UK Financial Rules Should Continue ‘As Usual’

When it comes to financial regulation, South Africa plays in the big leagues. In part this is due to a robust regulatory regime which has many parallels with that of the UK. But, in the post-Brexit world, is staying in step with the UK the best move? 

The World Economic Forum has long recognised the world-class nature of South Africa’s financial sector and the effective regulation of its banking system, ranking the country as the world’s 19th most competitive financial hub in 2019. This confidence has, over the years, attracted foreign banks into the country alongside multinationals from Europe, China, the US, the UK and India.  

The financial protections and robust regulatory controls offered are among the advantages associated with having a South African presence, alongside considerations such as strategic access to the African market, a convenient time zone, the use of English as the language of business and a strong national infrastructure.  

Financial and banking ties to the UK, in particular, remain particularly strong with many local banks having established offshore branches in the British Channel Islands, while big British banks have established headquarters and banking branches in South Africa. For many wealthy South Africans looking for international exposure, the UK is often among the first ports of call.  

Given this deep history and strong links, it goes without saying that any substantial changes to financial services regulation in the UK will have implications for the local sector. For example, any perceived weakening of Britain’s financial regulatory system – as some European Union officials fear – may have global implications for South African institutions operating in the UK market.  

View From the Top

Fortunately, the broad consensus currently is that the UK will carry on pretty much as usual. At least for the foreseeable future. That’s good news for a country already battered by a messy Brexit divorce and battling to get the Covid-19 pandemic under control. This means a certain degree of certainty for cross-border companies as well as countries in the UK orbit, such as South Africa. 

In 2019 Bank of England Deputy Governor Sam Woods said during a speech delivered in Lausanne, Switzerland that: “As far as the stringency of financial regulation goes, we at the Bank [of England] have a clear view of what would make sense for the UK in a post-Brexit environment: we should keep it calibrated roughly where it is now and have no desire whatsoever to weaken it.” 

At the time of writing, the UK and the European Union (EU) were in talks about the nature of future regulatory cooperation in the financial services space – a key industry that contributes 12% to the UK’s GDP. 

For the UK, one of the big issues currently on the table is ‘passporting’, or the process whereby British-based institutions can sell products and services into the EU without having to obtain regulatory approval or establish local subsidiaries. One option is a Swiss-type arrangement, under the EU’s ‘third country equivalence’ rules, which allows non-members to offer a small range of services. But this permission could easily be withdrawn by the EU with just 30 days’ notice, making it an uncertain option. Alternatively, a Free Trade Agreement could be reached.  

Playing the Field

While uncertainty continues to hang over this aspect of the UK’s exit from Europe, there may be one big plus in play for South Africa, which signalled its move towards a ‘Twin Peaks’ regulatory approach in 2018, as part of a wide-ranging overhaul of local financial regulation. This model, which echoes that of Australia, the UK, New Zealand, Belgium and the Netherlands, is essentially a two-headed system which necessitates the oversight of two independent regulators – the South African Reserve Bank and the Financial Sector Conduct Authority – to protect consumers and hold financial institutions to account. South Africa was the first emerging market to adopt Twin Peaks, which was first rolled out in Australia in 1998. 

In addition to this notable change, enacted as part of the Financial Sector Laws Amendment Bill 2020, South Africa’s financial regulatory framework is extensive and robust, from the Banks Act 1990 to the Currency and Exchanges Act 1933, the Financial Intelligence Centre Act 2001, the Financial Advisory and Intermediary Services Act 2002, the National Credit Act 2005 and the Consumer Protection Act 2008.   

In January 2020 South Africa also promulgated three tax Acts: The Rates and Monetary Amounts and Amendments of Revenue Laws Act 22 of 2020, the Taxation Laws Amendment Act 23 of 2020 and the Tax Administration Laws Amendment Act 24 of 2020. These adjustments were in line with the government’s new focus on modernising the exchange control system. The new framework would relax cross-border transactions, in line with an international capital flow management approach, and create a stronger and more transparent system.  

While it may be a messy world at times, both South Africa and the UK are part of a bigger, global system that continues to demand robust regulation in the financial space. While similarities in approach may continue given the deep ties between these two markets, both must continue to operate within key international frameworks.  

Ultimately that’s good news for institutions and great news for consumers, investors and regulators.