Schemes Act, 2002).

What is a significant owner?

In terms of section 157(1) of the FSR Act, a significant owner of a financial institution is a person who 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. Control or material influence is constituted as the person, directly or indirectly, alone or together with a related or inter-related person:

1. having the power to appoint 15% of the members of the governing body of the financial institution;
2. consenting to the appointment of 15% of the members of a governing body of the financial institution, if such consent is required; or
3. holding a qualifying stake in the financial institution.

Section 1 of the FSR Act defines a “qualifying stake” in a financial institution, which is a company, to mean a person who, directly or indirectly, alone or together with a related or inter-related person:

1. holds at least 15% of the issued shares of the financial institution;
2. has the ability to exercise or control the exercise of at least 15% of the voting rights attached to securities of the financial institution;
3. has the ability to dispose of or control the disposal of at least 15% of the financial institution’s securities; or
4. holds rights in relation to the financial institution that, if exercised, would result in that person directly or indirectly, alone or together with a related or inter-related person having the effect of items (1) to (3) above.

A “qualifying stake” in respect of a trust constitutes a person that has, directly or indirectly, alone or together with a related or inter-related person:

1. the ability to exercise or control the exercise of at least 15% of the votes of the trustees;
2. the power to appoint at least 15% of the trustees; or
3. the power to appoint or change any beneficiaries of the trust.

Joint Standard 1/2020

Joint Standard 1/2020 applies to all significant owners who fall within the scope of the definition of significant owner in terms of the FSR Act, unless exempt. This includes all historic significant owners that were in existence prior to the effective date of section 158 of the FSR Act.

Joint Standard 1/2020 sets out the criteria that must be met by significant owners in order to be considered fit and proper with a greater focus on factors that would constitute, on a prima facie basis, evidence of the absence of fitness and propriety. The Authorities recognise that the assessment of fitness and propriety requires an application of judgement, therefore Joint Standard 1/2020 also sets out the factors to be considered when exercising such judgement.

In order to assist the Authorities to have oversight of the fitness and propriety of significant owners, Joint Standard 1/2020 also places certain reporting obligations on financial institutions, to the extent practical and appropriate.

Points to note 

Roles and Responsibilities

A significant owner must have procedures in place for assessing and attesting to, on an annual basis and also upon written request by an Authority, its fitness and propriety as per the requirements of Joint Standard 1/2020.

As such, Joint Standard 1/2020 places a positive obligation on a financial institution to notify the Authorities, in the manner and form determined by the Authorities, within 30 days of it becoming aware of significant ownership/potential significant ownership in respect of a financial institution as well as of non-compliance with the Joint Standard or a change in the fit and proper status of the significant owner.

Increase or decrease in the extent of ability to control or influence

Joint Standard 1/2020 specifies that an increase or a decrease of 5% of the 15% thresholds as specified under the heading “What is a Significant Owner” above (the Thresholds), constitutes an increase or decrease in the extent of the ability of a person, alone or together with a related or inter-related person, to control or influence materially the business or strategy of a financial institution. Accordingly, based on the language of Joint Standard 1/2020 and in the absence of further clarification from the Authorities, it is our view that a person may not effect any arrangement that will result in such an increase or decrease of 5%, or any multiple thereof, above the Thresholds without having obtained the prior written approval or provided a prior written notification as may be required by the authority responsible for that financial institution. Similarly, any decrease below the Thresholds would also require such prior written approval from or prior written notification to the relevant authority as applicable.

Amendment of Other Regulatory Instruments

The publication of Joint Standard 1/2020 has resulted in an amendment to a number of other Prudential Standards to ensure that anything in respect of the fitness, propriety and other matters related to significant owners will be dealt with under Joint Standard 1/2020. These amendments can be found in attachment 1 of Joint Standard 1/2020.

Exemption  

The Authorities have acknowledged that due to the size and complexity of some of the financial institutions there would be practical issues with complying with Joint Standard 1/2020. This has resulted in the publication of Exemption Notice 1/2020, Exemption by the Prudential Authority of Certain Persons from Joint Standard 1 Of 2020 made under sections 107 And 159(1) of the Financial Sector Regulation Act, 2017 (the PA Exemption Notice) and FCSA General Notice 3 of 2020, Exemption by the Financial Sector Conduct Authority of Certain Persons from Joint Standard 1 Of 2020 made under sections 107 And 159(1) of the Financial Sector Regulation Act, 2017 (the FSCA Exemption Notice), in addition to Joint Standard 1/2020. Accordingly, the following financial institutions as well as its significant owners are exempt: 

1. a branch of a foreign institution as referred to in section 18A of the Banks Act;
2. an insurer (that is also a co-operative registered under the Co-operatives Act, 2005), a branch of a foreign reinsurer or Lloyd’s or Lloyd’s underwriters as defined in the Insurance Act, 2017;
3. a co-operative bank or a co-operative financial institution as defined in the Co-operatives Banks Act, 2007;
4. an authorised financial service provider as defined in the Financial Advisory and Intermediary Services Act, 2002 (excluding an authorised financial service provider that is also an eligible financial institution, for example a bank or a long-term or short-term insurer, or a manager of a collective investment scheme as defined in the Collective Investment Schemes Act, 2002);
5. a credit rating agency as defined in the Credit Rating Services Act, 2012;
6. a friendly society as defined in the Friendly Societies Act, 1956;
7. a pension fund as defined in the Pension Funds Act, 1956; and
8. a financial product provider of financial services provider that is not subject to a financial sector law other than the FSR Act.

What Next

Joint Standard 1/2020, the PA Exemption Notice and the FSCA Exemption Notice to become effective on 1 December 2020.