The Prudential Authority (PA), the regulator of SA’s financial services sector, says foreign banks operating in SA often face a compliance minefield, with these banks now increasing their employment of locals who understand the lay of the land.
“The branches of foreign banks have maintained relatively healthy levels of profitability, capital and liquidity, with continued support from their respective head offices,” the regulator said in its latest annual report.
“However, these branches often face compliance challenges when implementing directives issued by the PA, partly due to their reliance on their head office. Notably, there has been an increased focus on appointing senior executives with SA risk, compliance and regulatory experience at these branches.”
The PA earlier this year successfully liquidated the local branch of Pakistani lender Habib Bank. This is after the National Treasury placed it under curatorship over governance issues, which included allegations that it flagrantly breached SA’s exchange control rules and facilitated money-laundering activities.
The PA’s annual report also shows that the dispute between the regulator and the State Bank of India (SBI) over contravention of the Financial Intelligence Centre (FIC) Act, which was referred to the FIC appeal board, has seen the regulator emerge victorious. The SBI had appealed the PA’s decision to impose a financial penalty of R10.2m with R500,000 suspended for two years over various contraventions.
The watchdog said it was consistently enhancing the regulation, oversight and monitoring of foreign representative offices, adding that it was committed to creating a supportive environment for foreign banking institutions’ representative offices operating in SA.
It said it observed a notable improvement in foreign representative offices’ adherence to regulatory obligations.
SA’s banking sector continues to be dominated by the five largest banks — Standard Bank, FirstRand, Absa, Nedbank and Investec — which collectively held 89.69% of the total banking sector assets. Local branches of international banks accounted for 5.95% of banking sector assets.
The regulator flagged smaller banks, which are facing corporate governance challenges leading to ineffective risk management, along with concerns over profitability “given the current loss-making trend”.
“The PA has therefore focused on the appointment of appropriately fit and proper directors, executives, senior management and primary risk custodians as well as effective governance structures,” it said.
“Furthermore, succession planning has been highlighted as a crucial factor in ensuring that a pool of experienced and qualified bankers are readily available to smaller banks that often struggle with recruiting and retaining such talent.”
The PA levied hefty fines on African Bank and Grindrod in the year under review for contravening sections of the FIC Act. African Bank was fined R29m, while Grindrod was slapped with a fine of R10.7m.
Reserve Bank governor Lesetja Kganyago in the PA’s annual report said that in 2023 the PA noted that non-life insurers and reinsurers had started to impose restrictions on catastrophes related to business interruptions, power supply failures and climate events.
“This led to the non-availability of insurance cover for these extreme events. The PA will continue to monitor these emerging policy protection gaps and engage industry participants and standard-setting bodies on an ongoing basis,” he said.
“While both banks and insurers are in the early stages of climate risk management, they are in relatively early stages of quantifying climate risks. Understandably, the focus has been on knowledge building, data gathering and disclosures, and to a lesser extent climate scenarios.”
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