Fintech regulation in South Africa

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Financial regulation

Regulatory bodies

Which bodies regulate the provision of fintech products and services?

There are currently no fintech product and services-specific laws or regulatory bodies.

As will become apparent from the following questions, however, certain fintech products and services may fall within the scope and ambit of general financial services regulatory frameworks, and so will be subject to the supervision of regulatory bodies charged with the monitoring of those frameworks. As such, the FSCA, the Prudential Authority (PA), the National Credit Regulator (NCR), the SARB and the FIC may each have regulatory oversight in respect of various aspects of the offering of fintech products and services.

To the extent that competition law issues may arise, the Competition Act, No. 89 of 1998 (as amended) (the Competition Act) applies to all economic activity within, or having an effect within, South Africa and, as such, the provisions of the Competition Act may have bearing on the provision of fintech products and services.

Regulated activities

Which activities trigger a licensing requirement in your jurisdiction?

Financial services

The Financial Advisory and Intermediary Services Act 2002 (FAIS) requires any person who seeks to proactively market or provide financial services to clients or investors, whether from within South Africa or on a cross-border basis from offshore, as a regular feature of such person’s business, to be appropriately authorised under FAIS (as a financial services provider or, under certain circumstances, as a representative). The term ‘financial services’, for the purposes of FAIS, comprises ‘advice’ and ‘intermediary services’ in relation to ‘financial products’ (which term is broadly defined to include, among others, shares, derivatives, money-market instruments, bonds, participatory interests in collective investment schemes and deposits).

Services that are currently subject to licensing under FAIS (as ‘intermediary services’) include (but are not limited to): arranging investment deals; making arrangements with a view to investment transactions; and dealing in investments as agent. Acting as an agent or intermediary in relation to forex investments by local clients or investors is also licensable under FAIS. At present, dealing in investments or financial products as principal is not licensable under FAIS, although an amendment to the definition of an ‘intermediary service’, brought about in 2018 (but which is not yet in force), is likely to subject principal dealing in investments with local clients to FAIS licensing requirements in future.

Services that are subject to licensing under FAIS (as ‘advice’) include (but are not limited to) advising on investments and advising on forex trades.

In terms of FAIS, a FAIS-unlicensed financial services provider may not promote or market its business or capabilities to any South African-resident person, whether onshore in South Africa or from offshore on a cross-border basis.

FAIS falls under the purview of the FSCA.

OTC derivatives

As regards OTC derivatives as investment instruments, regulations under South Africa’s Financial Markets Act 2012 (FMA Regulations) provide that a person who, as a regular feature of business and transacting as principal, originates, issues, sells or makes a market in an OTC derivative must be registered as an ‘OTC derivative provider’.

The FMA Regulations fall under the purview of the FSCA.

Credit and lending activities

The provision of loans or any form of credit is regulated under South African law by the provisions of the National Credit Act 2005 (NCA), which requires lenders in respect of whose credit agreements the NCA applies, to formally register as ‘credit providers’ with South Africa’s National Credit Regulator (NCR). The NCA generally applies to every credit agreement between parties dealing at arm’s length and made within, or having an effect in, South Africa.

The NCA does provide for certain general exemptions from its application (NCA Exemptions). In this regard, the NCA will not apply to:

  • A credit agreement in respect of which the credit receiver (borrower) is a juristic or legal person (as opposed to a natural person or individual), whose net asset value or annual turnover, together with the combined net asset value or annual turnover of all persons related to that juristic-person credit receiver, equals or exceeds 1 million rand at the time of conclusion of the credit agreement.
  • A ‘large’ credit agreement (eg, a credit transaction, in respect of which the principal debt under that transaction falls at or exceeds 250,000 rand, where the consumer for the purposes of the NCA is a juristic person having a net asset value or annual turnover falling below 1 million rand).
  • A local applicant credit receiver can formally apply to the Ministry of Trade and Industry in South Africa for a credit agreement that the credit receiver seeks to enter into with an offshore (foreign) credit provider to be formally exempt from the application of the NCA.

Lending will be subject to the NCA, unless an NCA Exemption applies. While there is no specific licensing regime for factoring or invoice discounting, where the NCA applies to the underlying agreements in respect of which the factoring or discounting takes place, the person acquiring the rights to the debts under those underlying agreements will also need to be licensed under the NCA. This is because the NCA includes in its definition of a ‘credit provider’ a person who acquires the rights of a credit provider under an NCA-regulated credit agreement after that agreement has been entered into.

