South African regulatory reform – what does it mean for Private Equity Fund managers?

25 Mar 2020

Following the Global Financial Crisis in 2008, regulation was largely criticised for failing to protect customers, prompting regulators throughout the world to undertake a review of financial regulation. Following the lead of a number of developed countries, the South African government published a paper, called "A safer financial sector to serve South Africa better" introducing the concept of a new regulatory framework, the Twin Peaks Model, for financial institutions in 2011.  Due to the significant reforms proposed, the regulatory framework took a number of years of deliberation before the first enabling act, namely the Financial Sector Regulation Act (“FSR Act”), was signed into law on 21 August 2017. It came into effect on 1 April 2018. The FSR Act creates the legislative framework for the reforms and was the first piece of legislation to be signed into law commencing the process to overhaul the existing South African regulatory framework to the proposed Twin Peaks Model.

The purpose of this legislative overhaul is ultimately to create a safer financial services sector in South Africa. It is believed that this could be achieved by, amongst others, consolidating and harmonising a fragmented set of regulations governing the sector, into a more uniform set of regulations, split between prudential regulations and conduct regulations, which would apply to all financial institutions.

In order to implement, oversee and enforce the above, the FSR Act established two new regulatory bodies, namely the Prudential Authority (“PA”) and the Financial Sector Conduct Authority (“FSCA”) (previously the Financial Services Board). The PA and the FSCA came into existence on 1 April 2018.  They were tasked with promoting and enhancing the safety and soundness of regulated financial institutions and protecting financial customers through supervising market conduct (including but not limited to what is commonly referred to as the “treating customers fairly” or TCF principles) respectively.

The first draft of a new piece of conduct legislation, dealing solely with the market conduct of financial institutions was published for public comment at the end of 2018. The Conduct of Financial Institutions Bill (“COFI bill”) creates the legal framework in respect of the conduct of financial institutions, and will, upon coming into effect, repeal the conduct requirements from all other primary legislation that currently deals with the market conduct of financial institutions. The purpose of such repeal and subsequent regulation in terms of the COFI bill, is due to the fact that financial sector laws deal differently with market conduct requirement in terms of that law. The prescribed conduct requirements of a bank under the Banks Act, for example currently differs from the conduct requirements imposed on an insurer in terms of the Long-term Insurance or Short-term Insurance Act, notwithstanding the fact that both the bank and the insurer sells a financial product to a client. This is an example of where entities (and the conduct of such entities) are being regulated based on an institutional form (i.e. as a bank or an insurer) and not based on an activity (i.e. selling a financial product) which such entity performs. The legislative reform thus aims to harmonise the legislation and treatment of all financial services firms doing similar types of activities, irrespective of whether they are a bank, asset manager, insurer, private equity or venture capital firm.     

This legislation represents a fundamental shift in the way that financial services firms will be regulated, changing to an activity and principles-based, outcomes-focused and risk-based approach.


The drafting of principles in the regulation, enable the policing of the spirit as well as the letter of the legislation.  The COFI bill sets out principles that should be complied with rather than strict rules, although the drafters set out in the explanatory memorandum that a certain number of rules will still remain to protect highly vulnerable consumers.


Regulation of the activity that a financial services provider performs rather than their institutional definition or form with the aim of creating a more level playing field for all companies operating in the sector.  The effect of an activity-based model of regulation is that companies will now be regulated on what you do rather than who you are.

Outcomes focused

The regulators are of the view that management is best placed to determine controls, processes and policies that should be in place to achieve desired outcomes.  The new regulatory approach will enable the monitoring of desired outcomes being achieved and ensure preventative action is taken. The regulation focuses on whether institutions are conducting themselves in a manner that delivers the regulators' desired outcomes.

Risk-based and proportionate

This is closely related to outcomes-focused approach and enables the regulators to identify the greatest conduct risk areas and use its proportionate regulatory capacity to address these risks.

The COFI bill, once enacted, is expected to have a significant impact on the private equity and venture capital industry.  For the first time in South African financial regulation, the legislation included a definition of an ‘alternative asset’.  Although the COFI bill is not yet finalised, it clearly indicates the regulators intention in relation to all alternative assets.  The explanatory policy paper accompanying the COFI bill, clarifies that both pooled funds currently regulated under the Collective Investments Schemes Control Act (“CISCA”) and private equity funds and real estate trusts will be licenced under the COFI bill.

As with most first drafts of new legislation, there are still a number of items that require clarification.  In terms of the private equity and venture capital industry, this includes which entity / entities will require a licence, as multiple entities within a traditional private equity en Commandite partnership could meet the licencing requirements (based on the activities they perform).  The draft does not specify how foreign fund managers will be regulated where they manage South African institutional money, or how or if, an investment holding company will be included in the regulation.  SAVCA continues to engage with the policy makers on a number of industry specific issues, and we hope that a number of these items will be considered and clarified in the second draft of the COFI bill. 

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