- The FSCA has published its financial sector transformation strategy for comments until 29 April 2022.
- Among other things, the strategy proposes a regulatory framework that enables the entry of new players.
- It says licensing requirements must not pose unnecessary barriers to entry.
Getting a licence to open a bank, an insurance company and other financial services operations might become less daunting for small businesses who want to serve poor and under-served communities.
The Financial Sector Conduct Authority (FSCA) published its financial sector transformation strategy for comment. It has a huge focus on driving financial inclusion in SA.
The regulator said that even though 80% of the adult population now has a transactional bank account, financial inclusion in many other financial products is still not that good. Even when people have other products, like credit, insurance and savings, sustained use of those remains low.
Reviewing licensing requirements
To help facilitate the entry of small financial services providers, the FSCA will be looking at the licensing regime.
"It is therefore essential that licensing processes are not only efficient and robust but promote a diversification of financial institutions. We will ensure that licensing requirements do not pose unnecessary barriers to entry," it wrote in the financial inclusion strategy document.
The regulator said applications should be individually assessed to see where it may be appropriate to grant licences subject to conditions.
"The aim should be for a regulatory framework that enables, rather than inhibits, entrants into the market and appropriate innovation," read the document.
Currently, the banking and insurance sectors in SA are dominated by large players because of the stringent regulatory requirements and the high cost of acquiring licences, among other things. Although there are several small and cooperative banks in the country, they have not effectively penetrated the market.
The SA Reserve Bank only granted three new bank licences around 2018/19 to TymeBank, Discovery Bank and Bank Zero. Those were the first new banking licences in the country in almost a decade. It has since given the Young Women in Business Network authorisation to establish YWBN Mutual Bank, but that has not taken off as planned yet.
In the insurance space, it is also difficult for small players to enter the market because of regulatory capital requirements.
But the Insurance Act has now created a new category for micro-insurance. The FSCA document said the Act has tailored regulatory requirements have to be more appropriate for the lower level of risk that simpler products sold by micro-insurers should pose.
A new regulatory framework will be put in place to ensure that this tailoring leads to accessible and affordable insurance to low-income South Africans.
The FSCA said it will also roll out regulatory support programmes to ensure that small businesses wanting to enter the financial services industry understand and comply with licensing requirements.
For existing licensed entities, it will provide guidance to help them understand regulatory requirements better.
Tackling SME lending
On the lending side, the FSCA plans to collect and analyse recent data to see patterns of access and usage of financial products among small, medium and micro-enterprises.
The last available data from the FinScope South Africa Small Business Survey in 2010 showed that only 8% of small business owners had formal credit from banks and other financial institutions then.
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The situation was a bit better for consumers as 61% of the adult population borrowed from formal credit providers. But the problem was that most of that was consumption credit instead of home loans and other credit lines to acquire assets.
The strategy document also proposes intervention in the design of products targeting low-income earners. Where there is an identified lack of appropriate products, the FSCA may develop product standards so that financial institutions can create simpler and better value services for low-income earners.
In its supervisory role, the regulator will ensure that products marketed to these consumers are appropriate for their needs and that companies disclose everything consumers need to know upfront.
The FSCA said the Conduct of Financial Institutions (COFI) Bill, which deals with many issues proposed in its strategy, is expected to be tabled in Parliament this year.
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