Secondary market loan trading will be subject to the NCA under circumstances where the original loan being traded was subject to the NCA (in other words, where an NCA Exemption applied to the original loan, secondary market trading in respect of that loan will also be exempt from the NCA).

The NCA falls under the purview of the NCR.

Banking and deposit-taking activities

The Banks Act 1990 (Banks Act) requires any person seeking to conduct ‘the business of a bank’ in South Africa to be registered as a local bank or to be licensed as a local branch of a foreign banking institution. Two of the key activities included in the concept of the business of a bank are the marketing or solicitation of deposits (which would include the promotion of bank deposit accounts) and the acceptance of deposits, among others.

The Banks Act falls under the purview of the PA, from a prudential perspective, and the FSCA, from a market conduct perspective. Licensing under the Banks Act is considered by the PA.

Payment services

The National Payment Systems Act 1998 (NPSA) provides for the management, administration, operation, regulation and supervision of payment, clearing and settlement systems in South Africa. It also provides for the establishment of the Payments Association of South Africa (PASA), as the body mandated by the South African Reserve Bank to organise, manage and regulate the participation of its members in the payment system.

The NPSA makes provision for various role players (both bank and non-bank) in the payment system, and requires the role players seeking to participate in the payment system to be formally authorised in order to do so.

The NPSA falls under the purview of the SARB and PASA.

Trading in currencies

Where forex trading involves the buying and selling of foreign currency, such activities can be performed only by Authorised Dealers in South Africa (generally, commercial banks in South Africa that have been appointed as such by the SARB) or, to a limited extent, by Authorised Dealers with Limited Authority (ADLAs).

This falls under the purview of the SARB, in terms of South Africa’s legislated exchange control regime.

Consumer lending

Is consumer lending regulated in your jurisdiction?

See question 4 under ‘Credit and lending activities’, which applies equally here.

Secondary market loan trading

Are there restrictions on trading loans in the secondary market in your jurisdiction?

See question 4 under ‘Credit and lending activities’.

Secondary market loan trading will be subject to the NCA under circumstances where the original loan being traded was subject to the NCA (in other words, where an NCA Exemption applied to the original loan, secondary market trading in respect of that loan will also be exempt from the NCA).

Collective investment schemes

Describe the regulatory regime for collective investment schemes and whether fintech companies providing alternative finance products or services would fall within its scope.

The solicitation of investments in foreign collective investment schemes (CISs) from local investors (including institutional investors) is governed by the Collective Investment Scheme Control Act 45 of 2002 (CISCA), together with the regulations and notices promulgated under CISCA.

In terms of CISCA, no person may market, or solicit investments in, a foreign CIS unless that foreign CIS has itself been formally approved in accordance with CISCA’s requirements by the FSCA. This prohibition is strictly enforced (such that even the naming of an unapproved foreign CIS to a South African prospect of any classification is strictly prohibited). Breach of the prohibition constitutes a criminal offence.

The definition of a CIS includes an open-ended investment company, and provides for a scheme where members of the public are invited to invest money or other assets in a portfolio where investors hold participatory interests (any interest, shares, units, etc) and share pro rata in terms of their investment in the risks and benefits of the scheme.

The applicability (or not) of CISCA turns entirely on whether the definition of a CIS under CISCA is met. As such, certain fintech product offerings could trigger the application of CISCA (eg, crowdfunding offerings could trigger CISCA under circumstances where investments are pooled in a portfolio as defined under CISCA).

Alternative investment funds

Are managers of alternative investment funds regulated?

Alternative investment funds themselves, including private equity funds (but excluding hedge funds, which have been declared to be CISs), are not currently specifically regulated in South Africa.

Such investment funds could trigger the application of CISCA, however (as no express carve-out for them is provided for in CISCA), and so AIFs should be carefully structured and marketed discriminatively to selected (sophisticated) local investors. The application (or not) of CISCA to an AIF needs to be considered on a case-by-case basis.

Where CISCA is triggered, the manager or operator of a foreign CIS will be indirectly regulated by the FSCA.

Where CISCA does not apply to an AIF, the manager of the AIF is likely to be caught by the licensing provisions of FAIS, in that investments in AIFs constitute ‘financial products’ for the purposes of FAIS.

Peer-to-peer and marketplace lending

Describe any specific regulation of peer-to-peer or marketplace lending in your jurisdiction.

