Unathi Kamlana, commissioner of South Africa’s Financial Sector Conduct Authority, talks to The Banker about the country’s virtual assets service provider licensing programme, the impact of the Financial Action Task Force’s grey listing on South African banks, and working with the National Treasury on managing financial institutions’ foreign exposure.
Q: About a year ago, the FSCA issued calls to virtual asset service providers to apply for licences ahead of a deadline of the end of November. How close are you to awarding the first tranche of licences?
Ahead of the application deadline at the end of November, we received around 340 applications in total — from both greenfield players and financial institutions that are already licensed — for a variety of activities including virtual asset exchanges, digital custodial services, and payment and remittance providers. The FSCA has now approved licence applications for around 60 firms, and we will be sharing details shortly.
We believe bringing such firms within a regulatory net is something that makes good sense in terms of ensuring transparency and consumer protection, enabling customers that have exposure to such products to have similar recourse mechanisms that are available within the wider financial sector.
We continue to emphasise, however, our view that these are risky products, and that people need to educate themselves about the risks they are taking when they invest in them.
Q: How did the events of the last ‘crypto winter’ — which hit African customers particularly hard as crypto prices plunged, and saw several high profile international bankruptcies — influence the FSCA’s regulatory approach to VASPs?
After a long period of deliberation we decided not to introduce a new regulatory framework for VASPs, but rather to license them within an existing legal framework that requires them to be fit and proper, and to meet certain capital and transparency requirements. What this does is immediately put them on par with other financial institutions that have a similar scale and exposure to financial customers.
I think it’s important for us as a regulator to be able to use our entire regulatory toolkit if there are any issues with any of these licensed firms. This approach empowers us far more than introducing a completely new framework without developed tools for us to respond.
Given the risk profile of the virtual assets sector and the events that you mention, we remain concerned that these are risky products, but we feel comfortable in our ability to intervene if we need to, with the same tools that we would use for other firms that handle similarly risk investment products, and have a similar kind of exposure in terms of the size and make of their client base.
Q: South Africa remains on the FATF’s grey list following its plenary meeting last month. Were you disappointed to remain on the list?
South Africa has agreed an action plan with the FATF on what needs to be done to exit the grey list, which will see them re-evaluate our compliance structures in early 2025, with a decision being made at the FATF plenary in February 2025. Since going on the grey list in February 2023 there’s been a lot of hard work done and acknowledgement by the FATF of the progress that has been made.
Since going on the grey list in February 2023 there’s been a lot of hard work done and acknowledgement by the FATF of the progress that has been made.
At the FSCA we’ve significantly increased our supervisory capacity over the last two years in line with recommendations from the FATF, and we plan to expand it further over the coming year. In 2023/24, the FSCA conducted 60 inspections, an increase from 38 in 2022/23. The FATF have also made recommendations over more dissuasive financial sanctions. Work is ongoing in this space.
Last month we imposed a R16mn ($840,000) administrative sanction on Ashburton Fund Managers for deficiencies in its AML/CFT programme, and we are going to continue along that trajectory, informed by further in-depth inspections.
But comparing where we are right now with the past, there’s definitely been a change. There are much more considerable fines that we’re imposing and considering imposing.
Q: What has the impact of the grey listing been on South African banks over the past year?
It’s hard to assess what the exact impact of the listing is given everything else that is happening in the domestic economy and beyond. While the announcement of the decision didn’t prompt any immediate volatility or market impact, it definitely has had a reputational impact for South Africa and its banks. It has meant enhanced due diligence for lenders, which impacts transaction costs that are then passed on to customers, which is why public sector bodies such as ourselves are taking the matter seriously, and doing what we can to get off the grey list.
One of the initial main concerns about going on to the grey list was the potential impact on correspondent banking relationships with local lenders. In our conversations with banks and the Prudential Authority, we haven’t seen significant de-risking across the sector. So although greylisting is an important issue, the integrity of the banking sector remains intact, given the high compliance standards that have been put in place.
Q: What are the other main operational priorities for the FSCA during the coming year?
Sustainable finance is a big area of focus for the FSCA and the PA, setting expectations for financial institutions that link to the government’s policy objectives around decarbonisation and net zero targets. We’ve published a statement of work for sustainable finance, with key pillars including developing common taxonomies for sustainability, reporting and disclosure; education; increasing active management, and market development.
Cyber security of course remains a key priority, helping ensure that financial institutions develop resilience around cyber risks. We’ve recently issued a joint standard with the PA for the management of cyber risk and cyber security in general.
We’re also working with the National Treasury on the area of managing financial institutions’ foreign exposure, moving towards a market conduct risk framework that includes the management of foreign investment and foreign exposure at an institutional level.
The South African Reserve Bank is leading the work on a macroprudential framework for foreign exposure, ensuring that [financial institutions] are clear about objectives related to the soundness of investments at an institutional level and objectives that pertain to capital flows in general and potential risks. We are working together with the financial surveillance department of the SARB and the National Treasury and to deliver in this area.