There is no specific regulation of peer-to-peer or marketplace lending in South Africa. Activities in relation to peer-to-peer lending, however, are likely to trigger licensing or regulatory requirements under South Africa’s general financial services regulatory frameworks (eg, the NCA, the Banks Act, CISCA and/or the NPSA), where the offering entails engagement in regulated activities or regulated ancillary activities.

In the main, peer-to-peer or marketplace lending will be regulated under the NCA, unless an NCA Exemption applies. See question 4 under ‘Credit and lending activities’ for an explanation of the NCA’s scope.

The offering and structure of the service would also generally need to be assessed for compliance with the Banks Act, CISCA and/or the NPSA in order to ensure that these frameworks are not inadvertently breached (ie, to ensure that the offering does not involve the business of a bank, the pooling of investments or the processing of payments in the regulated space).

Crowdfunding

Describe any specific regulation of crowdfunding in your jurisdiction.

Crowdfunding is not specifically regulated in South Africa. We note, however, that crowdfunding activities may be subject to existing regulation under South Africa’s general financial services regulatory frameworks. For example, the activities may fall within the ambit of:

  • the Banks Act, where activities could be seen as deposit-taking (which constitutes the business of a bank);
  • the Companies Act, where the business in question is a company and the crowdfunding activities amount to offers to the public of securities, which would necessitate compliance with certain requirements including the filing of a Companies Act-compliant prospectus;
  • CISCA, where investments are pooled;
  • FAIS, where the crowdfunding platform can be seen to provide an ‘intermediary service’ or ‘advice’ in relation to a financial instrument or product;
  • the Financial Markets Act 2012, where the online platform can be seen to operate as an exchange, matching investors with issuers or product providers; and
  • the NCA, where crowdfunding is based on a lending model (note that the intermediation of loans is not regulated per se).

Invoice trading

Describe any specific regulation of invoice trading in your jurisdiction.

While there is no specific licensing regime for invoice discounting or trading per se, where the NCA applies to the underlying agreements in respect of which the discounting or trading takes place, the person acquiring the rights to the debts under those underlying agreements will also need to be licensed under the NCA. This is because the NCA includes in its definition of a ‘credit provider’ a person who acquires the rights of a credit provider under an NCA-regulated credit agreement after that agreement has been entered into.

Payment services

Are payment services regulated in your jurisdiction?

Yes. The NPSA provides for the management, administration, operation, regulation and supervision of payment, clearing and settlement systems in South Africa. It also provides for the establishment of PASA, as the body mandated by the SARB to organise, manage and regulate the participation of its members in the payment system.

The National Payment System Department of the SARB has formally clarified that the South African payment system encompasses the entire payment process from a payer to a beneficiary and ‘. . . includes all the tools, systems, mechanisms, institutions, agreements, procedures, rules or laws applied or utilised to effect payment’.

The NPSA makes provision for various role players (both bank and non-bank) in the payment system, and requires the role players seeking to participate in the payment system to be formally authorised in order to do so. Fintech companies that seek to provide ‘mobile money’-type products are likely to be subject to licensing under one of the roles provided for under the NPSA. Electronic money is also regulated in South Africa (albeit under a Position Paper published by the SARB), and only a registered South African bank is permitted to issue e-money. This requirement often means that fintech companies will need to partner with a bank in order to provide certain services within South Africa.

Open banking

Are there any laws or regulations introduced to promote competition that require financial institutions to make customer or product data available to third parties?

No.

Insurance products

Do fintech companies that sell or market insurance products in your jurisdiction need to be regulated?

Yes. Insurers and underwriters are required to be licensed under the Insurance Act 2017, while persons seeking to broker or market insurance products on behalf of an insurer or underwriter require authorisation under FAIS (as insurance products constitute financial products under FAIS and broking insurance constitutes an intermediary services.

Insurers and underwriters are supervised, in the main, by the PA (with the FSCA supervising insurers on market conduct). Insurance brokers (regulated under FAIS) are supervised by the FSCA.

Credit references

Are there any restrictions on providing credit references or credit information services in your jurisdiction?

Yes. These services are likely to trigger registration requirements under the NCA, as being the services of a credit bureau.

Although not expressed in the NCA itself, from a practical perspective, the NCR permits persons seeking to pull credit information from existing registered credit bureaux (as opposed to maintaining that information themselves, on their own database) to register as ‘reseller credit bureaux’. Reseller credit bureaux are subject to a lighter-touch regulatory regime than that to which credit bureaux are subject, and are exempt from compliance with certain obligations imposed by the NCA on credit bureaux proper.